UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30,
2020
¨ 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
|
|
(631) 240-8800
|
(Address of principal executive offices)
|
|
(Zip Code)
|
|
(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 Capital Market
|
Securities registered pursuant to Section 12(g) of
the Act: None
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes x No
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨ Yes x No
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.
x 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).
x 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.
Large accelerated filer ¨
|
Accelerated filer ¨
|
Non-accelerated filer x
|
Smaller reporting company x
|
Emerging growth company ¨
|
If an emerging growth company, indicate by a check mark if the
registrant has elected to not use the extended transition period of 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 has filed a report
on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ¨
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). ¨ Yes x No
The aggregate market value of the Registrant’s voting
and non-voting common stock held by non-affiliates of the Registrant, based upon the last sale price of the common stock reported
on The Nasdaq Capital Market as of the last business day of the Registrant’s most recently completed second fiscal quarter
(March 31, 2020), was approximately $13.5 million. Shares of the Registrant’s common stock held by each executive officer
and director and by each entity or person that, to the Registrant’s knowledge, owned 5% or more of the Registrant’s
outstanding common stock as of March 31, 2020 have been excluded in that such persons may be deemed to be affiliates of the
Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of December 10, 2020, the Registrant
had outstanding 5,661,330 shares of common stock, par value $0.001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K will be incorporated
by reference from certain portions of the Registrant's definitive Proxy Statement for its 2021 Annual Meeting of Shareholders,
or will be included in an amendment hereto, to be filed not later than 120 days after the close of the fiscal year ended September
30, 2020. Except with respect to information specifically incorporated by reference in the Annual Report on Form 10-K, the
Proxy Statement is not deemed to be filed as part hereof.
TABLE OF CONTENTS
PART I
Forward-looking Information
This Annual Report on Form 10-K (including
but not limited to Item 7, “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. Forward-looking statements can generally be identified by the fact that they do not relate strictly to
historical or current facts and include, but are not limited to, statements using terminology such as “can”, “may”,
“could”, “should”, “assume”, “forecasts”, “believe”, “designated
to”, “will”, “expect”, “plan”, “anticipate”, “estimate”, “potential”,
“position”, “predicts”, “strategy”, “guidance”, “intend”, “budget”,
“seek”, “project” or “continue”, or the negative thereof or other comparable terminology regarding
beliefs, plans, expectations or intentions regarding the future, including risks
relating to the continuing outbreak of the coronavirus (COVID-19). 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 under Item 1, “Business,” Item 1A, “Risk
Factors,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
and our consolidated financial statements and notes thereto included in this report, those set forth from time to time in our other
filings with the SEC.
Our forward-looking statements address, among other things:
|
•
|
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;
|
|
•
|
our expectations concerning product candidates for our technologies;
|
|
•
|
our expectations concerning existing or potential development and license agreements for third-party collaborations and joint ventures;
|
|
•
|
our expectations of when different phases of clinical activity may commence and conclude;
|
|
•
|
the effect of governmental regulations generally;
|
|
•
|
our expectations of when regulatory submissions may be filed or when regulatory approvals may be received; and;
|
|
•
|
our expectations of when commercial sales of our products may commence and when actual revenue from the product sales may be received.
|
|
|
|
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 approval to market product candidates;
|
|
•
|
the inherent uncertainties associated with commercialization of products that have received regulatory approval;
|
|
•
|
economic and industry conditions generally and in our specific markets;
|
|
•
|
the volatility of, and decline in, our stock price; and
|
|
•
|
our current lack of financing for operations 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 Annual Report on Form 10-K 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.
Any of the assumptions underlying the forward-looking statements
contained in this Annual Report on Form 10-K could prove inaccurate and, therefore, we cannot assure you that the results
contemplated in any of such forward-looking statements will be realized. Based on the significant uncertainties inherent in these
forward-looking statements, the inclusion of any such statement should not be regarded as a representation or as a guarantee by
us that our objectives or plans will be achieved, and we caution you against relying on any of the forward-looking statements contained
herein.
Our trademarks currently used in the United States include Applied
DNA Sciences®, SigNature® molecular tags, SigNature® T molecular tags, fiberTyping®, DNAnet®, SigNify®,
Beacon®, CertainT®, LinearDNATM, LineaTM COVID-19
Assay Kit and safeCircleTM Surveillance Program. 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 Annual Report on Form 10-K are the property of
their respective owners, including, without limitation, the PimaCott®, HomeGrown®, LoneStar™
and HomeGrown Acala™ marks owned by Himatsingka America, Inc. and/or its affiliates.
Overview
Our proprietary PCR-based DNA LinearDNATM manufacturing
platform produces large quantities of DNA for use in the 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”). In
response to the COVID-19 pandemic, the Company developed a PCR-based molecular diagnostic test for COVID-19, which was granted
Emergency Use Authorization (EUA) by the U.S. Food and Drug Administration (“FDA”) in May 2020. The Company currently
manufactures and sells its EUA authorized COVID-19 molecular diagnostic test kit under the LineaTM COVID-19
Assay Kit trademark (“COVID-19 Diagnostic Testing”). In addition, and in further response to the COVID-19 pandemic,
the Company developed and is currently offering non-diagnostic COVID-19 pooled surveillance testing to detect instances of COVID-19
in defined populations. The Company’s COVID-19 pooled surveillance testing services are currently offered under the safeCircleTM
trademark (“COVID-19 Surveillance Testing”). The Company is also developing an invasive circulating tumor cell capture
and identification technology (“iCTC Technology”) which uses a patented functional assay to capture live invasive circulating
tumor cell and associated lymphocytes that can be identified and expanded for further analysis.
Applied DNA’s LinearDNATM 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:
|
·
|
Speed – Production of DNA via the LinearDNATM platform can be measured in terms of hours, not days and weeks like other large scale DNA manufacturing platforms.
|
|
·
|
Scale – The LinearDNATM platform is flexible and can be adapted to encompass large quantity production.
|
|
·
|
Purity – DNA produced via PCR is pure, resulting in only large quantities of the target DNA sequence. Unwanted DNA sequences such as bacterially-derived DNA are not present.
|
|
·
|
Customization – DNA produced via PCR can be easily chemically modified to suit specific customer applications.
|
Corporate History
We are a Delaware corporation, which was initially formed in
1983 under the laws of the State of Florida as Datalink Systems, Inc. In 1998, we reincorporated in the State of Nevada, and
in 2002, we changed our name to our current name, Applied DNA Sciences, Inc. In December 2008, we reincorporated from
Nevada to the State of Delaware. LineaRx (“LRx”), Inc. was incorporated in Delaware on September 11, 2018.
Applied DNA Clinical Labs, LLC (“ADCL”) was formed in Delaware on June 12, 2020.
Our corporate headquarters are located at the Long Island High
Technology Incubator at Stony Brook University in Stony Brook, New York, where we established laboratories for the manufacture
of molecular tags, product prototyping, molecular tag authentication, bulk DNA production, as well the manufacture of our LineaTM COVID-19
Assay Kit and the performance of our COVID-19 Surveillance Testing. The address of our corporate headquarters is 50 Health Sciences
Drive, Stony Brook, New York 11790, and our telephone number is (631) 240-8800. We maintain a website at www.adnas.com where
general information about us is available. The information on, or that may be accessed through, our website is not incorporated
by reference into and should not be considered a part of this report.
Industry Background
Biotherapeutic Contract Research
and Manufacturing
Our patented continuous flow PCR systems
and other proprietary PCR-based production technology and post-processing systems that comprise the LinearDNATM platform
allows for the large-scale production of specific DNA sequences. The LinearDNATM platform is currently being used
for customers to manufacture DNA as components of in vitro diagnostic tests and for preclinical nucleic acid-based drug
development in the fields of adoptive cell therapies (CAR T and TCR therapies), DNA vaccines (anti-viral and cancer), RNA therapies,
clustered regularly interspaced short palindromic repeats (CRISPR) based therapies and gene therapies. We believe our LinearDNATM platform
confers a distinct competitive advantage in cost, cleanliness, and time-to-market as compared to other DNA manufacturing systems.
The Company provides preclinical contract
research and manufacturing services for the nucleic acid-based therapeutic markets. We work with biotech and pharmaceutical companies
to convert plasmid-based and/or viral transduction-based preclinical biotherapeutics into PCR-produced linear DNA-based forms that
can be produced on our LinearDNATM platform. In addition, we provide contract research services to RNA based drug
and biologic customers for preclinical studies. These services include the design, development and manufacture of PCR-produced
DNA templates for RNA. In addition, we also use our LinearDNATM platform to produce very large gram-scale quantities
of DNA for the in vitro diagnostic market where our DNA is used for both commercially available diagnostics and diagnostics under
development.
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 LinearDNATM platform in the fields of DNA-based anti-viral and anti-cancer vaccines, CAR-T
cell immunotherapy and the manufacture of rAAV vectors for gene therapy.
We are also engaged in preclinical and
animal drug candidate development activities focusing on therapeutically relevant DNA constructs manufactured via our PCR-based
production platform. We seek to develop, acquire and commercialize, alone or with partners, a diverse portfolio of nucleic acid-based
therapeutics based on PCR-produced linear DNA which we believe will improve existing nucleic acid-based therapeutics or create
new nucleic acid-based therapeutics that address unmet medical needs. To this end, we are currently working with our development
partners Takis S.R.L. and Evvivax S.R.L. (“Takis/Evvivax”) to develop an amplicon-based linear DNA vaccine for COVID-19
that would be manufactured on our LinearDNATM platform. Together with our development partners, our amplicon-based
linear COVID-19 vaccine candidate has shown efficacy in preclinical cell and small animal studies. In September 2020, we entered
into an Animal Clinical Trial Agreement with Takis/Evvivax and with Veterinary Oncology Services, PLLC, an affiliate of Guardian
Veterinary Specialists (“GVS”), a multi-specialty veterinary hospital. In November 2020, we, together with Takis/Evvivax
and GVS, announced receipt of approvals from the New York State Department of Agriculture and Markets and the U.S. Department of
Agriculture (“USDA”) on an advanced clinical strategy to conduct a veterinary trial of a vaccine candidate. Our jointly-developed
amplicon-based DNA vaccine for COVID-19 is expected to start veterinary clinical trials in domestic feline cats by early 2021,
with the end goal of applying for a USDA Animal and Plant Health Inspection Service conditional license to enable commercial veterinary
sales for domestic felines.
COVID-19 Diagnostic Testing
On May 13, 2020 we received an EUA
from the FDA for the clinical use of the LineaTM COVID-19 Assay Kit for the qualitative detection of nucleic acid from
SARS-CoV-2 in respiratory specimens including anterior nasal swabs, self-collected at a healthcare location or collected by a healthcare
worker, and nasopharyngeal and oropharyngeal swabs, mid-turbinate nasal swabs, nasopharyngeal washes/aspirates or nasal aspirates,
and bronchoalveolar lavage specimens collected by a healthcare worker from individuals who are suspected of COVID-19 by their healthcare
provider. Under the EUA, testing is limited to laboratories certified under the Clinical Laboratory Improvement Amendments of 1988
, 42 U.S.C. §263a (“CLIA”), that meet requirements to perform high complexity tests, which certification we have
applied for but have not yet obtained. Subsequently, during July and November 2020, we were granted EUA amendments that
expand the installed base of PCR equipment platforms on which our LineaTM COVID-19 Assay Kit can be processed and
significantly increased the daily testing capacity of the LineaTM COVID-19 Assay Kit through the use of automation.
The scope of the EUA, as amended, is expressly limited to use consistent with the Instructions for Use by authorized laboratories,
certified under CLIA to perform high complexity tests. 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. Our LineaTM COVID-19 Assay Kit 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. We currently manufacture the LineaTM COVID-19 Assay Kit at our facilities in Stony Brook, New
York.
COVID-19 Surveillance Testing
Starting in July 2020, the Company
under its ADCL subsidiary, began offering COVID-19 pooled surveillance testing to customers as a Testing-as-a-Service (TaaS) offering
branded under the safeCircleTM trademark. Unlike diagnostic testing, which looks for the occurrence of COVID-19 at the
individual level, safeCircleTM surveillance testing looks for infections within a defined population or community and
can be used for making health management decisions at the population level. safeCircleTM surveillance testing uses high-sensitivity
pooled COVID-19 testing utilizing the LineaTM COVID-19 Assay Kit. Under the safeCircleTM surveillance testing
service, pooled test results are returned to the sponsoring organization in the aggregate only, not directly to the participating
individuals, and may be performed without CLIA certification. Once potentially infected portions of a defined population are identified
by the safeCircleTM surveillance testing service, the individuals comprising the potentially infected portions of the
defined population are referred to follow on diagnostic testing at a clinical lab to obtain individual results. ADCL is offering
its safeCircleTM surveillance testing in compliance with current CDC, FDA, CMS and New York State Department of Health
recommendations. The use of pooled sampling procedures for the safeCircleTM surveillance testing service has been internally
validated by ADCL in compliance with current CDC guidance. The use of pooled sampling procedures is not included in the LineaTM
COVID-19 Assay Kit EUA.
We seek to commercialize the safeCircleTM
surveillance testing TaaS offering with institutional clients such as schools, colleges and businesses. We currently provide safeCircleTM
surveillance testing to several private schools, New York State-based small enterprises and college athletic programs.
Clinical Testing Laboratory
Under our ADCL subsidiary, we have
applied to the New York State Department of Health for all necessary licensing to operate a New York State clinical diagnostics
laboratory. These applications are currently pending. The New York State Department of Health performed its initial inspection
of our clinical laboratory and identified deficiencies in the clinical standard of practice. These deficiencies need to be rectified
before we can submit a request for re-inspection. We are working to rectify these deficiencies now. Through ADCL, we seek to further
commercialize our EUA authorized Linea COVID-19 Assay Kit and our iCTC Technology. ADCL is also performing testing services in
support of the Company’s safeCircleTM surveillance testing services in accordance with current CDC, FDA, CMS and
New York State Department of Health recommendations.
iCTC Technology
We seek to further develop, manufacture
and commercialize our Vita-AssayTM iCTC Technology recently acquired from Vitatex, Inc. in August 2019.
Our iCTC Technology uses a patented functional assay to capture live invasive circulating tumor cell and associated lymphocytes
that can be identified and expanded for further analysis, including genetic sequencing. We believe our iCTC Technology can be used
as an early cancer diagnostic tool, to facilitate cancer disease progression monitoring, to assess metastatic tumor risk and to
discover epitopes to serve as targets for nucleic-acid based immunotherapies. Our iCTC Technology has been used and is currently
being used in a human cancer drug candidate clinical trial to monitor cancer disease progression in the trial subjects as a Research
Use Only diagnostic assay. We believe our iCTC Technology has several advantages over existing in vitro circulating
tumor cell diagnostic technologies that do not capture live iCTC cells. The Company seeks to further develop and commercialize
this technology and to potentially integrate aspects of the iCTC Technology with the LinearDNATM platform for cancer
research and nucleic-acid based drug development.
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 LinearDNATM 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 underlying strategy in our tagging
business is to become an authenticity and traceability platform provider for large complex supply chains, particularly in process
industries in which contracts for our products and services are typically larger and recurring over longer duration as compared
to our historic norms, where the benefits to customers and consumers are more significant, and where our forensic security and
traceability offer a unique and protected value. Using our tagging products and technology, manufacturers, brands, and other stakeholders
can ensure authenticity and protect against diversion throughout a product’s journey from manufacturer to use.
SigNature® Molecular Tags, SigNature®
T Molecular Tags, fiberTyping®, SigNify® Beacon® and CertainT® comprise our principal Non-Biologic tagging and
security technology platform.
Signature Molecular Tags
SigNature® molecular tags manufactured via our LinearDNATM platform
form the core of our supply chain security technology platform. They provide forensic power and protection for a wide array of
applications. Highly secure, robust and durable, SigNature® molecular tags are an ingredient that can be used to fortify brand
protection efforts; strengthen supply chain security; and mark, track and convict criminals. Through our SigNature® molecular
tags, custom DNA sequences can be embedded into a wide range of host carriers including natural and synthetic materials such as
cotton, leather, cannabis, ink, varnish, thread, metal coatings, and pharmaceuticals and nutraceuticals. SigNature® molecular
tag formulations are made to be resistant to challenging environments such as heat, cold, vibration, abrasion, organic solvents,
chemicals, UV radiation and other extreme environmental conditions, and can be identified for numerous years after being embedded
directly into or on an item. The sequence of each individual molecular tag is recorded and stored in a secure database so that
we can later detect it to obtain definitive proof of the presence or absence of a specific molecular tag using a simple in-field
test, or in our laboratories. Our in-lab forensic testing capability delivers Certificate of DNA Authentication (“CODA”)
or an expert witness report, with expert witness services for some cases. Because DNA can be amplified with high fidelity, only
minute quantities of our molecular tags extracted from our customers’ goods are necessary for successful analysis and authentication.
As a result, SigNature® molecular tags can fold seamlessly into production and logistics workflows at extremely low concentrations.
Our SigNature® molecular tags can
be uniquely designed for specific industries. For example, our SigNature® T molecular tags, designed for textiles and
apparel industry, are specially engineered to adhere tenaciously to textile substrates, which make them resistant to standard
textile production conditions. The result is an enduring forensic level molecular tag that remains present from the fiber
stage through to the finished product. Overall SigNature® molecular tags now exist on hundreds of millions of commodity
goods ranging from consumer product packaging to microcircuits to cotton and synthetic fibers.
SigNify®
SigNify® IF portable DNA readers and
SigNify® consumable reagent test kits provide definitive real-time authentication of molecular tags in the
field, providing a front-line solution for supply chain integrity backed with forensic-level molecular tag authentication.
CertainT®
The CertainT® trademark indicates the
use of our tagging, testing and tracking platforms and solutions, enabling manufacturers, brands and trade organizations to convey
proof of their product claims.
CertainT® and other customer applications
include the use of a software platform that enables customers to manage the security of company-marked goods from point of marking
to point of authentication or validation to end of life. The base platform is configurable to customer requirements. Basic functions
offered include molecular tag inventory management, program training and communications, a database of marked items information,
associated documents and images, chain of custody and location tracking, sample authentication processing and CODA downloads, and
other administrative functions.
Our Strategy
Our products and services are offered in the United States,
Europe and Asia. At the present time, we are focusing our efforts on DNA manufacturing services for in vitro medical
diagnostics, preclinical biotechnology research, preclinical biotherapeutic candidates and PCR-produced linear DNA products, ,
the manufacturing and sale of our LineaTM COVID-19 Assay Kit, our testing as a service offerings, primarily as it relates
to our COVID-19 Surveillance Testing, and our supply chain security business, primarily in the areas of textile and apparel, pharmaceuticals
and nutraceuticals The basic technology we use in various markets is very similar, and we believe our solutions are adaptable for
many types of products and markets.
To date, 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. We expect to grow revenues from sales of our Linea™ COVID-19 Assay Kit, our COVID-19 Surveillance Testing,
clinical diagnostic services (upon receipt of necessary certifications) and 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.
Pursue Strategic Acquisitions and Alliances
We intend to pursue strategic acquisitions of companies and
technologies that strengthen and complement our core technologies, improve our competitive positioning, allow us to penetrate new
markets, and grow our customer base. We also intend to work in collaboration with potential strategic partners in order to continue
to market and sell new product lines derived from, but not limited to, biotherapeutics and in vitro diagnostics, non-biologic
DNA tagging technologies and other supply chain provenance technologies.
Markets
Diagnostics and Reagents
DNA-based diagnostics
is an emerging application area in the in-vitro diagnostics industry. DNA–protein adducts are popular across the medical
diagnostics industry, where these molecules aid in the determination of the incidence of a suspected disease caused by an organism
or pathogen. Based on the amount of target DNA present, probes can be used either directly to detect target DNA, facilitate the
performance of targeting proteins or indirectly to target DNA through amplification that creates a number of copies of a specific
nucleotide. Increased automation of diagnostic tests, discovery of new diagnostic markets, rising investments in pharmaceutical
and pharmacogenomics research, and advancements in DNA array technologies are major growth facilitators for the DNA probes-based
diagnostic products market.
According to an
article from BCC Research, (“DNA Diagnostics Market to Almost Double by 2022 with 14.3% CAGR”), the DNA
Diagnostics market will reach $23.8 billion in 2022. The potential to provide accurate diagnosis and cost effectiveness over
alternative diagnostic techniques are factors that supplement the growth of the DNA diagnostics market. According to
estimates from the International Agency for Research on Cancer (IARC), in 2018 there were 17.0 million new cancer cases and
9.5 million cancer deaths worldwide. By 2040, the global burden is expected to grow to 27.5 million new cancer cases and 16.3
million cancer deaths. These
numbers, we believe, are set to increase consistently; however, advanced automated DNA diagnostics technologies such as next
generation sequencing could play a crucial role in diagnosing and curbing these diseases. In addition, the Global Covid-19
diagnostics market generated $73.19 million in the first quarter of calendar 2020 and is anticipated to hit $9.94 billion by
the fourth quarter of calendar 2020 (Allied Market Research, “Global Covid-19 Diagnostics Market to Garner $9.94
Billion by Fourth Quarter of 2020” (November 2, 2020)).
Our Market Response
Our PCR-produced linear
DNA is used by customers who provide patient diagnosis through the in vitro examination of specimens, such as blood. All
of the linear DNA we provide to our in vitro diagnostic customers is produced through our large-scale PCR process, using
our proprietary technology, with optimized performance for the final diagnostic assay. In addition to performance optimization,
we believe that the production of linear DNA in large lots with quantifiable reproducibility improves the efficiency of our customer’s
quality control for incoming raw materials and improve the overall quality, accuracy and reproducibility of their diagnostic products.
Cell-based DNA production methods are often complicated by impurities. In contrast, we believe our PCR-based production
method offers a high degree of purity and efficiency. In April 2017, we were awarded a five-year supply agreement with FUJIFILM
Wako Pure Chemical Corp. (formerly Wako Pure Chemical Industries, Ltd.) for the manufacture of bulk DNA for in vitro medical
diagnostics. This supply agreement includes quarterly DNA shipments and optional three-year renewals. Under this multi-year contract,
our DNA is utilized in a medical diagnostic tool that aids in assessing disease. We currently also have a number of new linear
DNA amplicons being evaluated by customers for potential use in the in vitro diagnostic market.
On August 8, 2019 we announced that LRx acquired the assets
and intellectual property of Vitatex, Inc, which included the iCTC Technology. As part of the Vitatex, Inc. asset acquisition,
we entered into an Amended and Restated License Agreement with the Research Foundation for the State University of New York relating
to a patent estate covering the iCTC Technology. See “Collaboration and Licensing Agreements.” We seek to further develop,
manufacture and commercialize the iCTC Technology to address the growing circulating tumor cell in vitro diagnostics market.
The acquired iCTC Technology uses a patented functional assay to capture live invasive circulating tumor cell and associated lymphocytes
that can be identified and expanded for further analysis, including genetic sequencing. We believe our recently acquired iCTC technology
can be used as an early cancer diagnostic tool, to facilitate cancer disease progression monitoring and to assess metastatic tumor
risk. The acquired iCTC Technology has been used in a human cancer drug candidate clinical trial to monitor cancer disease progression
in the trial subjects. We believe the acquired iCTC Technology has several advantages over existing in vitro circulating
tumor cell diagnostic technologies that do not capture live iCTC cells.
We have also developed a patent-pending nucleic acid-based in
vitro diagnostic, (LineaTM COVID-19 Assay Kit) to detect the presence of SARS-CoV-2
(the virus that causes COVID-19) RNA in patient specimens. During April 2020, we entered into an agreement with Stony Brook
University Hospital for the validation of our LineaTM COVID-19 Assay Kit.
On May 13, 2020, we received an EUA from the FDA for the clinical use of the Linea COVID-19 Assay Kit for the qualitative
detection of nucleic acid from SARS-CoV-2 in respiratory specimens including anterior nasal swabs, self-collected at a healthcare
location or collected by a healthcare worker, and nasopharyngeal and oropharyngeal swabs, mid-turbinate nasal swabs,
nasopharyngeal washes/aspirates or nasal aspirates, and bronchoalveolar lavage specimens collected by a healthcare worker from
individuals who are suspected of COVID-19 by their healthcare provider. Under the EUA, testing is limited to laboratories certified
under CLIA that meet requirements to perform high complexity tests which certification the Company has applied for but has not
yet obtained. Subsequently, during July and November 2020, the Company was granted EUA amendments that expand
the installed base of PCR equipment platforms on which the Company’s LineaTM COVID-19
Assay Kit can be processed and increases the throughput of the LineaTM COVID-19
Assay Kit through the use of automated RNA extraction. The scope of the EUA, as amended, is expressly limited to use consistent
with the Instructions for Use by authorized laboratories, certified under the CLIA to perform high complexity tests. 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. The Company’s
LineaTM COVID-19 Assay Kit 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. We currently
manufacture the LineaTM COVID-19 Assay Kit at our facilities in Stony Brook, New York. On September 29, 2020 we
announced that we had entered into a Master Services Agreement with Stony Brook University Hospital to supply the LineaTM COVID-19
Assay Kit and related automation systems.
In addition, starting in
July 2020, the Company through its ADCL subsidiary, began offering COVID-19 pooled surveillance testing to customers as
a Testing-as-a-Service (TaaS) offering branded under the safeCircleTM trademark. Unlike diagnostic testing, which
looks for the occurrence of COVID-19 at the individual level, safeCircleTM surveillance testing looks for
infections within a defined population or community and can be used for making health management decisions at the population
level. safeCircleTM surveillance testing uses high-sensitivity pooled COVID-19 testing utilizing the
LineaTM COVID-19 Assay Kit. Under the safeCircleTM surveillance testing service, pooled test results
are returned to the sponsoring organization in the aggregate only, not directly to the participating individuals, and may be
performed without CLIA certification. Once potentially infected portions of a defined population are identified by the
safeCircleTM surveillance testing service, the individuals comprising the potentially infected portions of the
defined population are referred to follow on diagnostic testing at a clinical lab to obtain individual results. ADCL is
offering its safeCircleTM surveillance testing in compliance with current CDC, FDA, CMS and New York State
Department of Health recommendations. The use of pooled sampling procedures for the safeCircleTM surveillance
testing service has been internally validated by ADCL in compliance with current CDC guidance. The use of pooled sampling
procedures is not included in the LineaTM COVID-19 Assay Kit EUA. We currently provide safeCircleTM
surveillance testing to several private schools, New York State-based small enterprises and college athletic programs.
Biotherapeutic Contract Research and Manufacturing
Nucleic acid-based drugs and biologics have emerged as a new
class of treatments for unmet medical needs. Through LRx, we are currently pursuing several types of nucleic acid-based therapeutic
applications for PCR-produced DNA. These applications include: (i) adoptive cell therapy; (ii) DNA vaccines; (iii) RNA-based
therapeutics and (iv) gene therapies. To date, the most prominent use of adoptive cell therapy is for CAR T-cell immuno-oncology
therapies, wherein autologous or allogeneic cells are collected and genetically modified to kill cancer cells. At least two CAR
T-cell therapies have recently been approved by the FDA for treatment of B-cell malignancies. These approved therapies have demonstrated
high efficacy in published studies. Current CAR T-cell therapies are manufactured via bacterial plasmid and viral vector-based
methods. We believe these manufacturing methods are extremely expensive, time-consuming and may have public health concerns. We
believe that production of CAR T-cell therapies via a PCR-based platform, without plasmid or viral vectors, may lead to reduced
manufacturing times, reduced costs and mitigation of public health concern.
DNA vaccines may we believe hold numerous advantages over conventional
vaccination methods. DNA vaccines are able to trigger a wide range of immune responses, leading to broad applications. DNA vaccines
we believe are cheaper and easier to manufacture when compared to convention vaccines. Current DNA vaccines are manufactured via
bacterial plasmids. Production via our PCR-based platform may reduce DNA vaccine costs and manufacturing timeframes.
There are two types of RNA therapeutics. mRNA-based therapeutics,
which result in protein production, and antisense/interfering RNA-based therapeutics, which interfere with or inhibit gene expression.
This dual functionality allows RNA-based therapeutics to target a wide range of indications. RNA-based therapeutics are typically
manufactured from a DNA template obtained from a bacterial plasmid. We believe creating RNA-based therapeutics from a DNA template
obtained from our PCR-based platform may reduce RNA-based therapeutic costs and manufacturing timeframes.
Gene therapy is designed to introduce genetic material into
a subject’s cells to compensate for abnormal genes or to make a beneficial protein. Currently, gene therapy is accomplished
through the viral transduction of a subject’s cells via the use of a recombinant viral vector manufactured from plasmid-derived
DNA. Recently, several gene therapies have been approved for use in the United States. We believe recombinant viral vectors manufactured
in whole or in part from PCR-produced DNA may reduce manufacturing complexities, timelines and costs.
Our Market Response
During September 2018, we formed a new, majority owned
subsidiary LineaRx, Inc. (LRx) to develop and commercialize our extensive experience in the design, manufacture and chemical
modification of DNA via our large scale PCR-based LinearDNATM production platform in the fields of nucleic acid-based
therapeutics, including drugs and biologics. We believe our PCR-produced linear DNA products and services are made cleaner and
faster than historical manufacturing methods. We are also engaged in preclinical and animal drug candidate development, directly
and with collaborators focusing on therapeutically relevant DNA constructs manufactured via our LinearDNATM production
platform. We seek to develop, acquire and commercialize, previously alone and now along 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.
In September 2018, LRx signed a Joint Development
Agreement with Takis/Evvivax to develop PCR-produced DNA expression vectors for two of Takis/Evvivax’s DNA-based
anti-cancer vaccine candidates. Under the Joint Development Agreement, PCR-produced-linear DNA amplicons carrying the DNA
sequences for Takis/Evvivax vaccine candidates will be delivered to preclinical and animal models via Takis/Evvivax’s
proprietary electroporation technology. Antigen-specific immune responses aimed at achieving therapeutic effects will be
studied. See “Collaboration and Licensing Agreements.” During February 2020 we expanded our existing Joint
Development Agreement (JDA) with Takis/Evvivax to include the preclinical development of five linear DNA vaccine candidates
against COVID-19. Together with our development partners, our amplicon-based linear COVID-19 vaccine candidates have shown
promising efficacy in preclinical cell and small animal studies. In addition, on September 16, 2020, we announced the
initiation of a veterinary clinical trial of one of the Company’s five amplicon-based linear COVID-19 vaccine
candidates. In November 2020, we, together with Takis/Evvivax and our clinical research partner GVS, announced receipt
of approvals from the New York State Department of Agriculture and Markets and the USDA on an advanced clinical strategy to
conduct a veterinary trial of a vaccine candidate. Our jointly-developed amplicon-based DNA vaccine for COVID-19 is expected
to start veterinary clinical trials in domestic feline cats by early 2021. The goal of the veterinary clinical trial is to
evaluate the vaccine candidate as a strategy for the prevention of SARS-CoV-2 (COVID-19) (a zoonotic disease) infections in
companion felines of humans. This veterinary clinical trial will seek to understand the immune response in cats by utilizing
a vaccination strategy of interest in people that could yield valuable data for both cats and humans, with the end goal of
applying for a USDA Animal and Plant Health Inspection Service conditional license to enable commercial veterinary sales for
domestic felines.
Non-Biologic Tagging
Pharmaceutical and Nutraceutical Supply Chain
The pharmaceutical industry faces major
problems relative to counterfeit, diluted, or falsely labeled drugs that make their way through healthcare systems worldwide, posing
a health threat to patients and a financial threat to drug makers and distributors. Counterfeit prescription pharmaceuticals are
a growing trend, widely recognized as a public health risk and a serious concern to public health officials, private companies,
and consumers. According to a 2017 report by PricewaterhouseCoopers (“Fighting counterfeit
pharmaceuticals: New defenses for an underestimated - and growing – menace” (June 2017)), the counterfeit drug
market earns between $163 billion to $217 billion per year, making it one of the most lucrative types of illegally-copied goods.
The National Association of Boards of Pharmacy estimates that counterfeit drugs account for 1% of all drugs sold in the United
States. The global anti-counterfeit packaging market size is projected to grow from USD 106.3 billion in 2020 to USD 188.2 billion
by 2025, at a CAGR of 12.09% from 2020 to 2025. The market is driven by factors such as strong growth in the demand from the food &
beverage and pharmaceutical & healthcare sectors. The growing pharmaceutical & healthcare industry and rise in
counterfeit products in the market are the major drivers of the anti-counterfeit packaging market. Applied DNA’s use of molecular
tagging on both the packaging and directly embedded into the dosage itself is targeted at this market segment.
Nearly 40 percent of the drugs Americans
take are made outside of the United States, and about 80 percent of manufacturing sites of active pharmaceutical ingredients (APIs)
used in drugs manufactured in the United States are located outside our borders—in more than 150 countries, many with less
sophisticated manufacturing and regulatory systems than our own. In addition to the sheer volume of imports and foreign facilities,
there has been an increase in the variety of sources, shippers, methods of transportation, and supply chain complexity of products.
Combined, these factors create great challenges to the FDA and industry in ensuring that all drugs and drug components are high
quality and travel safely throughout their complex supply chains. A joint report issued by the Organization for Economic Cooperation
and Development (OECD) and the European Union’s Intellectual Property Office (EUIPO) in April 2020 identified the most
frequently counterfeited drug products from 2014 to 2016. Most did not contain the active ingredients in the correct proportions,
and many contained undeclared substances that are potentially harmful. The study noted that forensic tests of samples suggest that
90% of counterfeit medicines can cause harm to patients. The report also found that 96% of websites offering pharmaceuticals are
operating illegally, and that more than 50% and 33% of fake medicines seized in recent years have come from India and China, respectively.
The COVID-19 pandemic is exacerbating this situation. Interpol, during its annual Operation Pangea in March (the same
week that the WHO declared the novel coronavirus outbreak a pandemic) seized over $14 million worth of dangerous pharmaceuticals
in just seven days. 1 (“The COVID-19 Pandemic Magnifies Pharmaceutical Supply Chain Issues”
(September 2020)).
Our Market Response
On March 31, 2018,
we entered into a License and Cooperation Agreement and a related Supply Agreement with Colorcon, Inc. (“Colorcon”)
for the use of our molecular tags in Colorcon’s product offerings and access to our associated authentication technologies.
Under the terms of the Agreements, we granted Colorcon exclusive worldwide right to use our molecular tags and associated authentication
technologies in film coatings for solid oral dosage form (“SOD”) applications, for which Colorcon is the largest global
supplier, and non-exclusive rights to use our technologies in inks and colorants for SOD applications. Pursuant to the Agreements,
we will supply taggant and authentication materials to Colorcon in exchange for long-term royalties on the sale of Colorcon products
incorporating our molecular tags and on the sale of authentication services related thereto. Further, the first of two milestone
payments was paid to us at the signing of the Agreements. We will receive the second milestone payment upon initial approval by
a regulatory authority for application in a Solid Oral Dosage Form (SODF) pharmaceutical or nutraceutical product application.
The Agreements generally expire on the later of October 1, 2032 or the last expiration date of any patent licensed pursuant
to the Agreements.
In April 2018, we filed our Drug Master File with the U.S.
FDA to allow confidential information about the chemistry, manufacturing and controls processes of our product to be made available
to the FDA for inspection should an end-user company choose to have the FDA review the addition of SigNature molecular tag to their
product. In May 2018, the FDA acknowledged receipt of our filing. In April 2020, we were accepted to participate in the
FDA’s Emerging Technology Program for guidance in regulatory activities with customers.
We continue to expand the formulation of our SigNature®
tags with Colorcon into coatings and inks for targeted pharmaceutical companies, following the October 2011, the FDA Final
Guidance document on the use of so called “Physical-Chemical Identifiers” (PCIDs). The FDA Guidance stipulates that
a PCID should be pharmacologically inactive and present no risk of adverse reaction. The PCID cannot affect the efficacy of the
drug. In addition, 11 categories of information about the PCID must be satisfactorily addressed. We believe SigNature® DNA
may be able to fulfill these requirements. In addition, DNA identifier molecular taggants can be embedded at parts per billion
onto film coatings that cover many of the world’s leading brands of tablets. By integrating the Applied DNA molecular tags
within already utilized film coatings of tablets, we believe we will be able to offer a seamless solution for pharmaceutical company
customers.
On February 19, 2020 we entered into a multi-year Master
Services Agreement and a Trademark Licensing Agreement (the “Agreements”) with Nutrition21, LLC (“Nutrition21”)
to cover commercial production of Nitrosigine®, as well as potential expansion to other products within the Nutrition21 portfolio.
Separately, a Broker Agreement was also signed between the parties to enable Nutrition21 to represent Applied DNA’s CertainT
platform throughout its extensive network in the dietary supplement market. Shipments of SigNature tags for Nitrosigine
commercial production are now in their second production cycle, with shipments for a second product, nooLVL® now
in progress. We are providing authentication services for both products on a periodic basis.
Textiles and Apparel
Textile identity and the authentication
of a product’s origin, are issues of global significance, important to brand owners for quality assurance and compliance,
and to governments that must regulate international trade, enforce textile labeling, and protect consumers. We believe that CertainT®,
an integrated platform to Tag, Test, and Track fiber, yarn, fabrics all the way to finished goods, enables brands and manufacturers
to preserve the integrity authenticity and quality of the source materials in a global supply chain. As a result, consumers will
have confidence that claims and ingredients listed on the label are proven in the finished product. CertainT® molecular business
solutions are relevant to natural fibers like cotton, wool, cashmere, down and feather, and leather, as well as man-made fiber,
recycled polyester, viscose and other synthetic products used in apparel, footwear and home textiles globally.
Our Market Response
As part of the CertainT® platform,
our patented SigNature® T molecular tag technology for molecular tagging and authentication has been proven to be scalable
and commercially applicable in integrated textile supply chains, in cotton as well as recycled polyester and is currently in use
by our customers. Our SigNature® T molecular tag commercial program involves the creation of unique SigNature® T molecular
tags that can be used to tag a customer’s cotton fiber at the ginning stage. Our fully automated, secure DNA Transfer Systems
allow for traceability and monitoring of all molecularly-tagged cotton at multiple gins in Arkansas and California.
Once tagged, the cotton fiber may be
authenticated for textile identity from grower to ginner to spinner to manufacturer to distributor to retailer. At each step of
the process, its textile identity can be tested to link the original cotton fiber to finished product, preserving the authenticity
of the product and the integrity of the supply chain. SigNature® T DNA tags are being used to mark premium Pima cotton fiber,
known as PimaCott® and are also used to mark Upland cotton under the HomeGrown™ trademark. As the cotton ginning in the
U.S. takes place sometime between September and March each year, it is possible that revenues from this business will
be seasonal. In particular, due to the impacts of the COVID-19 global pandemic, the Company did not recognize revenue for the shipment
of DNA concentrate relating to its cotton customer contract during the twelve months ended September 30, 2020.
In June 2017, we entered into a new licensing agreement
with Himatsingka America, Inc., which is part of the Himatsingka Group. (“Himatsingka America”), a leading supplier
of home textiles. Under the terms of the Agreement, Himatsingka America will be solely responsible for promoting, marketing and
selling on a worldwide basis the Company’s technology with respect to finished and unfinished cotton products. The Agreement
grants Himatsingka America an exclusive license to use our technology in respect of cotton, subject to certain carve-outs including
governmental users, non-commercial trade associations and others. The Agreement has a term that continues until June 23, 2042,
except in the case of patents, in which case the term continues with respect to a patent until such patent is no longer in effect.
The Agreement also provides that Himatsingka America will make royalty payments on a quarterly basis in arrears in the event that
our technology is used on non-home products. Himatsingka America is responsible for the inspection and compliance within the supply
chain.
Himatsingka America is generally required to use our
technology during the term of the Agreement, subject, among other things, to their customers’ requirements. We have
established an independent testing laboratory in Ahmedabad, India, which is required by the agreement. Finished products
made from this tagged fiber have been offered for sale under the PimaCott®, HomeGrown®, and HomeGrown
Acala™ content branded labels. The Agreement includes customary mutual indemnification provisions. See also the
information under the caption “—Distribution of our Products and Commercial Agreements—Himatsingka
America.”
Sales and Marketing
We have eight employees engaged in sales and marketing, of which
five are directly involved with sales.
Research and Development
In our Biotherapeutic Contract Research and Manufacturing business,
our research and development efforts are focused on the development of PCR-produced linear DNA expression vectors for use in nucleic
acid-based therapies including drugs and biologics and associated PCR-based methods of linear DNA expression vector manufacture.
Methods for viral free transfection, high-level cellular expression and linear DNA based rAAV manufacture are under development.
In addition, we are developing several linear DNA based COVID-19 and cancer vaccine candidates in collaboration with Takis/Evvivax.
Under our COVID-19 Diagnostic and Surveillance Testing business,
our research and development efforts are focused on the development of high-throughput high-sensitivity molecular diagnostic assays
for COVID-19 and other pathogens.
Our research and development efforts for our Non-Biologic Tagging
business are primarily focused on incorporating DNA molecular tags into carriers such as ink, textiles, thermoplastics and pharmaceuticals
and then authenticating DNA obtained from those marked products both in our laboratories and in the field, with the use of portable
infield DNA readers and proprietary reagents. As part of this effort, we typically conduct feasibility and pilot testing to ensure
that DNA tagging methods are compatible with the customer’s manufacturing and logistic processes, and that they can be implemented
in a cost-effective manner. In some cases, the DNA incorporation methods may undergo wash-out and/or adherence tests to ensure
that DNA can be authenticated on a product even if it is subjected to aggressive processing techniques. We also continue development
in the area of genotyping of cotton, down to the cultivar level to detect more specific information about cotton type. In short,
we have considerable experience working with DNA in a wide range of carriers and substrates and authenticating them even years
after they have been applied onto the surface or inside of product materials. We believe that our continued development of new
and enhanced technologies relating to our core business is essential to our future success.
We incurred approximately $3.3 million and $3.0 million on research
and development activities for the fiscal years ended September 30, 2020 and 2019, respectively
Raw Materials and Suppliers
Our sources of raw materials include synthesized sources of
DNA which we are able to replicate to use in our product offerings and that are available from multiple sources.
Manufacturing
We have the capability to manufacture specific sequences of
SigNature DNA molecular tags and DNA for biopharma applications using PCR at large scale and to produce all of the resulting finished
products at our laboratories in Stony Brook. We manufacture COVID-19 diagnostic assay kits. We also have in-house capabilities
to complete all authentications in our Stony Brook location and textile authentications in our India location.
Distribution of our Products and Commercial Agreements
Our products are distributed in the following ways:
|
·
|
directly to the customer;
|
|
|
|
|
·
|
through channel partners; and
|
|
|
|
|
·
|
through licensed distributors.
|
We have entered into the following agreements and arrangements
for the distribution of our products, among others:
Tyme Technologies. During
November 2019, the Company’s majority-owned subsidiary, LRx signed a definitive agreement with Tyme Technologies, Inc.
to supply the Company’s Vita-AssayTM invasive Circulating Tumor Cell (iCTC) capture assay and associated services for
use in the pivotal stage of the TYME-88-PANC clinical trial for patients with third-line pancreatic cancer.
Under the terms of the Agreement, TYME
has the option to purchase from the Company up to 3,000 Vita-Assay kits and associated iCTC analytical and storage services over
the course of treatment of up to 250 patients.
Collaboration and Licensing Agreements
Takis S.R.L. and Evvivax S.R.L. During September 2018
we signed a joint development agreement with Takis/Evvivax, biotechnology companies focused on the discovery and development of
DNA based anti-cancer vaccines for the human and animal targets, respectively. Under the terms of the agreement, we will jointly
develop linear DNA expression vectors for two of Takis/Evvivax’s anti-cancer vaccines candidates utilizing our linear DNA
technology. Linear DNA amplicons carrying the DNA sequences for Takis/Evvivax’s vaccine candidates will be delivered to preclinical
animal models via Takis/Evvivax’s proprietary electroporation technology. Antigen-specific immune responses aimed at achieving
therapeutic effects will be studied. During February 2020 we expanded our existing Joint Development Agreement (JDA) with
Takis/Evvivax to include the preclinical development of a linear DNA vaccine against COVID-19. In addition, on September 16,
2020, we announced the initiation of a veterinary clinical trial of one of the Company’s five LineaDNA™ vaccine candidates.
In November 2020, we, together with Takis/Evvivax and our clinical research partner GVS, announced receipt of approvals from
the New York State Department of Agriculture and Markets and the USDA on an advanced clinical strategy to conduct a veterinary
trial of a vaccine candidate. The goal of the vaccine trial is to evaluate the vaccine candidate as a strategy for the prevention
of SARS-CoV-2 (COVID-19) (a zoonotic disease) infections in companion felines of humans. This veterinary clinical trial will seek
to understand the immune response in cats by utilizing a vaccination strategy of interest in people that could yield valuable data
for both cats and humans. Our jointly-developed amplicon-based DNA vaccine for COVID-19 is expected to start veterinary clinical
trials in domestic feline cats by early 2021, with the end goal of applying for a USDA Animal and Plant Health Inspection Service
conditional license to enable commercial veterinary sales for domestic felines.
iCell Gene Therapeutics, Inc. During October 2018,
we entered into an exclusive North American licensing agreement and a research services agreement with iCell Gene Therapeutics, Inc.
(“iCell”) under which iCell licensed to us an anti-CD19 CAR T therapy candidate for non-viral delivery. We intend to
utilize our non-viral, plasmid free platform, along with the in-licensed anti-CD19 CAR T therapy to develop, manufacture and commercialize
LinCART19, a non-viral, plasmid free anti-CD19 CAR T therapeutic candidate. During April 2019, we announced that LRx had improved
expression levels and survival rates of linear DNA constructs delivered without viruses or plasmids to human T cells. In collaboration
with Avectas, a cell engineering technology business enabling the manufacture of cell therapies, LRx has achieved a greater than
four-fold increase in cell survival and a more than 50% increase in linear gene expression of a model amplicon. Results were presented
by Avectas at the Cell & Gene Meeting on the Mediterranean in April 2019, which was attended by more than 50 companies.
The Company expects to continue its preclinical research relating to LinCART19 with its partners to increase cellular expression
without the use of viral transduction.
Customer Concentration
Our revenues earned from sale of products and services for the
fiscal year ended September 30, 2020 includes 13%, 12%, 11% and 10% respectively from four customers. At September 30,
2020, four customers accounted for 74% of our accounts receivable. Our revenues earned from sale of products and services for the
fiscal year ended September 30, 2019 includes 27%, 26% and 15%, respectively from three customers. At September 30, 2019,
one customer accounted for 77% of our accounts receivable. Generally, our customers do not have an obligation to make purchases
from us and may stop ordering our products and services or may terminate existing orders or contracts at any time with little or
no financial penalty. The loss of any of our significant customers, any substantial decline in sales to these customers, or any
significant change in the timing or volume of purchases by our customers, could result in lower revenues and could harm our business,
financial condition or results of operations.
Competition
Some of our competitors that operate in the nucleic-acid based
therapeutic, biologics and DNA manufacturing markets include: Precigen, Inc., Aldevron, LLC, Cobra Biologics, Limited, Integrated
DNA Technologies, Inc., Ziopharm Oncology, Inc., MaxCyte, Inc., Touchlight Genetics Ltd., Novartis AG, Kite Pharma, Inc.
and Juno Therapeutics, Inc.
Some of our competitors that operate in the in vitro diagnostics
and/or clinical laboratory markets include: Laboratory Corporation of America Holdings, Quest Diagnostics Incorporated, PerkinElmer, Inc.,
Roche Molecular Systems, Inc., Thermo Fisher Scientific Inc., Hologic, Inc., Becton, Dickinson and Company, Abbott Molecular
Inc., Canon Inc. and Bio-Rad Laboratories, Inc.
Some of our competitors that operate in the anti-counterfeiting
and fraud prevention markets include: AlpVision Sa, Authentix, Inc., Brandwatch Technologies, Inc., Chromologic LLC,
Collectors Universe, Inc., DataDot Technology Limited, De La Rue Plc., Digimarc Corporation, DNA Technologies, Inc.,
Haelixa Ltd., ICA Bremen GmbH, IEH Corporation, Informium AG, opSec Security Group plc., MicroTag Temed Ltd., Nanotech
Security Corp., Nokomis, Inc., Oritain Global Limited, SafeTraces, Inc., Selectamark Security Systems plc, SmartWater
Technology, Inc., Sun Chemical Corporation, TraceTag International Ltd., TruTag Technologies, Inc., Tailorlux gmbH and
YottaMark, Inc.
We expect competition with our products and services to continue
and intensify in the future. We believe competition in our principal markets is primarily driven by:
|
·
|
product performance, features and liability;
|
|
|
|
|
·
|
price;
|
|
·
|
timing of product introductions;
|
|
·
|
ability to develop, maintain and protect proprietary products and technologies;
|
|
·
|
sales and distribution capabilities;
|
|
·
|
technical support and service;
|
If a competitor develops superior technology or cost-effective
alternatives to our products, our business, financial condition and results of operations could be significantly harmed.
Proprietary Rights
We believe that our approximately 87
issued patents, 42 patent applications, 34 trademark registrations, and 8 trademark applications, and our trade secrets,
copyrights and other intellectual property rights are important assets for us. Our patents will expire at various times
between 2021 and 2037. The duration of our trademark registrations varies from country to country. However, trademarks are
generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly
maintained.
On August 7, 2019 we entered into an Amended and Restated
Exclusive Licensing Agreement with The Research Foundation for the State University of New York (the “RF”) for a patent
estate relating to the iCTC Technology. Under the terms of the Amended and Restated Exclusive Licensing Agreement, LRx is provided
exclusive world-wide rights to the iCTC Technology patent estate that was previously licensed from the RF by Vitatex, Inc.
However, there are events that are outside of our control that
pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual
property protection may not be available in every country in which our products and services are distributed. The efforts we have
taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete. Protecting our intellectual property rights is costly and time consuming.
Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating
results. Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of
these innovations. Given the costs of obtaining patent protection, we may choose not to protect certain innovations that later
turn out to be important. There is always the possibility that the scope of the protection gained from one of our issued patents
will be insufficient or deemed invalid or unenforceable. We also seek to maintain certain intellectual property as trade secrets.
This secrecy could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to
lose the competitive advantage resulting from these trade secrets.
Litigation regarding patents and other intellectual property
rights is extensive in the biotechnology industry. In the event of an intellectual property dispute, we may be forced to litigate.
This litigation could involve proceedings instituted by the U.S. Patent and Trademark Office or the International Trade Commission,
as well as proceedings brought directly by affected third parties. Intellectual property litigation can be extremely expensive,
and these expenses, as well as the consequences should we not prevail, could seriously harm our business. If a third party claims
an intellectual property right to technology we use, we might need to discontinue an important product or product line, alter our
products and processes, pay license fees or cease our affected business activities. Although we might under these circumstances
attempt to obtain a license to this intellectual property, we may not be able to do so on favorable terms, or at all.
Government Approvals of Commercial Non-Biologic Products
We do not require any governmental approvals of our currently
commercialized non-biologic products or services.
Government Regulations for COVID-19 Diagnostic and Surveillance
Testing
For our LineaTM COVID-19 Assay Kit we received EUA
from the FDA for the clinical use of the LineaTM COVID-19 Assay Kit for the qualitative detection of nucleic acid from SARS-CoV-2
in respiratory specimens including anterior nasal swabs, self-collected at a healthcare location or collected by a healthcare
worker, and nasopharyngeal and oropharyngeal swabs, mid-turbinate nasal swabs, nasopharyngeal washes/aspirates or nasal aspirates,
and bronchoalveolar lavage specimens collected by a healthcare worker from individuals who are suspected of COVID-19 by their
healthcare provider. Under the EUA, testing is limited to laboratories certified under CLIA that meet requirements to perform
high complexity tests. In July and November 2020, we were granted amendments to our EUA that expand the installed base
of PCR equipment platforms on which our LineaTM COVID-19 Assay Kit can be processed and significantly increased
the daily testing capacity of the LineaTM COVID-19 Assay Kit through the use of robotic automation. Our EUA and
other information relating to our LineaTM COVID-19 Assay Kits can be found at https://www.fda.gov/medical-devices/coronavirus-disease-2019-covid-19-emergency-use-authorizations-medical-devices/vitrodiagnostics-euas.
Surveillance testing is not regulated by the FDA and CMS
has stated that CLIA certification is not required to conduct surveillance testing. ADCL is offering its
safeCircleTM surveillance testing in compliance with current CDC, FDA, CMS and New York State Department of Health
recommendations. The use of pooled sampling procedures for the safeCircleTM surveillance testing service has been
internally validated by ADCL in compliance with current CDC guidance. The use of pooled sampling procedures is not included
in the LineaTM COVID-19 Assay Kit EUA.
Government Approvals of Drug and Biologic Products
Some of our products may be incorporated
into drug and biologic products which are subject to extensive regulation by FDA and other regulatory agencies in the United States
and by comparable authorities in foreign countries. Biologics include a wide range of products such as vaccines, gene therapy,
and recombinant therapeutic proteins. Biologics can be composed of sugars, proteins or nucleic acids or complex combinations of
these substances. They may also be living entities such as cells or tissue. Some of our products may be incorporated into drugs
and biologics that are or will be subject to regulation as described in the next section. Some of our products may be drugs or
biologics that are subjected themselves to regulation as described in the following section. In either case, we are unlikely to
receive material revenues until the related drug or biologic receives regulatory approval. The FDA and other authorities regulate
among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and
marketing, distribution, post-approval monitoring and reporting, sampling and import and export of drug and biologic products.
Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions,
such as FDA refusal to file a marketing application, to issue a Complete Response letter or to not approve pending New Drug Applications
(NDA) or Biologics Licensing Applications (BLAs), or to issue warning letters, product recalls, product seizures, total or partial
suspension of production or distribution, injunctions, fines, civil penalties, litigation, government investigation and criminal
prosecution.
Drug and biologic products that must undergo
preclinical and clinical evaluation relating to product safety and efficacy before they are approved as commercial therapeutics
products. The regulatory authorities having jurisdiction in the countries in which our collaborators and customers intend to market
their products may delay or put on hold clinical trials, delay approval of a product or determine that the product is not approvable.
The FDA and comparable government authorities having jurisdiction in the countries in which our customers intend to market their
products have the authority to withdraw product approval or suspend manufacture if there are significant problems with raw materials
or supplies, quality control and assurance, safety, efficacy or the product is deemed adulterated or misbranded.
Government Regulation of Pharmaceutical and Biologic Products
In the United States, the FDA regulates
drugs and biologics under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. The process of obtaining
regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations requires
the expenditure of substantial time and financial resources. Failure to comply with the applicable U.S. requirements at any time
during the product development process, approval process or after approval, may subject an applicant to a variety of administrative
or judicial sanctions, such as the FDA’s refusal to approve pending NDAs or BLAs, withdrawal of an approval, imposition of
a clinical hold, issuance of warning letters, product recalls, product seizures, total or partial suspension of production or distribution,
injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.
The process required by the FDA before
a drug or biologic may be marketed in the United States generally involves the following:
|
·
|
completion of preclinical laboratory tests, animal studies and formulation studies in compliance
with the FDA’s Good Laboratory Practice regulations;
|
|
·
|
submission to the FDA of an Investigational New Drug Application (“IND”), which must
become effective before human clinical trials may begin;
|
|
·
|
approval by an independent Institutional Review Board (“IRB”) at each clinical site
before each trial may be initiated;
|
|
·
|
performance of adequate and well-controlled human clinical trials in accordance with Current Good
Clinical Practices (“cGCPs”), requirements to establish the safety and efficacy of the proposed drug or biologic product
for each indication;
|
|
·
|
submission to the FDA of a New Drug Application (“NDA”) or Biologics Licensing Application
(“BLA”);
|
|
·
|
satisfactory completion of an FDA advisory committee review, if applicable;
|
|
·
|
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which
the drug or biologic product is produced to assess compliance with cGMP requirements and to assure that the facilities, methods
and controls are adequate to preserve the drug’s identity, strength, quality and purity;
|
|
·
|
satisfactory completion of FDA audits of clinical trial sites to assure compliance with cGCPs and
the integrity of the clinical data;
|
|
·
|
payment of user fees and securing FDA approval of the NDA or BLA; and
|
|
·
|
compliance with any post-approval requirements, including the potential requirement to implement
a Risk Evaluation and Mitigation Strategy (“REMS”), and the potential requirement to conduct post-approval studies.
|
Preclinical Studies
Preclinical studies include laboratory
evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safety and efficacy. An
IND sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data and any
available clinical data or literature, among other things, to the FDA as part of an IND. Some preclinical testing may continue
even after the IND is submitted. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time
the FDA raises concerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical
hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. As
a result, submission of an IND may not result in the FDA allowing clinical trials to initiate.
Clinical Trials
Clinical trials involve the administration
of the investigational new drug or biologic product to human subjects under the supervision of qualified investigators in accordance
with cGCP requirements, which include the requirement that all research subjects provide their informed consent in writing for
their participation in any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives
of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. A protocol for each
clinical trial and any subsequent protocol amendments must be submitted to the FDA. In addition, an IRB at each institution participating
in the clinical trial must review and approve the plan for any clinical trial before it initiates at that institution. Information
about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public
dissemination on their www.clinicaltrials.gov website.
Progress reports detailing the results
of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. Furthermore,
the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research
subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial
at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug
or biologic has been associated with unexpected serious harm to patients.
Marketing Approval
Assuming successful completion of the required
clinical testing, the results of the preclinical and clinical studies, together with detailed information relating to the product’s
chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA or BLA requesting
approval to market the product for one or more indications. In most cases, the submission of an NDA or BLA is subject to a substantial
application user fee. Under the Prescription Drug User Fee Act, or PDUFA, guidelines that are currently in effect, the FDA has
a goal of ten months from the date of “filing” of a standard NDA or BLA, for a new molecular entity to review
and act on the submission. This review typically takes twelve months from the date the NDA or BLA is submitted to FDA because the
FDA has approximately two months to make a “filing” decision.
After evaluating the NDA or BLA and all
related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing
facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete
response letter generally contains a statement of specific conditions that must be met in order to secure final approval of the
NDA or BLA and may require additional clinical or preclinical testing in order for FDA to reconsider the application. Even with
submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria
for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval
letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications.
Even if the FDA approves a product, it
may limit the approved indications for use of the product, require that contraindications, warnings or precautions be included
in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess
a drug or biologic’s safety after approval, require testing and surveillance programs to monitor the product after commercialization,
or impose other conditions, including distribution and use restrictions or other risk management mechanisms under a REMS, which
can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of
a product based on the results of post-marketing studies or surveillance programs. After approval, some types of changes to the
approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further
testing requirements and FDA review and approval.
Post-Approval Requirements
Drugs or biologics manufactured or distributed
pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements
relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse
experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling
claims are subject to prior FDA review and approval. There are continuing, annual user fee requirements for any marketed products
and the establishments where such products are manufactured, as well as new application fees for supplemental applications with
clinical data.
The FDA may impose a number of post-approval
requirements as a condition of approval of an NDA or BLA. For example, the FDA may require post-marketing testing, including Phase
4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization.
In addition, drug and biologic manufacturers
and other entities involved in the manufacture and distribution of approved drugs or biologics are required to register their establishments
with the FDA and state agencies and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance
with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before
being implemented. FDA regulations also require investigation and correction of any deviations from cGMP requirements and impose
reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use.
Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain
cGMP compliance.
Once an approval of a drug or biologic
is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if
problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse
events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements,
may result in mandatory revisions to the approved labeling to add new safety information; imposition of post-market studies or
clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program.
The FDA strictly regulates marketing, labeling,
advertising and promotion of products that are placed on the market. Drugs or biologics may be promoted only for the approved indications
and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations
prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject
to significant liability.
In many foreign countries, drugs and biologics
are subject to regulatory requirements in addition to and sometimes different than the U.S. requirements described herein.
Laboratory Developed Tests
The FDA is currently exercising
enforcement discretion over the regulation of Laboratory Developed Tests (“LDTs”), such as our iCTC capture
assay. If the FDA were to begin enforcement, our product would potentially be subject to extensive regulation as a medical
device under federal law. In order to market a medical device, a company must first receive either FDA clearance under
Section 510(k) of the Federal Food, Drug and Cosmetic Act or approval of a PMA application from the FDA, unless an
exemption applies. The process of obtaining PMA approval is much more rigorous, costly, lengthy and uncertain than the
510(k) clearance process. In the 510(k) clearance process, the FDA must determine that a proposed device is
“substantially equivalent” to a device legally on the market, known as a “predicate” device, in order
to clear the proposed device for marketing. To be “substantially equivalent,” the proposed device must have the
same intended use as the predicate device, and either have the same technological characteristics as the predicate device or
have different technological characteristics and not raise different questions of safety or effectiveness than the predicate
device. Clinical data is sometimes required to support substantial equivalence. In the PMA approval process, the FDA must
determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but
not limited to, technical, pre-clinical, clinical trial, manufacturing, and labeling data. The PMA process is typically
required for devices for which the 510(k) process cannot be used and that are deemed to pose the greatest risk.
Following FDA clearance or approval, medical devices are subject to continuing regulatory requirements, including those
related to manufacturing, labeling, advertising and promotion, restrictions on sale, distribution and use, and surveillance
of safety issues and product complaints.
Clinical Laboratory Improvement Amendments
The CLIA is a federal law regulating clinical
laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis,
prevention, or treatment of disease. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United
States by mandating specific standards in the areas of personnel qualifications, administration, and participation in proficiency
testing, patient test management, quality control, quality assurance and inspections. Clinical laboratories must be certified under
CLIA in order to perform testing on human specimens, unless they fall within an exception to CLIA certification, such as research
laboratories that test human specimens but do not report patient-specific results for the diagnosis, prevention, or treatment of
any disease or impairment of, or the assessment of the health of individual patients. CLIA certification is also required to be
eligible to bill Federal and State healthcare programs, as well as many private third-party payers, for diagnostic testing and
services. In addition, proprietary tests must also be recognized as part of an accredited program under CLIA so that they can be
offered in a CLIA-certified laboratory.
Emergency Use Authorizations
The FDA has the authority to grant an EUA
to allow unapproved medical products to be used in an emergency to diagnose, treat, or prevent serious or life-threatening diseases
or conditions when there are no adequate, approved, and available alternatives. When issuing an EUA, the FDA imposes conditions
of authorization, with which the company must comply. Such conditions include, but may not be limited to, compliance with labeling,
distribution of materials designed to ensure proper use, reporting obligations, and restrictions on advertising and promotion.
The EUA is only effective for the duration of the COVID-19 public health emergency. The FDA may revoke or terminate the EUA sooner
if, for example, we fail to comply with the terms of the EUA or our test is determined to be less accurate than it was initially
believed to be. The FDA may revoke an EUA if there is a failure to comply with the conditions of authorization.
U.S. Healthcare Fraud and Abuse Laws and Compliance Requirements
We are subject to various federal and state
laws targeting fraud and abuse in the healthcare industry. These laws may impact, among other things, our proposed sales and marketing
programs for drugs and biologics. In addition, we may be subject to patient privacy regulation by both the federal government and
the states in which we conduct our business. The laws that may affect such operations include:
|
·
|
the federal Anti-Kickback Statute, which prohibits, among other things, persons from soliciting,
receiving, offering or paying remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for,
either the referral of an individual for, or the purchase, order or recommendation of, an item or service reimbursable under a
federal healthcare program, such as the Medicare and Medicaid programs. The term “remuneration” has been broadly interpreted
to include anything of value;
|
|
·
|
federal false claims and civil monetary penalties laws, including the federal civil False Claims
Act, which prohibits anyone from, among other things, knowingly presenting, or causing to be presented, for payment to federal
programs (including Medicare and Medicaid) claims for items or services that are false or fraudulent;
|
|
·
|
provisions of federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”),
which created federal criminal statutes that prohibit, among other things, knowingly and willfully executing a scheme to defraud
any healthcare benefit program or making false statements in connection with the delivery of or payment for healthcare benefits,
items or services. In addition, HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of
2009 (“HITECH”) and its implementing regulations, impose certain requirements relating to the privacy, security and
transmission of individually identifiable health information; and
|
|
·
|
the federal Physician Payments Sunshine Act requirements, under the Patient Protection and the
Affordable Care Act (the “ACA”), which require manufacturers of certain drugs and biologics to track and report to
Centers for Medicare & Medicaid Services, or CMS, payments and other transfers of value they make to U.S. physicians and
teaching hospitals as well as physician ownership and investment interests in the manufacturer.
|
Other U.S. Regulatory Matters
Manufacturing, sales, promotion and other
activities following product approval for drugs and biologics are also subject to regulation by numerous regulatory authorities
in the United States in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of
the Department of Health and Human Services, the Department of Justice, the Drug Enforcement Administration, the Consumer Product
Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection
Agency and state and local governments. Sales, marketing and scientific and educational programs also must comply with state and
federal fraud and abuse laws.
Pricing and rebate programs must comply
with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more recent requirements in the
ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration,
additional laws and requirements apply. Products must meet applicable child-resistant packaging requirements under the U.S. Poison
Prevention Packaging Act. Manufacturing, sales, promotion and other activities also are potentially subject to federal and state
consumer protection and unfair competition laws.
The distribution of pharmaceutical and
biologic products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage
and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
The failure to comply with any of these
laws or regulatory requirements subjects firms to possible legal or regulatory action. Depending on the circumstances, failure
to meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, requests
for recall, seizure of products, total or partial suspension of production, denial or withdrawal of product approvals or refusal
to allow a firm to enter into supply contracts, including government contracts. Any action against us for violation of these laws,
even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s
attention from the operation of our business. Prohibitions or restrictions on sales or withdrawal of future products marketed by
us could materially affect our business in an adverse way.
Changes in regulations, statutes or the
interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our
manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation
of our products; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely
affect the operation of our business.
Coverage and Reimbursement
Sales of our drug and biologic products
will depend, in part, on the extent to which such products will be covered by third party payors, such as government health programs,
commercial insurance and managed healthcare organizations. In the United States no uniform policy of coverage and reimbursement
for drug products or biologics exists. Accordingly, decisions regarding the extent of coverage and amount of reimbursement to be
provided for any of our products will be made on a payor-by-payor basis. As a result, the coverage determination process is often
a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our products
to each payor separately, with no assurance that coverage and adequate reimbursement will be obtained.
As noted above, the marketability of any
drug or biologic products for which we receive regulatory approval for commercial sale may suffer if the government and third-party
payors fail to provide adequate coverage and reimbursement. An emphasis on cost containment measures in the United States has increased,
and we expect will continue to increase, the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement
rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which
we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
In addition, in most foreign countries,
the proposed pricing for a drug or biologic must be approved before it may be lawfully marketed. The requirements governing drug
and biologic pricing and reimbursement vary widely from country to country. For example, the European Union provides options for
its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement
and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product
or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product
on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical
products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in
the European Union do not follow price structures of the United States and generally prices tend to be significantly lower.
Impact of Other Government Regulation
We and our products are subject to regulation
by various U.S. federal regulatory agencies such as the Federal Trade Commission and are subject to regulation by the Occupational
Safety and Health Administration concerning employee safety and health matters. Such regulations principally relate to the ingredients,
labeling, packaging, advertising and marketing of our products. There are no significant capital expenditures for government regulation
matters either planned in the current year or expected in the near future.
Compliance with Environmental Law
We and any suppliers we currently or may in the future engage
are subject to numerous federal, state, and local environmental, health, and safety laws, regulations, and permitting requirements,
including those governing laboratory procedures; the generation, handling, use, storage, treatment, and disposal of hazardous and
regulated materials and wastes; the emission and discharge of hazardous materials into the ground, air, and water; and employee
health and safety. We believe that we are in compliance with all applicable environmental law and do not have any material costs
of compliance.
Under certain environmental laws, we could be held responsible
for costs relating to any contamination at our current or past facilities and at third party facilities. We also could incur significant
costs associated with civil or criminal fines and penalties. Compliance with applicable environmental laws and regulations may
be expensive, and current or future environmental laws and regulations may impair our research, product development and manufacturing
efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes.
Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our
employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities.
We do not carry specific biological or hazardous waste insurance coverage, and our property, casualty, and general liability insurance
policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination.
Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount
exceeding our resources, and our preclinical trials, future clinical trials or regulatory approvals could be suspended, which could
have a material adverse effect on our business, prospects, financial condition, results of operations, and prospects.
Employees
As of September 30, 2020 we had a total of 61employees
(59 fulltime and 2 part-time), consisting of 3 in executive management, 13 in research and development, 4 in
forensics, 5 in quality assurance and compliance, 4 in quality control, 3 in finance and accounting, 6 in operations/production,
8 in sales and marketing, 1 in human resources, 1 in shared services, 1 in investor relations, 2 in information services, 4 in
product development, and 6 in Applied DNA Clinical Labs, LLC. . Expenses related to travel, marketing, salaries,
and general overhead will be increased as necessary to support our growth in revenue. Any projected increase in human capital is
dependent upon our ability to generate revenues and obtain sources of funding. Since June 2012, we have been working with
Insperity Inc. to assist in managing many of our back-end administrative human resources, benefits, and payroll responsibilities.
We are an at-will employer and generally do not enter into employment agreements requiring our employees to continue in our employment
for any period of time, with the exception of our Chief Executive Officer, Dr. James A. Hayward. The initial term of Dr. Hayward’s
current employment agreement was July 1, 2016 through June 30, 2017, and this employment agreement automatically renews
for one-year periods subject to ninety days’ prior notice of non-renewal by Dr. Hayward or us in accordance with the
terms of the employment agreement. As of June 30, 2020, the employment contract automatically renewed for an additional year.
Available Information
We are subject to the informational requirements of the Exchange
Act, which requires us to file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
amendments to such reports and other information with the SEC. Because we file documents electronically with the SEC, you may obtain
this information by visiting the SEC’s website at: www.sec.gov. Our website is located at: www.adnas.com. The
information on, or that may be accessed through, our website is not incorporated by reference into and should not be considered
a part of this report.
Summary of Risk Factors
Our business is subject to numerous risks
and uncertainties, discussed in more detail in the following section. These risks include, among others, the following key risks:
|
·
|
The COVID-19 global pandemic may continue to materially and adversely impact our business, financial condition and
results of operations.
|
|
·
|
Our ability to continue as a going concern.
|
|
·
|
We have a history of net losses.
|
|
·
|
We have not produced significant revenues. This makes it difficult to evaluate our future prospects and increases the risk
that we will not be successful.
|
|
·
|
Our opportunities in pharmaceuticals and biologics will require substantial additional funding. We may not be successful
in our efforts to create a pipeline of product candidates or to develop commercially successful products. If we fail to successfully
identify, finance and develop product candidates, our commercial opportunities in pharmaceuticals and biologics may be limited.
|
|
·
|
Our LineaTM COVID-19 Assay Kit is being sold under a FDA EUA which could be revoked or terminated by the FDA
at any time and will cease to be effective once the public health emergency justifying its use ends.
|
|
·
|
Our COVID-19 Surveillance Testing may become obsolete for a variety of reasons, including an end
to the current pandemic. The utility will also be diminished if positivity rates reach levels high enough to render surveillance
testing ineffective or inefficient. Pharmaceutical and biologic products are highly complex, and if we or our collaborators and
customers are unable to provide quality and timely offerings to our respective customers, our business could suffer.
|
|
·
|
Our LineaTM COVID-19 Assay Kits could become obsolete or their utility could be significantly diminished.
|
|
·
|
Pharmaceutical and biologic-related revenue will be dependent on our collaborators’ and customers’
demand for our manufacturing services.
|
|
·
|
The markets for our drug and biologic candidates and linear DNA are very competitive, and we may
be unable to continue to compete effectively in these industries in the future.
|
|
·
|
The markets for our supply chain security and product authentication solutions are very competitive,
and we may be unable to continue to compete effectively in these industries in the future.
|
|
·
|
Intellectual property litigation could harm our business, financial condition and results of operations.
|
|
·
|
Our joint pursuit of a potential vaccine for COVID-19 is at an early stage and may be unable to produce a vaccine that successfully
treats the virus in a timely manner, if at all, and compete successfully with vaccines developed by larger companies.
|
|
·
|
Pharmaceutical and biologic-related revenue is generally dependent on regulatory approval, oversight and compliance.
|
|
·
|
The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy, time consuming, and
inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, we will be unable
to generate product revenue and our business will be substantially harmed.
|
|
·
|
If the FDA were to begin to enforce regulation of Laboratory Developed Tests (“LDTs”), we could incur substantial
costs and delays associated with trying to obtain pre-market clearance or approval and costs associated with complying with post-market
requirements.
|
|
·
|
If we are unable to obtain laboratory licensure or we fail to comply with laboratory licensing requirements, we could lose
the ability to offer our clinical testing services or experience disruptions to our business.
|
|
·
|
If we fail to comply with healthcare laws, we could face substantial penalties and our business, operations and financial conditions
could be adversely affected.
|
|
·
|
We need to expand our sales, marketing and support organizations to increase market acceptance of our products and services.
|
|
·
|
If we are unable to continue to retain the services of Dr. Hayward, we may not be able to continue our operations.
|
|
·
|
We may have conflicts of interest with our affiliates and related parties, and in the past we have engaged in transactions
and entered into agreements with affiliates that were not negotiated at arms’ length.
|
|
·
|
There are a large number of shares of common stock underlying our outstanding options and warrants and the sale of these shares
may depress the market price of our common stock and cause immediate and substantial dilution to our existing stockholders.
|
In addition to the above
key factors, as well as other variables affecting our operating results and financial condition, past financial performance
may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or
trends in future periods. The following are important factors that could cause actual results or events to differ materially
from those contained in any forward-looking statements made by us or on our behalf. The risks and uncertainties described
below are not the only ones we face. In addition to the factors discussed elsewhere in this report and our other reports and
documents filed with the SEC, risks and uncertainties not presently known to us or that we may currently deem immaterial also
may impair our business, financial condition, operating results and/or stock price. If any of the following risks or such
other risks actually occurs, our business, financial condition, operating results and/or stock price could be harmed. In the
following factors, “volatility in our share price”, “adverse impact on the price (or value) of our
shares”, “decline in the price of our common stock” and similar terms also refer to our warrants and shares
to be received upon exercise of our warrants.
Risks Relating to Our Business:
The COVID-19 global pandemic may continue to
materially and adversely impact our business, financial condition and results of operations.
Our business has been and could continue to be materially and
adversely affected by the outbreak of a widespread health epidemic. The present coronavirus (or COVID-19) pandemic has disrupted
our operations and has affected our business, as government authorities impose mandatory closures, work-from-home orders and social
distancing protocols or impose other restrictions that could materially adversely affect our ability to adequately staff and maintain
our operations. Portions of our business are considered “essential” such as our government and pharmaceutical
contracts, as well as our vaccine and diagnostic candidate development and our COVID-19 Surveillance Testing. However, we have
experienced, and may continue to experience in the future, facility closures related to our “nonessential” businesses,
and pursuant to the government order, the Company has reduced the scope of its operations and where possible, certain workers are
telecommuting from their homes. As a result of COVID-19 we have experienced a decline in revenues from non-biological tagging
and related services. As the COVID-19 outbreak and responses to it continue to evolve, we may experience further adverse impacts
on our operations, including our ability to secure supplies, and our ability to access capital on favorable terms, or at all, may
be impaired. There may also be long-term effects on our customers in and the economies of affected countries. Although the duration
and ultimate impact of these factors is unknown at this time, the decline in economic conditions due to COVID-19, or another disease-causing
similar impacts, may adversely affect our business, financial condition and results of operations and such impact may be material.
There is substantial
doubt relating to our ability to continue as a going concern.
We have recurring net
losses, which have resulted in an accumulated deficit of $269,835,650 as of September 30, 2020. We have incurred a net loss
of $13,028,904 for the fiscal year ended September 30, 2020. At September 30, 2020, we had cash and cash equivalents
of $7,786,743. We have concluded that these factors raise substantial doubt about our ability to continue as a going concern for
one year from the issuance of the financial statements. In addition, the report from our independent registered public accounting
firm for the year ended September 30, 2020 includes an explanatory paragraph stating that our significant losses and needs
to raise additional funds to meet our obligations and sustain operations raise substantial doubt about our ability to continue
as a going concern. We will continue to seek to raise additional working capital through public equity, private equity or debt
financings. If we fail to raise additional working capital, or do so on commercially unfavorable terms, it would materially and
adversely affect our business, prospects, financial condition and results of operations, and we may be unable to continue as a
going concern. Future reports from our independent registered public accounting firm may also contain statements expressing substantial
doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the
future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources
may be unwilling to provide additional funding to us on commercially reasonable terms, if at all.
We may not be entitled to forgiveness
of our recently received Paycheck Protection Program Loan, and our application for the Paycheck Protection Program Loan could in
the future be determined to have been impermissible.
In
May 2020, we received loan proceeds of approximately $847 thousand (the “PPP Loan”) pursuant to the Paycheck Protection
Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small
Business Administration (the “SBA”). The PPP Loan, if not forgiven,
bears interest at a rate of 1.00% per annum, and is subject to the standard terms and conditions applicable to loans administered
by the SBA under the CARES Act.
Under the terms of the CARES Act, PPP Loan recipients must meet
certain eligibility criteria. Due to the size of the PPP Loan, it is subject to review by regulators. We could be granted forgiveness
for all or a portion of loans granted under the PPP. Such forgiveness will be determined based on the use of loan proceeds for
payment of payroll costs and any payments of mortgage interest, rent, and utilities. We have considered the requirements of the
PPP Loan and we believe we are within the eligibility threshold and have used the loan proceeds in accordance with PPP Loan forgiveness
requirements. However, no assurance can be provided that we will obtain forgiveness for any portion of the PPP Loan.
Further, if despite our actions and certification
that we satisfied all eligibility requirements for the PPP Loan, it is later determined that we violated applicable laws or were
otherwise ineligible to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety in a lump sum or be subject
to additional penalties, which could result in adverse publicity and damage to our reputation. If these events were to transpire,
they could have a material adverse effect on our business, results of operations and financial condition.
We have not produced significant revenues. This makes
it difficult to evaluate our future prospects and increases the risk that we will not be successful.
Our operations since inception have produced
limited revenues and may not produce significant revenues in the near term, or at all, which may harm our ability to obtain additional
financing and may require us to reduce or discontinue our operations. You must consider our business and prospects in light of
the risks and difficulties we will encounter as a company operating in a rapidly evolving industry. We may not be able to successfully
address these risks and difficulties, which could significantly harm our business, operating results, and financial condition.
Our new emphasis on biotherapeutic
contract research and manufacturing and COVID-19 diagnostic and surveillance testing may reduce our ability to maintain and expand
our existing Non-Biologic Tagging businesses
Our new emphasis on biotherapeutic contract
research and manufacturing and COVID-19 diagnostic and surveillance testing may divert funding and our limited managerial and other
resources from our existing non-biologic tagging businesses. This may have the effect of reducing opportunities to grow or maintain
revenues in our existing businesses while at the same time we may fail in our biotherapeutic contracts research and manufacturing
and COVID-19 diagnostic and surveillance testing efforts.
Our opportunities in pharmaceuticals and biologics will
require substantial additional funding. We may not be successful in our efforts to create a pipeline of product candidates
or to develop commercially successful products. If we fail to successfully identify, finance and develop product candidates, our
commercial opportunities in pharmaceuticals and biologics may be limited.
We have no pharmaceutical or biologic products
approved for commercial sale and have not generated any revenue from pharmaceutical or biologic product sales. Identifying, developing,
obtaining regulatory approval and commercializing pharmaceutical and biologic product candidates will require substantial additional
funding beyond our current available resources and is prone to the risks of failure inherent in drug or biologic development. Developing
product candidates is expensive, and we expect to spend substantial amounts as we fund our early-stage research projects, engage
in preclinical development of early-stage programs and, in particular, advance program candidates through preclinical development
and clinical trials.
Investment in pharmaceutical and biologic
product development involves significant risk that any product candidate will fail to demonstrate adequate efficacy or an acceptable
safety profile, gain regulatory approval, and become commercially viable. We cannot provide any assurance that we will be able
to successfully advance any product candidates through the development process or, if approved, successfully commercialize any
product candidates.
Even if we receive regulatory approval
to market any of our product candidates, we cannot assure you that any such product candidate will be successfully commercialized,
widely accepted in the marketplace or be more effective than other commercially available alternatives.
Even if we are able to generate revenue
from the sale of any approved pharmaceutical and biologic products, we may not become profitable and may need to obtain additional
funding to continue operations. Our failure to become and remain profitable would decrease the value of our Company and could impair
our ability to raise capital, expand our business, maintain our research and development efforts, diversify our pipeline of product
candidates or continue our operations, and cause a decline in the value of our common stock, all or any of which may adversely
affect our viability.
Our operating results could be adversely affected by a
reduction in business with our significant customers.
Our revenue earned from the sale of products and services for
the fiscal year ended September 30, 2020 included an aggregate of 46% of our total revenues from four customers. These four
customers accounted for approximately 22% of our total accounts receivable at September 30, 2020. At September 30, 2020,
four customers accounted for an aggregate of 74% of our total accounts receivable. Our revenue earned from the sale of products
and services for the fiscal year ended September 30, 2019 included an aggregate of 68% of our total revenues from three customers.
These three customers accounted for approximately 82% of our total accounts receivable at September 30, 2019. At September 30,
2019, one customer accounted for an aggregate of 77% of our total accounts receivable. Generally, our customers do not have an
obligation to make purchases from us and may stop ordering our products and services or may terminate existing orders or contracts
at any time with little or no financial penalty. The loss of any of our significant customers, any substantial decline in sales
to these customers, or any significant change in the timing or volume of purchases by our customers could result in lower revenues
and could harm our business, financial condition or results of operations.
Fluctuations in quarterly results may cause a decline
in the price of our common stock.
Our revenues and profitability are
difficult to predict due to the nature of the markets in which we compete, as well as our recent entry into new markets and
products, such as our LineaTM COVID-19 Assay Kit and our
COVID-19 Surveillance Testing, fluctuating user demand, the uncertainty of current and future global economic conditions, and
for many other reasons, including that our operating results are highly dependent on the volume and timing of orders received
during a quarter, which are difficult to forecast. Customers generally order on an as-needed basis and we typically do not
obtain firm, long-term purchase commitments from our customers. The quarterly fluctuations in operating results
described above may cause a decline in the price of our common stock.
Risks Relating to Our Product Candidates, Manufacturing,
Development, and Industries:
Our LineaTM COVID-19
Assay Kit is being sold under an FDA EUA.
Our LineaTM COVID-19 Assay
Kit has not been cleared or approved by FDA, but has been authorized for sale under an EUA. The FDA has the authority to grant
an EUA to allow unapproved medical products to be used in an emergency when there are no adequate, approved, and available alternatives.
The EUA authorizes our test to be used by laboratories certified to perform high complexity testing under CLIA. The EUA includes
conditions of authorization with which we must comply, including, but not limited to, compliance with labeling, distribution of
materials designed to ensure proper use, reporting obligations, and restrictions on advertising and promotion. Distributors of
and laboratories using our LineaTM COVID-19 Assay Kit must also comply with the relevant provisions of our EUA.
The EUA is only effective for the duration of the COVID-19 public health emergency. The FDA may revoke or terminate the EUA sooner
if, for example, we fail to comply with the terms of the EUA or our test is determined to be less accurate than it was initially
believed to be. We cannot predict how long the EUA will remain in place. If the EUA is revoked or terminated, it could significantly
harm our business, results of operations, and profits.
Our safeCircleTM surveillance testing service
could become obsolete or its utility could be significantly diminished.
Surveillance testing is not regulated
by the FDA and CMS has stated that CLIA certification is not required to conduct surveillance testing. ADCL is offering its
safeCircleTM surveillance testing in compliance with current CDC, FDA, CMS and New York State Department of Health
recommendations. The regulatory framework or recommendations regarding COVID-19 Surveillance Testing could change at any
time. Further, our COVID-19 Surveillance Testing may become obsolete for a variety of reasons, including an end to the
current pandemic or the development and widespread distribution of a vaccine,
including the vaccine developed by Pfizer-BioNTech for which the FDA has recently granted emergency use authorization. In addition, the utility of these services will also diminish if positivity rates reach levels high enough
to render surveillance testing ineffective or inefficient.
Our LineaTM COVID-19
Assay Kits could become obsolete or their utility could be significantly diminished.
Our LineaTM COVID-19 Assay Kits may become obsolete
for a variety of reasons, including an end to the current pandemic or the development and widespread distribution of a vaccine,
including the vaccine developed by Pfizer-BioNTech for which the FDA has recently granted emergency use authorization.
Our joint pursuit of a potential vaccine for COVID-19
is at an early stage and may be unable to produce a vaccine that successfully treats the virus in a timely manner, if at all ,
and compete successfully with vaccines developed by larger companies.
In response to the global outbreak of coronavirus,
we are jointly pursuing the development of linear DNA vaccine candidates in collaboration with Takis/Evvivax. Our joint development
of vaccine candidates is in early stages, and we may be unable to produce a successful vaccine candidate in a timely manner, if
at all. Additionally, development of an effective vaccine candidate depends on the success of our and our partner’s manufacturing
capabilities, and we may face challenges in clinical trials, licensing, distribution channels, intellectual property disputes or
challenges, and the need to establish teams of people with the relevant skills worldwide. We may also face challenges with sourcing
a sufficient amount of raw materials to support the demand for a vaccine. We may be unable to effectively create a supply chain
for any vaccine candidate that will adequately support demand.
We would require additional funding in
order to enable the development of vaccine candidates. Our commitment of financial resources and personnel to the joint
development of these vaccine candidates may cause delays in or otherwise negatively impact our other development programs and could
prove futile, as future demand for any successful vaccine is unknown.
In addition, another party may be successful
in producing a more efficacious vaccine or other treatment for COVID-19 which may reduce or eliminate demand for any successful
vaccine that we may jointly develop. In particular, given the widespread media attention on the current COVID-19 pandemic, there
are efforts by public and private entities to develop a COVID-19 vaccine as fast as possible. On December 11, 2020, the FDA issued
the first emergency use authorization to Pfizer-BioNTech for a vaccine for the prevention of COVID-19 in individuals 16 years of
age and older. The emergency use authorization allows the COVID-19 vaccine to be distributed in the U.S. In addition to the Pfizer-BioNTech
vaccine, other entities, including AstraZeneca PLC, GlaxoSmithKline plc, Johnson & Johnson, Moderna, Inc., and Sanofi,
may develop COVID-19 vaccines that are more effective than any we may jointly develop, may develop a COVID-19 vaccine that becomes
the standard of care, may develop a COVID-19 vaccine at a lower cost or earlier than we are able to jointly develop any COVID-19
vaccine, or may be more successful at commercializing a COVID-19 vaccine. These other organizations are much larger than we are
and have access to larger pools of capital and broader manufacturing infrastructure. The success or failure of other entities,
or perceived success or failure, may adversely impact our ability to obtain any future funding for our joint COVID-19 vaccine development
efforts or for us to ultimately commercialize any vaccine candidate, if approved.
Pharmaceutical and biologic products are highly complex,
and if we or our collaborators and customers are unable to provide quality and timely offerings to our respective customers, our
business could suffer.
The process of manufacturing pharmaceutical
and biologics and their components is complex, highly-regulated and subject to multiple risks.
Manufacturing biologics is highly
susceptible to product loss due to contamination, equipment failure, improper installation or operation of equipment, vendor
or operator error, inconsistency in yields, variability in product characteristics and difficulties in scaling the production
process. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects
and other supply disruptions.
Our ability to generate revenue in the
pharmaceutical and biologic market depends on our ability to manufacture products that meet exacting quality and safety standards.
If we are unable to manufacture these products to the required levels, it could have an adverse effect on our business, financial
condition, and results of operations and may subject us to regulatory actions, including product recalls, product seizures, injunctions
to halt manufacture or distribution, restrictions on our operations, or civil sanctions, including monetary sanctions and criminal
actions. In addition, we could be subject to costly litigation, including claims from our collaborators and customers for reimbursement
for the cost of our products or other related losses, the cost of which could be significant.
Our business also depends on the ability
of our collaborators and customers to manufacture the pharmaceutical or biologic products that incorporate our products. If the
FDA determines that our collaborators and customers are not in compliance with FDA laws and regulations, including those governing
cGMP regulations, the FDA may deny NDA or BLA approval until the deficiencies are corrected. Even if our collaborators or customers
obtain regulatory approval for any of their product candidates, there is no assurance that they will be able to manufacture the
approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities
to meet the requirements for the potential launch of the product or to meet potential future demand. If our collaborators or customers
are unable to produce sufficient quantities for clinical trials or for commercialization, commercialization efforts would be impaired,
which would have an adverse effect on our business, financial condition, results of operations and growth prospects.
Pharmaceutical and biologic-related revenue will be dependent
on our collaborators’ and customers’ demand for our manufacturing services.
The amount of customer spending on pharmaceutical
and biologic development and manufacturing will have an impact on our sales and profitability in the pharmaceutical and biologic
market. Our collaborators and customers determine the amounts that they will spend based upon, among other things, available resources,
access to capital, and their need to develop new products, which, in turn, are dependent upon a number of factors, including their
competitors’ research, development and product initiatives and the anticipated market uptake, and clinical and reimbursement
scenarios for specific products and therapeutic areas. Consolidation in the pharmaceutical and biologic industry may impact such
spending as customers integrate acquired operations, including R&D departments and manufacturing operations. Any reduction
in spending on pharmaceutical and biotechnology development and related services as a result of these and other factors could have
a material adverse effect on our business, results of operations and financial condition.
The markets for our drug and biologic candidates and linear
DNA are very competitive, and we may be unable to continue to compete effectively in these industries in the future.
The principal markets for our
drug and biologic candidates and linear DNA are intensely competitive. We compete with many existing suppliers and new competitors
continue to enter the market. Many of our competitors, both in the United States and elsewhere, are major pharmaceutical, chemical
and biotechnology companies, or have strategic alliances with such companies, and many of them have substantially greater capital
resources, marketing experience, research and development staff, and facilities than we do. Any of these companies could succeed
in developing products that are more effective than the product candidates that we have or may develop and may be more successful
than us in producing and marketing their existing products. Some of our competitors that operate in the nucleic-acid based
therapeutic, biologics and DNA manufacturing markets include: Precigen, Inc., Aldevron, LLC, Cobra Biologics, Limited, Integrated
DNA Technologies, Inc., Ziopharm Oncology, Inc., MaxCyte, Inc., Touchlight Genetics Ltd., Novartis AG, Kite Pharma, Inc.
and Juno Therapeutics, Inc.
We expect this competition to continue
and intensify in the future. Our competitors also compete with us in recruiting and retaining qualified scientific and management
personnel, as well as in acquiring technologies complementary to, or necessary for, our programs. Our commercial opportunities
could be reduced or eliminated if our competitors develop and commercialize drug and biologic candidates or linear DNA that are
safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than any drug and biologic
candidates and linear DNA that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products
more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position
before we are able to enter the market. Additionally, drug and biologic candidates and linear DNA developed by our competitors
may render our potential drug and biologic candidates and linear DNA uneconomical or obsolete, and we may not be successful in
marketing any drug and biologic candidates and linear DNA we may develop against competitors.
If any of these risks occur, our business,
financial condition and results of operations could be significantly harmed.
The markets for our supply chain security and product
authentication solutions are very competitive, and we may be unable to continue to compete effectively in these industries in the
future.
The principal markets for our offerings are intensely competitive.
We compete with many existing suppliers and new competitors continue to enter the market. Many of our competitors, both in the
United States and elsewhere, are major pharmaceutical, chemical and biotechnology companies, or have strategic alliances with such
companies, and many of them have substantially greater capital resources, marketing experience, research and development staff,
and facilities than we do. Any of these companies could succeed in developing products that are more effective than the products
that we have or may develop and may be more successful than us in producing and marketing their existing products. Some of our
competitors that operate in the supply chain security and product authentication markets include: AlpVision Sa, Authentix, Inc.,
Brandwatch Technologies, Inc., Chromologic LLC, Collectors Universe, Inc., DataDot Technology Limited, De La Rue Plc.,
Digimarc Corporation, DNA Technologies, Inc., Haelixa Ltd., ICA Bremen GmbH, IEH Corporation, Informium AG,
opSec Security Group plc., MicroTag Temed Ltd., Nanotech Security Corp., Nokomis, Inc., Oritain Global Limited, SafeTraces, Inc.,
Selectamark Security Systems plc, SmartWater Technology, Inc., Sun Chemical Corporation, TraceTag International Ltd., TruTag
Technologies, Inc., Tailorlux gmbH and YottaMark Inc.
We expect this competition to continue
and intensify in the future.
Our research and development efforts for new products
may be unsuccessful.
We incur research and development expenses to develop new products
and technologies in an effort to maintain our competitive position in a market characterized by rapid rates of technological advancement.
Under our COVID-19 Diagnostic and Surveillance Testing businesses, our research and development efforts are focused on the development
of high-throughput high-sensitivity molecular assays for COVID-19. Our research and development efforts are subject to unanticipated
delays, expenses and technical problems. There can be no assurance that any of these products or technologies will be successfully
developed or that, if developed, will be commercially successful. In the event that we are unable to develop commercialized products
from our research and development efforts or we are unable or unwilling to allocate amounts beyond our currently anticipated research
and development investment, we could lose our entire investment in these new products and technologies. Any failure to translate
research and development expenditures into successful new product introduction could have an adverse effect on our business.
In addition, research, development, and
commercialization of pharmaceutical and biologic products is inherently risky. We cannot give any assurance that any of our pharmaceutical
and biologic product candidates will receive regulatory approval, which is necessary before they can be commercialized.
Risks Related to Our Intellectual Property:
Our intellectual property rights are valuable, and any
inability to protect them could reduce the value of our products, services and brand.
Our patents, trademarks, trade secrets,
copyrights and all of our other intellectual property rights are important assets for us. There are events that are outside of
our control that pose a threat to our intellectual property rights as well as to our products and services. For example, effective
intellectual property protection may not be available in every country in which our products and services are distributed. The
efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual
property rights could harm our business or our ability to compete. Protecting our intellectual property rights is costly and time
consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm
our operating results. Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect
some of these innovations. Given the costs of obtaining patent protection, we may choose not to protect certain innovations that
later turn out to be important. There is always the possibility that the scope of the protection gained from one of our issued
patents will be insufficient or deemed invalid or unenforceable. We also seek to maintain certain intellectual property as trade
secrets. The secrecy could be compromised by third parties, or intentionally or accidentally by our employees, which would cause
us to lose the competitive advantage resulting from these trade secrets.
Intellectual property litigation could harm our business,
financial condition and results of operations.
Litigation regarding patents and other
intellectual property rights is extensive in the drug and biotechnology industry. In the event of an intellectual property dispute,
we may be forced to litigate. This litigation could involve proceedings instituted by the U.S. Patent and Trademark Office or the
International Trade Commission, as well as proceedings brought directly by affected third parties. Intellectual property litigation
can be extremely expensive, and these expenses, as well as the consequences should we not prevail, could seriously harm our business.
If a third party claims an
intellectual property right to technology we use, we might need to discontinue an important product or product line, alter
our products and processes, pay license fees or cease our affected business activities. Although we might under these
circumstances attempt to obtain a license to this intellectual property, we may not be able to do so on favorable terms, or
at all. Furthermore, a third party may claim that we are using inventions covered by the third party’s patent rights
and may go to court to stop us from engaging in our normal operations and activities, including making or selling our
products. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and
technical personnel. A court may decide that we are infringing the third party’s patents and would order us to stop the
activities covered by the patents. In addition, a court may order us to pay the other party damages for having violated the
other party’s patents. The drug and biotechnology industry has produced a proliferation of patents, and it is not
always clear to industry participants, including us, which patents cover various types of products or methods of use. The
coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued
for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent
claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving
invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the
presumption of validity enjoyed by issued patents.
Because some patent applications in the
United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many
foreign jurisdictions are typically not published until eighteen months after filing, and because publications in the scientific
literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology
covered by our or our licensor’s issued patents or pending applications or that we or our licensors were the first to invent
the technology. During the ordinary course of our business, we do not conduct “prior art” searches before filing a
patent application. Our competitors may have filed, and may in the future file, patent applications covering technology similar
to ours. Any such patent application may have priority over our or our licensors’ patent applications and could further require
us to obtain rights to issued patents covering such technologies. If another party has filed a United States patent application
on inventions similar to ours, we may have to participate in an interference proceeding declared by the U.S. Patent and Trademark
Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is
possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such
inventions.
Some of our competitors may be able to
sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources.
In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect
on our ability to raise the funds necessary to continue our operations.
A cybersecurity incident and other technology disruptions
could negatively affect our business and our relationships with customers.
We use technology in substantially all
aspects of our business operations. The widespread use of technology, including mobile devices, cloud computing, and the internet,
give rise to cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information.
Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual
property, including information relating to customers and suppliers, private information about employees, and financial and strategic
information about us and our business partners. If we fail to effectively assess and identify cybersecurity risks associated with
the use of technology in our business operations, we may become increasingly vulnerable to such risks. Additionally, while we have
implemented measures to prevent security breaches and cyber incidents, our preventative measures and incident response efforts
may not be entirely effective. The theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information
or intellectual property, or interference with our information technology systems or the technology systems of third parties on
which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers,
potential liability and competitive disadvantage.
Risks Related to Regulatory Approval of Our Pharmaceutical
and Biotherapeutic Product Candidates and Other Legal Compliance Matters:
The regulatory pathway of a potential vaccine for COVID-19
is continually evolving, and may result in unexpected or unforeseen challenges.
The speed at which all parties are moving
to create, test and approve a vaccine for COVID-19 is highly unusual, and evolving or changing plans or priorities at the FDA,
including based on new knowledge of COVID-19 and how the disease affects the human body, may significantly affect the regulatory
pathway for any of our potential vaccine candidates. For example, any results from clinical testing may raise new questions and
require us to redesign proposed clinical trials, including revising proposed endpoints or adding new clinical trial sites or cohorts
of subjects. In addition, the FDA’s analysis of any clinical data may differ from our interpretation and the FDA may require
that we conduct additional analyses.
The FDA has the authority to grant an EUA
to allow unapproved medical products to be used in an emergency to diagnose, treat, or prevent serious or life-threatening diseases
or conditions when there are no adequate, approved, and available alternatives. If we are granted an EUA for any vaccine candidate,
we would be able to commercialize it prior to FDA approval. The EUA is only effective for the duration of the COVID-19 public health
emergency. The FDA may revoke or terminate the EUA sooner if, for example, we fail to comply with the terms of the EUA or our vaccine
is determined to be less effective or safe than it was initially believed to be. We cannot predict how long, if ever, an EUA would
remain in place.
Shifting enforcement priorities of federal and state laws
relating to cannabis may create uncertainties for our business.
Some of our products may be incorporated
into cannabis products which are subject to regulation by federal and state regulatory agencies in the United States and by comparable
authorities in foreign countries. Cannabis is a Schedule I substance, as defined under federal law, and its possession and use
is generally not permitted under federal law, although a number of individual states have enacted state laws to authorize possession,
sale and use of cannabis for medical purposes, and in some states for recreational purposes. Revenue from the cannabis market is
highly dependent on our customers’ continuing compliance with federal and state regulations which may change over time. Our
business may be materially harmed by their failure to comply with applicable regulations and may subject us to an increased risk
of litigation.
Pharmaceutical and biologic-related revenue is generally
dependent on regulatory approval, oversight and compliance.
All of our pharmaceutical and biologic
product candidates, except for our LineaTM COVID-19 Assay Kit and
our COVID-19 Surveillance Testing, will require significant preclinical and clinical development before we can seek regulatory
approval for them and launch a product commercially. The sale and use of our products and services in the pharmaceutical and biologic
markets will generally be subject to regulatory approval and oversight, potentially including approval and/or oversight in various
foreign jurisdictions. In addition, our pharmaceutical and biologic products and services may be incorporated into products that
cannot be marketed in the United States or in many other jurisdictions without approval by the FDA or comparable agencies of other
countries or regions. Obtaining such regulatory approvals is costly, time-consuming, uncertain, and subject to unanticipated delays.
When, if ever, such approvals will be obtained is unknown. Our revenue in the pharmaceutical and biologic markets is highly dependent
upon obtaining such approval.
Federal agencies, including the FDA and
Federal Trade Commission, as well as state, local, and foreign authorities, also exercise ongoing review and control of the manufacturing,
packaging, labeling, advertising, sale, distribution, and monitoring of pharmaceutical and biologic products. If our pharmaceutical
or biologic product candidates or pharmaceutical or biologic products incorporating our products are ever approved, failure to
comply with any of these regulations or other requirements could also have an adverse effect on our revenue in the pharmaceutical
and biologic markets.
Pharmaceutical and biologic-related revenue will be highly
dependent on our collaborators’ and customers’ success in obtaining regulatory approval and commercializing their products.
Some of our products will be incorporated
into products in the pharmaceutical and biologic market that are subject to comprehensive regulation by the FDA and other regulatory
agencies in the United States and by comparable authorities in other countries. In the United States, to obtain approval from the
FDA to market any future pharmaceutical or biologic product that incorporates our technology, our collaborators or customers will
be required to submit a NDA or BLA. Ordinarily, the FDA requires a company to support an NDA or BLA with substantial evidence of
the product candidate’s safety and efficacy in treating the targeted indication based on data derived from adequate and well-controlled
clinical trials, including Phase III safety and efficacy trials conducted in patients with the disease or condition being targeted.
The process of obtaining such regulatory approvals is expensive, often takes many years if approval is obtained at all, and can
vary substantially based upon the type, complexity and novelty of the product candidate involved. Changes in the regulatory approval
process during the development period, changes in or the enactment of additional statutes or regulations, or changes in the regulatory
review process may cause delays in the approval or rejection of an application. There is no guarantee that our collaborators and
customers will ever be successful in obtaining regulatory approval for any product that incorporates our products or technology.
Even if regulatory approval is received, the manufacturing processes, post approval clinical data, labeling, advertising and promotional
activities for any such product will be subject to continual requirements of and review by the FDA and other regulatory bodies.
Our business may be materially harmed by our collaborators’ and customers’ failure to comply with applicable regulations.
In addition, we will be dependent on, and
have no control over, consumer demand for the products into which our products are incorporated. Consumer demand for our collaborators’
and customers’ products could be adversely affected by, among other things, delays in health regulatory approval, the loss
of patent and other intellectual property rights protection, the emergence of competing products, including generic drugs or biosimilars,
the degree to which private and government drug plans subsidize payment for a particular product and changes in the marketing strategies
for such products. The healthcare industry has changed significantly over time, and we expect the industry to continue to evolve.
Some of these changes may have a material adverse effect on our collaborators and customers and thus may have a material adverse
effect on our business. If the products into which our products are incorporated do not gain market acceptance, our revenues and
profitability may be adversely affected.
The regulatory approval processes of the FDA and comparable
foreign regulatory authorities are lengthy, time consuming, and inherently unpredictable. If we are ultimately unable to obtain
regulatory approval for our product candidates, we will be unable to generate product revenue and our business will be substantially
harmed.
The time required to obtain approval
by the FDA and comparable foreign regulatory authorities is unpredictable, typically takes many years following the
commencement of clinical trials, and depends upon numerous factors, including the type, complexity and novelty of the product
candidates involved. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain
approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions,
which may cause delays in the approval or the decision not to approve an application. Regulatory authorities have substantial
discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for
approval and require additional preclinical, clinical or other studies. We have not submitted for, or obtained regulatory
approval for any product candidate, and it is possible that none of our existing product candidates or any product candidates
we may seek to develop in the future will ever obtain regulatory approval. Applications for our product candidates could fail
to receive regulatory approval for a variety of reasons. This lengthy approval process, as well as the unpredictability of
the results of clinical trials, may result in our failing to obtain regulatory approval to market any of our product
candidates, which would significantly harm our business, results of operations, and prospects.
Our product candidates may cause undesirable side effects
or have other properties that could halt their clinical development, prevent their regulatory approval, limit their commercial
potential, or result in significant negative consequences.
Adverse events or other undesirable side
effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay, or halt clinical trials
and could result in a more restrictive label or the delay or denial of regulatory approval by regulatory authorities. Side effects
related to a drug or biologic could affect patient recruitment, the ability of enrolled patients to complete the study, and/or
result in potential product liability claims.
Additionally, if one or more of our product
candidates receives marketing approval, and we or others later identify undesirable side effects or adverse events caused by such
products, a number of potentially significant negative consequences could result. Regulatory authorities may withdraw approvals
of such product or impose restrictions on distribution. They may require additional warnings or contraindications on the product
label that could diminish the usage or otherwise limit the commercial success of the product. We may be required to change the
way the product is administered, conduct additional clinical trials or post-approval studies. We may be forced to suspend marketing
of the product or required to create a REMS. In addition, our reputation may suffer. Any of these events could prevent us from
achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business,
results of operations, and prospects.
Even if we obtain regulatory approval for a product candidate,
our products will remain subject to extensive regulatory scrutiny.
If any of our product candidates are approved,
they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion,
sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-market information,
including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.
Ongoing regulatory requirements include ensuring that quality control and manufacturing and production procedures conform to cGMP
regulations, and we will be subject to continual review and inspections to assess compliance with cGMP regulations and adherence
to commitments made in any regulatory filings. Accordingly, we and others with whom we work must continue to expend time, money,
and effort in all areas of regulatory compliance.
Any regulatory approvals that we receive
for our product candidates will be subject to limitations on the approved indicated uses for which the product may be marketed
and promoted or to the conditions of approval (including the requirement to implement a REMS), or contain requirements for potentially
costly post-marketing testing. We will be required to report certain adverse reactions and production problems, if any, to the
FDA and comparable foreign regulatory authorities. Any new legislation addressing drug or biologic safety issues could result in
delays in product development or commercialization, or increased costs to assure compliance. The FDA and other agencies, including
the Department of Justice, closely regulate and monitor the post-approval marketing and promotion of products to ensure that they
are manufactured, marketed and distributed only for the approved indications and in accordance with the provisions of the approved
labeling. We will have to comply with requirements concerning advertising and promotion for our products. Promotional communications
with respect to prescription drugs and biologics are subject to a variety of legal and regulatory restrictions and must be consistent
with the information in the product’s approved label. As such, we may not promote our products for indications or uses for
which they do not have approval. The holder of an approved NDA must submit new or supplemental applications and obtain approval
for certain changes to the approved product, product labeling, or manufacturing process. We could also be asked to conduct post-marketing
clinical trials to verify the safety and efficacy of our products in general or in specific patient subsets. If original marketing
approval was obtained via the accelerated approval pathway, we could be required to conduct a successful post-marketing clinical
trial to confirm clinical benefit for our products. An unsuccessful post-marketing study or failure to complete such a study could
result in the withdrawal of marketing approval.
If a regulatory agency discovers previously
unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where
the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, such regulatory agency may impose
restrictions on that product or us, including, but not limited to, requiring withdrawal or recall of the product from the market,
imposing civil or criminal penalties, and imposing restrictions on our operations. Any government investigation of alleged violations
of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure
to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate
revenue from our products. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our Company
and our operating results will be adversely affected.
In addition, the FDA’s
regulations, policies or guidance may change and new or additional statutes or government regulations in the United States
and other jurisdictions may be enacted that could further restrict or regulate post-approval activities. We cannot predict
the likelihood, nature or extent of adverse government regulation that may arise from pending or future legislation or
administrative action. If we are not able to achieve and maintain regulatory compliance, we may not be permitted to market
our products and/or product candidates, which would adversely affect our ability to generate revenue and achieve or maintain
profitability.
If the FDA were to begin to enforce regulation of LDTs,
we could incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and costs associated
with complying with post-market requirements.
As a LDT, our iCTC capture assay is currently
subject to enforcement discretion by the FDA. In October 2014, the FDA issued two draft guidance documents: “Framework
for Regulatory Oversight of Laboratory Developed Tests,” which provides an overview of how the FDA would regulate LDTs through
a risk-based approach, and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests”, which provides
guidance on how the FDA intends to collect information on existing LDTs, including adverse event reports. Pursuant to the Framework
for Regulatory Oversight draft guidance, LDT manufacturers will be subject to medical device registration, listing, and adverse
event reporting requirements. LDT manufacturers will be required to either submit a pre-market application and receive the FDA’s
approval before an LDT may be marketed or submit a pre-market notification in advance of marketing. The Framework for Regulatory
Oversight draft guidance states that within six months after the guidance documents are finalized, all laboratories will be required
to give notice to the FDA and provide basic information concerning the nature of the LDTs offered.
On November 18, 2016, however, the
FDA announced that it would not release final versions of these guidance documents and would instead continue to work with stakeholders,
the new administration and Congress to determine the right approach. On January 13, 2017, the FDA released a discussion paper
on LDTs outlining a possible risk-based approach for FDA and CMS oversight of LDTs. According to the 2017 discussion paper, previously
marketed LDTs would not be expected to comply with most or all FDA oversight requirements (grandfathering), except for adverse
event and malfunction reporting. In addition, certain new and significantly modified LDTs would not be expected to comply with
pre-market review unless the agency determines certain tests could lead to patient harm. Since LDTs currently on the market would
be grandfathered in, pre-market review of new and significantly modified LDTs could be phased-in over a four-year period, as opposed
to the nine years proposed in the Framework for Regulatory Oversight draft guidance. In addition, tests introduced after the effective
date, but before their phase-in date, could continue to be offered during pre-market review.
The discussion paper notes that the FDA
will focus on analytical and clinical validity as the basis for marketing authorization. The FDA anticipates laboratories that
already conduct proper validation should not be expected to experience new costs for validating their tests to support marketing
authorization and laboratories that conduct appropriate evaluations would not have to collect additional data to demonstrate analytical
validity for FDA clearance or approval. This goal would be achieved through a precertification process. The evidence of the analytical
and clinical validity of all LDTs will be made publically available. LDTs are encouraged to submit prospective change protocols
in their pre-market submission that outline specific types of anticipated changes, the procedures that will be followed to implement
them, and the criteria that will be met prior to implementation.
In March 2017, a draft bill “The
Diagnostics Accuracy and Innovation Act” (“DAIA”) was introduced in Congress. The bill would establish a new
regulatory framework for the oversight of in vitro clinical tests (“IVCTs”) which include LDTs. Following review and
comment from FDA on the provisions of DAIA, a revised version of the bill, now called “The Verifying Accurate, Leading-edge
IVCT Development Act” (VALID) was introduced in Congress in December 2018. Under the bill, a risk-based approach will
be used to regulate IVCTs. Each test will be classified as high-risk or low-risk. Pre-market review will be required for high-risk
tests. To market a high-risk IVCT, reasonable assurance of analytical and clinical validity for the intended use must be established.
Under VALID, a precertification process would be established which will allow a laboratory to establish that the facilities, methods,
and controls used in the development of its IVCTs meet quality system requirements. If pre-certified, low-risk IVCTs it develops
will not be subject to pre-market review. The new regulatory framework will include quality control and post-market reporting requirements.
The FDA will have the authority to withdraw from the market IVCTs that present an unreasonable and substantial risk of illness
or injury when used as intended. We cannot predict whether this bill will become law. If the FDA were to require us to seek clearance
or approval for our existing product or any of our future products for clinical use, we may not be able to obtain such approvals
on a timely basis or at all. Our business could be negatively impacted as a result of commercial delay that may be caused by any
new requirements. The cost of conducting clinical trials and otherwise developing data and information to support pre-market approval
may be significant. If we are required to submit applications for our currently-marketed iCTC test, we may be required to conduct
additional studies, which may be time-consuming and costly and could result in our currently-marketed test being withdrawn from
the market. Continued compliance with the FDA’s regulations would increase the cost of conducting our business, and subject
us to heightened regulation by the FDA and penalties for failure to comply with these requirements. Failure to comply with applicable
regulatory requirements can result in enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls,
injunctions and other civil and criminal sanctions. Any other regulatory or legislative proposals that would increase general FDA
oversight of clinical laboratories and LDTs could negatively impact our business if additional requirements are imposed. We are
monitoring developments and anticipate that our products will be able to comply with requirements that are ultimately imposed by
the FDA.
If we fail to comply with laboratory licensing requirements,
we could lose the ability to offer our clinical testing services or experience disruptions to our business.
CLIA is a federal law regulating
clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the
diagnosis, prevention, or treatment of disease. CLIA is intended to ensure the quality and reliability of clinical
laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration,
and participation in proficiency testing, patient test management, quality control, quality assurance and inspections.
Clinical laboratories must be certified under CLIA in order to perform testing on human specimens, unless they fall within an
exception to CLIA certification, such as research laboratories that test human specimens but do not report patient-specific
results for the diagnosis, prevention, or treatment of any disease or impairment of, or the assessment of the health of
individual patients. CLIA certification is also required to be eligible to bill Federal and State healthcare programs, as
well as many private third-party payers, for diagnostic testing and services. Currently, we are supplying our iCTC capture
assay and associated testing services under the research exception to CLIA. We also sell COVID-19 Surveillance Testing
services which, under FDA and CDC guidance, do not require an EUA or CLIA certification. If we expand our laboratory testing
services so that the research exception no longer applies to our iCTC capture assay or regulations and guidances change so
that our COVID-19 Surveillance Testing cannot be conducted without CLIA certification, we will no longer be able to offer
these services. Further, if we fail to comply with the CLIA research exception with respect to our iCTC capture assay or we
fail to comply with the government’s guidance regarding COVID-19 surveillance testing, we could be found to have
violated FDA or CLIA regulations or guidances and could have to stop offering these services and potentially be assessed
substantial penalties. We have applied for CLIA certification but do not know when, or if, we will receive it. A delay in
obtaining certification or a failure to do so could significantly harm our business, results of operations, and
prospects.
Healthcare legislative measures aimed at reducing healthcare
costs may have a material adverse effect on our business and results of operations.
Third party payors are developing increasingly
sophisticated methods of controlling healthcare costs. In both the United States and certain foreign jurisdictions, there have
been a number of legislative and regulatory changes to the health care system that could impact our ability to sell our products
profitably. In particular, in the United States in 2010, the ACA was enacted. In addition, other legislative changes have been
proposed and adopted in the United States since the ACA was enacted. The repeal of or changes in some or all of the ACA and complying
with any new legislation or reversing changes implemented under the ACA could be time-intensive and expensive, resulting in a material
adverse effect on our business. Until the ACA is fully implemented or there is more certainty concerning the future of the ACA,
it will be difficult to predict its full impact and influence on our business.
There have been, and likely will continue
to be, legislative and regulatory proposals at the foreign, federal and state levels directed at containing or lowering the cost
of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance
companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or impose
price controls may adversely affect the demand for our product candidates, if we obtain regulatory approval, including: our ability
to receive or set a price that we believe is fair for our products; our ability to generate revenue and achieve or maintain profitability;
the level of taxes that we are required to pay; and the availability of capital. We expect that the ACA, as well as other healthcare
reform measures that may be adopted in the future, may result in additional reductions in Medicare and other healthcare funding,
more rigorous coverage criteria, lower reimbursement, and new payment methodologies. This could lower the price that we receive
for any approved product. Any denial in coverage or reduction in reimbursement from Medicare or other government-funded programs
may result in a similar denial or reduction in payments from private payors, which may prevent us from being able to generate sufficient
revenue, attain profitability or commercialize our product candidates, if approved.
Our employees, independent contractors, consultants, commercial
partners and vendors may engage in misconduct or other improper activities, including non-compliance with regulatory standards
and requirements.
We are exposed to the risk of fraud, misconduct
or other illegal activity by our employees, independent contractors, consultants, commercial partners and vendors. Misconduct by
these parties could include intentional, reckless and negligent conduct that fails to: comply with the laws of the FDA and other
comparable foreign regulatory authorities; provide true, complete and accurate information to the FDA and other comparable foreign
regulatory authorities; comply with manufacturing standards we have established; comply with healthcare fraud and abuse laws in
the United States and similar foreign fraudulent misconduct laws; or report financial information or data accurately or to disclose
unauthorized activities to us.
If we obtain FDA approval of any of our
product candidates and begin commercializing those products in the United States, our potential exposure under such laws will increase
significantly, and our costs associated with compliance with such laws are also likely to increase. In particular, research, sales,
marketing, education and other business arrangements in the healthcare industry are subject to extensive laws designed to prevent
fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of
pricing, discounting, educating, marketing and promotion, sales and commission, certain customer incentive programs and other business
arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of
patient recruitment for clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We
have adopted a code of business conduct and ethics, but it is not always possible to identify and deter misconduct by employees
and third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown
or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a
failure to be in compliance with such laws. If any such actions are instituted against us, and we are not successful in defending
ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant
fines or other sanctions.
If we fail to comply with healthcare laws, we could face
substantial penalties and our business, operations and financial conditions could be adversely affected.
Healthcare providers, physicians and payors
play a primary role in the recommendation and prescription of any product candidates for which we may obtain marketing approval.
Our future arrangements with payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws
and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute
any product candidates for which we may obtain marketing approval. Even though we do not and will not control referrals of healthcare
services or bill directly to Medicare, Medicaid or other third party payors, federal and state healthcare laws and regulations
pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. Restrictions under applicable
federal, state and foreign healthcare laws and regulations which may affect our ability to operate and expose us to areas of risk
include: federal civil and criminal false claims laws and civil monetary penalty laws, including the False Claims Act; HIPAA, as
amended by HITECH; the federal Physician Payments Sunshine Act, created under the ACA, and its implementing regulations; federal
consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially
harm consumers; and analogous state and foreign laws and regulations.
Because of the breadth of these laws and
the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could,
despite our efforts to comply, be subject to challenge under one or more of such laws. Efforts to ensure that our business arrangements
will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities
will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting
applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are
not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including
the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from
participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits
and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business
and our results of operations. In addition, the approval and commercialization of any of our product candidates outside the United
States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.
Risks Related to Personnel:
Our failure to manage our growth in operations and acquisitions
of new product lines and new businesses could harm our business.
The recent growth in our operations could
place a significant strain on our current management resources, specifically as it relates to our
LineaTM COVID-19 Assay Kit and our COVID-19 pooled surveillance testing offering branded under the safeCircleTM
trademark. We seek to continue to commercialize the safeCircleTM surveillance testing TaaS offering with institutional
clients such as schools, colleges and businesses. In addition, we have applied to the New York State Department of Health for all
necessary licensing to operate a New York State clinical diagnostics laboratory. These applications are currently pending. The
New York State Department of Health performed its initial inspection of our clinical laboratory and identified deficiencies in
the clinical standard of practice. These deficiencies need to be rectified before we can submit a request for re-inspection. We
are working to rectify these deficiencies now. We seek to further commercialize our EUA authorized Linea COVID-19 Assay Kit and
our iCTC Technology. We are also performing testing services in support of our safeCircleTM surveillance testing services
in accordance with current CDC, FDA, CMS and New York State Department of Health recommendations.
To manage such growth, we may need to improve
our:
|
·
|
operations and financial systems;
|
|
·
|
procedures and controls; and
|
|
·
|
training and management of our employees.
|
If we are unable to continue to retain the services of
Dr. Hayward, we may not be able to continue our operations.
Our success depends to a significant extent
upon the continued service of Dr. James A. Hayward, our CEO. On July 28, 2016, we entered into an employment agreement
with Dr. Hayward. The initial term was from July 1, 2016 through June 30, 2017, with automatic one-year renewal
periods. As of June 30, 2020, the employment contract automatically renewed for an additional year. Loss of the services of
Dr. Hayward could significantly harm our business, results of operations and financial condition. We do not maintain key-person
insurance on the life of Dr. Hayward.
We may have conflicts of interest with our affiliates
and related parties, and in the past we have engaged in transactions and entered into agreements with affiliates that were not
negotiated at arms’ length.
We have engaged, and may in the future
engage, in transactions with affiliates and other related parties. These transactions may not have been, and may not be, on terms
as favorable to us as they could have been if obtained from non-affiliated persons. While an effort has been made, and will continue
to be made, to enter into transactions with affiliated persons and other related parties at rates and on terms as favorable as
would be charged by others, there will always be an inherent conflict of interest between our interests and those of our affiliates
and related parties. In August 2018 and November 2018, we issued an aggregate of $2.2 million in principal amount of
secured convertible notes, a majority of which were owned by Dr. James A. Hayward, our CEO. Dr. Hayward and other directors,
officers, and affiliates of the Company converted substantial portions of such August 2018 Notes and November 2018 Notes
(in each case, as defined in Management’s Discussion and Analysis of Financial Condition and Results of Operations, below)
into common stock of the Company in September 2019. During October 2020 we entered into Warrant Exercise Agreements with
Dillon Hill Capital, LLC and its affiliate, Dillon Hill Investment Company LLC, a greater than 5% shareholder in the Company, whereby
318,000 warrants were exercised. The gross proceeds to the Company from this partial exercise of the 2019 Warrants (as defined
below) was $1,669,500. Also during October 2020, we entered into a letter agreement with such investors for the repayment
of the secured convertible notes. The Company may be adversely impacted if any related party agreement or transaction is made on
unfavorable terms.
Risks Relating to Our Common Stock and Other Securities:
There are a large number of shares of common stock underlying
our outstanding options and warrants and the sale of these shares may depress the market price of our common stock and cause immediate
and substantial dilution to our existing stockholders.
As of December 10, 2020, we had
5,661,330 shares of common stock issued and outstanding, outstanding options to purchase 362,178 shares of common stock,
outstanding warrants to purchase 778,118 shares of common stock, and 3,615,486 shares available for grant under our 2020
Equity Incentive Plan. The issuance of shares upon exercise of our outstanding options and warrants will cause immediate and
substantial dilution to our stockholders.
We may be required to repurchase
certain of our warrants.
Under our warrants sold privately that
have registration rights, in the event of a “Fundamental Transaction” (as defined in the related warrant agreement,
which generally includes any merger with another entity, the sale, transfer or other disposition of all or substantially all of
our assets to another entity, or the acquisition by a person of more than 50% of our common stock), each warrant holder will have
the right at any time prior to the consummation of the Fundamental Transaction to require us to repurchase the warrant for a purchase
price in cash equal to the Black Scholes value (as calculated under the warrant agreement) of the then remaining unexercised portion
of such warrant on the date of such Fundamental Transaction, which may materially adversely affect our financial condition and/or
results of operations and may prevent or deter a third party from acquiring us.
We will require additional financing which may in turn
require the issuance of additional shares of common stock, preferred stock or other debt or equity securities (including convertible
securities) and which would dilute the ownership held by our stockholders.
We will need to raise funds through either
debt or the sale of our shares of our common stock in order to achieve our business goals. Any additional shares issued would further
dilute the percentage ownership held by the stockholders. Furthermore, if we raise funds in equity transactions through the issuance
of convertible securities which are convertible at the time of conversion at a discount to the prevailing market price, substantial
dilution is likely to occur resulting in a material decline in the price of your shares. Our public offerings completed in November 2014,
April 2015, December 2018 and November 2019, our registered direct public offering and concurrent private placement
during November 2015, our private placements completed in November 2016, June 2017, and August 2019, and our
registered direct offering in December 2017 resulted in dilution to investors and future offerings of securities could result
in further dilution to investors.
If we fail to comply with the continuing listing standards
of Nasdaq, our securities could be delisted.
Our common stock is listed on Nasdaq under
the symbol “APDN”. For our common stock to continue to be listed on Nasdaq, we must meet the current continued
listing requirements. If we were unable to meet these requirements, our common stock could be delisted from Nasdaq. If our common
stock were to be delisted from Nasdaq, our common stock could begin to trade on one of the markets operated by OTC Markets Group,
including OTCQX, OTCQB or OTC Pink (formerly known as the “pink sheets”), as the case may be. In such event, our common
stock could be subject to the “penny stock” rules which among other things require brokers or dealers to approve
investors’ accounts, receive written agreements and determine investor suitability for transactions and disclose risks relating
to investing in the penny stock market. Any such delisting of our common stock could have an adverse effect on the market price
of, and the efficiency of the trading market for our common stock, not only in terms of the number of shares that can be bought
and sold at a given price, but also through delays in the timing of transactions and less coverage of us by securities analysts,
if any. Also, if in the future we were to determine that we need to seek additional equity capital, it could have an adverse effect
on our ability to raise capital in the public or private equity markets.
Any material weaknesses in our internal control over financial
reporting in the future could adversely affect investor confidence, impair the value of our common stock and increase our cost
of raising capital.
Any failure to remedy deficiencies in our
internal control over financial reporting that may be discovered or our failure to implement new or improved controls, or difficulties
encountered in the implementation of such controls, could harm our operating results, cause us to fail to meet our reporting obligations
or result in material misstatements in our financial statements. Any such failure could, in turn, affect the future ability of
our management to certify that internal control over our financial reporting is effective. Inferior internal control over financial
reporting could also subject us to the scrutiny of the SEC and other regulatory bodies which could cause investors to lose confidence
in our reported financial information and could subject us to civil or criminal penalties or stockholder litigation, which could
have an adverse effect on our results of operations and the market price of our common stock.
In addition, if we or our independent registered
public accounting firm identify deficiencies in our internal control over financial reporting, the disclosure of that fact, even
if quickly remedied, could reduce the market’s confidence in our financial statements and harm our share price. Furthermore,
deficiencies could result in future non-compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Such non-compliance
could subject us to a variety of administrative sanctions, including review by the SEC or other regulatory authorities.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS.
|
None.
Our corporate headquarters is located at the Long Island High
Technology Incubator (“LIHTI”), which is located on the campus of Stony Brook University at 50 Health Sciences Drive,
Stony Brook, NY 11790. 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, 2016, with the option to extend the lease for two additional three-year periods. We have exercised our
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 addition to the office space, we also have 2,200 square feet of laboratory space.
On January 20, 2020, we 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. During October 2020, we exercised
the one-year renewal option for both of these leases. We also have a satellite testing facility in Ahmedabad, India, which
was established during fiscal 2018. On November 17, 2017, we leased 1,108 square feet for an initial three-year term beginning
November 1, 2017. During September 2020, we renewed this lease with a new expiration date of September 30, 2021.
The base rent is approximately $6,500 per annum.
ITEM 3.
|
LEGAL PROCEEDINGS.
|
From time to time, we may become involved in various lawsuits
and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
ITEM 4.
|
MINE SAFETY DISCLOSURES.
|
Not applicable.
PART II
ITEM 5.
|
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Market Information
Our common stock is listed on The Nasdaq Capital Market under
the symbol “APDN”. Our warrants were listed on The Nasdaq Capital Market under the symbol “APDNW”. These
warrants expired during November 2019. There is no certainty that the common stock will continue to be listed or that any
liquidity exists for our stockholders.
Holders
As of December 10, 2020, we had approximately 124
holders of record of our common stock. The number of record holders was determined from the records of our transfer agent
and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers,
and registered clearing agencies. The transfer agent of our common stock is American Stock Transfer & Trust Company, 6201
15th Avenue, Brooklyn, New York 11219.
Dividends
We have never declared or paid any cash dividends on our common
stock. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. In addition, any future determination
to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results
of operations, capital requirements, and such other factors as the Board of Directors deem relevant.
ITEM 6.
|
Selected Financial Data.
|
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 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the
related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis includes certain forward-looking
statements that involve risks, uncertainties and assumptions. You should review the Risk Factors section of this Form 10-K
for a discussion of important factors that could cause actual results to differ materially from the results described in or implied
by such forward-looking statements. See “Forward-Looking Information” at the beginning of this Form 10-K.
All warrants, option, share and per share information in this
report gives retroactive effect to a one-for-forty reverse stock split that was effective on November 1, 2019.
Introduction
Our proprietary PCR-based DNA LinearDNATM manufacturing
platform produces large quantities of DNA for use in the 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”). In
response to the COVID-19 pandemic, the Company developed a PCR-based molecular diagnostic test for COVID-19, which was granted
an EUA in May 2020. The Company currently manufactures and sells its EUA authorized COVID-19 molecular diagnostic test kit
under the LineaTM COVID-19 Assay Kit trademark (“COVID-19 Diagnostic
Testing”). In addition, and in further response to the COVID-19 pandemic, the Company developed and is currently offering
non-diagnostic COVID-19 pooled surveillance testing to detect instances of COVID-19 in defined populations. The Company’s
COVID-19 Surveillance Testing services are currently offered under the safeCircleTM trademark. The Company is also developing
an invasive circulating tumor cell capture and identification technology (“iCTC Technology”) which uses a patented
functional assay to capture live invasive circulating tumor cell and associated lymphocytes that can be identified and expanded
for further analysis.
Applied DNA’s LinearDNATM 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:
|
·
|
Speed – Production of DNA via the LinearDNATM platform can be measured in terms of hours, not days and weeks like
other large scale DNA manufacturing platforms.
|
|
·
|
Scale – The LinearDNATM platform is flexible and can be adapted to encompass large quantity production.
|
|
·
|
Purity – DNA produced via PCR is pure, resulting in only large quantities of the target DNA sequence. Unwanted DNA sequences
such as bacterially-derived DNA is not present.
|
|
·
|
Customization – DNA produced via PCR can be easily chemically modified to suit specific customer applications.
|
General
We seek to leverage our proprietary PCR-based
DNA LinearDNATM manufacturing platform to further grow and monetize both our Biotherapeutic Contract Research and
Manufacturing and Non-Biologic Tagging businesses.
To date, the substantial portion of our revenues has been
generated from sales pursuant to our non-biologic tagging and related services, principally related to our supply chain
security and product authentication solutions, including our SigNature® molecular tags produced via our
LinearDNATM platform. We expect to grow revenues from sales of our Linea™ COVID-19 Assay Kit, our
COVID-19 Surveillance Testing, clinical diagnostic services (upon receipt of necessary approvals) and the manufacturing of
DNA products for the biotechnology and in vitro diagnostic markets. To a lesser extent, we expect to grow revenues
from our non-biologic tagging businesses, 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
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 consolidated
results of operations, financial position or liquidity for the periods presented in this report.
The accounting policies identified as critical
are as follows:
|
·
|
Revenue recognition; and
|
|
·
|
Equity based compensation.
|
Revenue Recognition
We follow Financial Accounting Standards
Board (“FASB”) issued accounting standard updates which clarify the principles for recognizing revenue arising from
contracts with customers (“ASC 606” or “Topic 606”).
The core principle of the revenue standard
is that an entity recognizes revenue to depict the transfer of promised goods or services to clients in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 applies a five-step
model for revenue measurement and recognition and also requires increased disclosures including the nature, amount, timing, and
uncertainty of revenue and cash flows related to contracts with clients.
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.
The Company recognizes revenue upon transfer
of control of promised goods or services to customers in an amount that reflects the consideration it expects to receive for those
goods or services, including any variable consideration.
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 does not consider payment terms of a performance obligation for customers with contractual
terms that are one year or less and has elected the practical expedient. Nearly all of the Company’s sales contracts reflect
market pricing at the time the contract is executed, or are one year or less, and generally provide for shipment within 30 to 60
days after the price has been agreed upon with the customer. 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.
Laboratory Testing Services
The Company records revenue for its laboratory testing service
contracts 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 is nearly all cases is when the testing results are
released to the customer.
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 to not disclose the
value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Equity Based Compensation
We account 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 our common stock options are estimated using the Black Scholes option-pricing model with the following
assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. We expense 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 condensed consolidated statements
of 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 complex and subjective estimates include revenue recognition, recoverability
of long-lived assets, including the values assigned to goodwill, intangible assets and property and equipment, fair value calculations
for stock-based compensation and convertible promissory notes, contingencies, allowance for doubtful accounts 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.
The impact of the COVID-19 pandemic as
of and for the fiscal year ended September 30, 2020 did not have a material impact on the valuation of the Company’s
intangible assets or reporting units that contain goodwill. As such, we concluded that a triggering event, which would require
impairment testing for any intangible assets, or reporting units that contain goodwill, did not occur. We will continue to evaluate
the nature and extent of impacts related to COVID-19 on our business and any impact they may have on management's estimates. The
duration and severity of the outbreak and its long-term impact on our business is uncertain at this time.
Comparison of the Fiscal Year Ended September 30, 2020
to the Fiscal Year Ended September 30, 2019
Revenues
Product revenues
For the twelve month periods ended September 30, 2020
and 2019, we generated $615,430 and $2,136,055 in revenues from product sales, respectively. Product revenue decreased by
$1,520,625 or 71% for the twelve month period ended September 30, 2020 as compared to the prior fiscal year. Revenues
decreased by $1,351,266 in textiles relating to shipments of DNA concentrate to protect the cotton supply chain. This
decrease in textiles revenue is primarily as result of the global shut down related to the COVID-19 pandemic adversely
impacting the textile industry. Further decreases include $91,609 in Consumer Asset Marking due to a decrease in demand for
automobile marking in Scandinavia and $58,704 in biopharmaceuticals due to a customer having decreased demand and therefore
delaying the issuance of its annual purchase order.
Service revenues
For the twelve month periods ended September 30, 2020 and
2019, we generated $1,316,067 and $3,253,034 in revenues from sales of services, respectively. Service revenues include our feasibility
projects and any research and/or development contracts as well as our COVID-19 Surveillance Testing and fiberTyping and authentication
services. The decrease in service revenues of $1,936,967 or 60% for the twelve month period ended September 30, 2020 as compared
to the prior fiscal year is attributable to a decrease in revenue from a cannabis licensing agreement (now terminated) of $1,000,000,
as well as additional decreases of $612,890 for a government contract award that ended during the second half of fiscal 2019 and
$197,446 of textile authentications and feasibility projects.
Costs and Expenses
Cost of Revenues
Cost of revenues for the twelve month period ended September 30,
2020 decreased by $156,713 or 18% from $877,613 for the twelve month period ended September 30, 2019 to $720,900 for the twelve
month period ended September 30, 2020. Cost of revenues as a percentage of product revenues was 117% and 41% for the twelve
month periods ended September 30, 2020 and 2019, respectively. This increase in cost of revenues as a percentage of product
revenues is due to product sales mix, as sales during the twelve month period ended September 30, 2019 included textiles sales,
which are at a higher gross margin, and to a further extent, certain fixed costs, such as rent and payroll not getting fully absorbed
due to the low product revenue during the twelve month period ended September 30, 2020.
Selling, General and Administrative
Selling, general and administrative expenses for the fiscal
year ended September 30, 2020 decreased by $139,942 or 1% to $10,138,103 from $10,278,045 in fiscal year 2019. The decrease
is primarily attributable to a decrease in travel of $274,000 due to the global pandemic as well as a $140,000 decrease in consulting
expense. These decreases were offset by an increase of $278,000 for the establishment of our diagnostic clinical lab (recruitment
fees, payroll, office expenses).
Research and Development
Research and development expenses increased to $3,321,763 for
the twelve month period ended September 30, 2020 from $2,967,278 for the twelve month period ended September 30, 2019,
an increase of $354,485 or 12%. This increase is primarily due to costs incurred related to the development and validation of our
LineaTM COVID-19 Assay Kit and our COVID-19 Surveillance Testing. The
increase also relates to costs incurred on other feasibility projects in both textiles and pharmaceutical/nutraceutical markets,
as well as the write-off of certain development costs for transfer units that are not expected to be used commercially in the cannabis
market. These increases were offset by a decrease related to the completion of the government contract award of approximately $400,000.
Depreciation and Amortization
Depreciation and amortization decreased by $104,694 or 27% from
$390,424 for the twelve month period ended September 30, 2019 to $285,730 for the twelve month period ended September 30,
2020. This decrease is related primarily to items becoming fully depreciated during fiscal 2020 and therefore not having a full
12 months of expense in the current fiscal year.
Interest (expense) income
Interest (expense) income for the fiscal year ended September 30,
2020, decreased to expense of $115,830 from expense of $162,432 in the same period of 2019. The decrease in interest expense was
due to interest incurred on the secured convertible notes payable for the August 2018 and November 2018 secured convertible
notes amended during July 2019. These notes were repaid in full at the end of fiscal 2019, as such no interest expense was
recorded during fiscal 2020.
Other (expense) income
Other income (expense) for the twelve month
periods ended September 30, 2020 and 2019, was expense of $378,075 and $43,299, respectively. The increase of $334,776 is
due to an increase in franchise taxes during the twelve month period ended September 30, 2020.
Loss on extinguishment of debt
Loss on extinguishment of debt relates
to the August 2018 and November 2018 secured convertible notes amendment during July 2019 resulting in accounting
for such notes as an extinguishment of debt and issuance of new debt. The majority of these notes were subsequently converted into
equity during September 2019 and the remaining notes were paid back in full during the first quarter of fiscal 2020.
Gain on change in fair value of secured
convertible notes payable
Gain on change in fair value of secured
convertible notes payables relates to fair value adjustments relating to the August 2018 and November 2018 secured convertible
notes as amended in July 2019. Due to the amendment, the Company elected the fair value option and adjusts the remaining secured
convertible notes to fair value upon conversion as well as at every quarter-end. The majority of these notes were subsequently
converted into equity during September 2019 and the remaining notes were paid back in full during the first quarter of fiscal
2020.
Net Loss
Net loss increased $4,396,458, or 51% to
$13,028,904 for the fiscal year ended September 30, 2020 compared to $8,632,446 for the fiscal year ended September 30,
2019, due to the factors noted above.
Recently Issued Accounting Pronouncements
See Note C, “Recent Accounting Standards,” to the
accompanying consolidated financial statements for a description of accounting standards which may impact our consolidated financial
statements in future reporting periods.
Liquidity and Capital Resources
Our liquidity needs consist of our working capital requirements
and research and development expenditure funding. As of September 30, 2020, we had a working capital of $4,811,847. For the
fiscal year ended September 30, 2020, we used cash in operating activities of $11,143,059 consisting primarily of our loss
of $13,028,904 net with non-cash adjustments of $285,730 in depreciation and amortization charges, $1,001,082 in stock-based compensation
expense, $45,280 of bad debt expense and $26,019 in amortization of debt issuance costs. Additionally, we had a net decrease in
operating assets of $218,326 and a net increase in operating liabilities of $309,408. Cash used in investing activities was $1,063,698,
for the purchase of property and equipment. Cash provided by financing activities was $19,434,512, which included net proceeds
from the sale of common stock and warrants of $10,639,728, net proceeds from the exercise of warrants of $8,055,797, and net proceeds
from promissory notes of $846,789.
We have recurring net losses, which have resulted in an accumulated
deficit of $269,835,650 as of September 30, 2020. We have incurred a net loss of $13,028,904 for the fiscal year ended September 30,
2020. At September 30, 2020, we had cash and cash equivalents of $7,786,743. These factors, along with the impact of the COVID-19
pandemic, raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance
of the financial statements. The ability 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.
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.
We expect capital expenditures to be
less than $1,200,000 in fiscal 2021. Our primary investments will be in laboratory equipment related to our biotherapeutic
research and development activities.
Substantially all of the real property used in our business
is leased under operating lease agreements.
Recent Debt and Equity Financing Transactions
Fiscal 2020
Reverse Stock Split. On October 31, 2019, we filed
a Certificate of Amendment of our Certificate of Incorporation with the Secretary of State of the State of Delaware that effected
a one-for-forty (1:40) reverse stock split of our common stock, effective November 1, 2019.
Underwritten Public Offering. On November 15, 2019,
we closed an underwritten public offering where we issued and sold 2,285,000 shares of our common stock and 2,285,000 accompanying
common warrants (the “2019 Warrants”) each with the right to purchase one share of our common stock at an exercise
price of $5.25 per share. The shares of common stock and accompanying 2019 Warrants were sold at a combined offering price of $5.25
before underwriting discounts. The common warrants have an exercise price of $5.25 per share.
After deducting underwriter discounts and
commissions and other estimated expenses related to the underwritten public offering, we estimate the aggregate net proceeds to
be approximately $10.8 million.
We also granted the underwriter in the
underwritten offering an option to purchase an additional 342,750 shares of our common stock and/or additional 2019 Warrants to
purchase 342,750 shares of our common stock to cover any over-allotments made by the underwriters in the sale and distribution
of the securities.
The 2019 Warrants include an adjustment provision that, subject
to certain exceptions, reduces its exercise price if we issue common stock or common stock equivalents at a price lower than the
then-current exercise price of the 2019 Warrants, subject to a minimum exercise price of $1.47 per share.
Subject to limited exceptions, a holder
of the 2019 Warrants will not have the right to exercise any portion of its warrant if the holder, together with its affiliates,
would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding
immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that upon
61 days’ prior notice to us, the holder may increase the Beneficial Ownership Limitation, provided that in no event shall
the Beneficial Ownership Limitation exceed 9.99%.
The exercise price and number of the shares
of common stock issuable upon the exercise of the 2019 Warrants will be subject to adjustment in the event of any stock dividends
and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the related warrant agreement.
Fiscal 2019
Private Placement of Secured Convertible Notes. On November 29,
2018, we closed a securities purchase agreement with our chairman, president and chief executive officer and one member of the
management team, pursuant to which we issued and sold an aggregate of $550,000 in principal amount of secured convertible notes
bearing interest at a rate of 6% per annum (the “November 2018 Notes”). The November 2018 Notes
are substantially similar to our August 2018 Notes (as defined below) except with respect to maturity date. The November 29th Notes
are secured on a pari passu basis with the same Company assets as the August 2018 Notes.
Underwritten Public Offering. On December 21, 2018,
we entered into an underwriting agreement (the “Agreement”) with Maxim Group LLC (“Maxim”), as the sole
underwriter and book running manager, with respect to the issuance and sale of an aggregate of 137,500 shares (the “Shares”)
of common stock, together with warrants to purchase an aggregate of 137,500 shares of common stock (the “Warrants”)
at an exercise price equal to $20.00 per share of common stock (the “Exercise Price”) in an underwritten public offering.
The public offering price for each Share together with the accompanying Warrant was $20.00. Pursuant to the Agreement, we also
granted Maxim a 45-day option to purchase an additional 20,625 Shares and/or additional Warrants to purchase 20,625 Shares to cover
any over-allotments made by the underwriters in the sale and distribution of the Shares and Warrants. The gross proceeds of
the offering, before deducting underwriter discounts and commissions and other offering expenses, were approximately $2,750,000.
The offering closed on December 26, 2018. On December 26, 2018, Maxim partially exercised its overallotment option and
purchased an additional 20,000 Warrants at a price of $0.0000004 per Warrant.
After deducting underwriting fees and other
expenses related to the offering, the aggregate net proceeds were approximately $2,262,000.
On January 25, 2019, we closed on the underwriters’
partial exercise of its over-allotment option for 12,500 shares of common stock for gross proceeds of $250,000. After deducting
underwriting fees and other expenses related to the over-allotment option, the aggregate net proceeds were approximately $201,000.
The total number of common stock and Warrants issued under
this offering, including the exercise of the over-allotment option was 150,000 and 157,500, respectively. The gross proceeds to
us were $3.0 million and net proceeds after deducting underwriting expenses and other estimated offering expenses was approximately
$2.5 million.
The Warrants are immediately exercisable beginning on the date
of issuance (the “Initial Exercise Date”). The Warrants will be exercisable for five years from the Initial Exercise
Date, but not thereafter.
The Warrants include an adjustment provision that, subject
to certain exceptions, reduces their exercise price if we issue common stock or common stock equivalents at a price lower than
the then-current exercise price of the Warrants, subject to a minimum exercise price of $5.60 per share. The exercise price and
number of the shares of our common stock issuable upon the exercise of the Warrants will be subject to adjustment in the event
of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described
therein.
As a result of the November 2019 underwritten public offering,
the exercise price of the Warrants was reduced to an exercise price of $5.60 per share in accordance with the adjustment provision
contained in the warrant agreement.
As a result of this financing, the exercise price of the 68,375
warrants issued during December 2017 was reduced to an exercise price of $17.60 per share in accordance with the adjustment
provision contained in the warrant agreement. The incremental change in fair value of these warrants as a result of the triggering
event was insignificant.
Private Placement of Secured Convertible Notes. On July 16,
2019, we issued $1.5 million of secured convertible notes (the “July 2019 Notes”), bearing interest at a rate
of 6% per annum, in a non-brokered private placement with an accredited investor, Dillon Hill Capital, LLC (“Dillon Hill”)
and simultaneously amended the terms of certain outstanding August 2018 secured convertible notes (as amended, the “August 2018
Notes”) and November 2018 secured convertible notes (as amended, the “November 2018 Notes”, and together
with the August 2018 Notes, the “2018 Notes”, and together with the August 2018 Notes and July 2019
Notes, the “Company Notes”), to, among other amendments, (i) reduce the conversion price of the 2018 Notes to
$21.60 to facilitate their conversion into equity and (ii) change the maturity date of the August 2018 Notes to be November 28,
2021. Dillon Hill was granted a right to participate in certain of our future financing transactions, (each a “Subsequent
Financing”) until July 16, 2020 equal to the amount required for Dillon Hill to maintain its pro rata ownership of
us as if the July 2019 Notes had been fully converted into our common stock.
The Company Notes contain certain events of default that are
customarily included in financings of this nature. If an event of default occurs, the holders of the Company Notes (by an affirmative
vote of the holders of the Company Notes representing at least 30% of the aggregate principal amount of the Company Notes then
outstanding) may require us to redeem the Company Notes, in whole or in part, at a redemption price equal to the greater of (i) their
outstanding principal balance, plus all accrued and unpaid interest, divided by the Conversion Price (as defined below), multiplied
by the volume-weighted average price (“VWAP”) on the date the redemption price is either (x) demanded or otherwise
due or (y) paid in full, whichever has a higher VWAP, or (ii) 130% of the outstanding principal, plus all accrued and
unpaid interest.
After giving effect to the amendments to the 2018 Notes, the
July 2019 Notes are substantially similar to the 2018 Notes. The July 2019 Notes are secured on a pari passu basis with
the same Company assets as the 2018 Notes. In addition, on July 19, 2019, we also amended the security agreements dated as
of October 19, 2018, to among other amendments, exclude 20% of our equity interest in LRx from the assets securing the Company
Notes. The Company Notes are convertible, in whole or in part, at any time, at the option of the purchasers, into shares of our
common stock, in an amount determined by dividing the principal amount of the Company Notes, together with any and all accrued
and unpaid interest, by the conversion price of $21.60 (the “Conversion Price”). The Company Notes are due and payable
in full on November 28, 2021. We have reserved sufficient shares of our common stock for the potential conversion of the
Company Notes.
The July Company Notes, contain certain negative covenants
that restrict us, including prohibitions or limitations, among other things, on the incurrence of additional indebtedness, subsidiary
asset sales, intercompany loans, liens, amendments to our organization documents, dividends, and redemptions without consent of
the Required Holders (as defined in the Company Notes).
Private Placement of Common Stock.
On August 22, 2019, the Company issued and sold 38,704 shares of common stock at a price of $10.80 per share for total
gross proceeds of $418,000 to a group of accredited investors, including its chief executive officer, president and chairman of
the board of directors, our chief information officer, and a 5% or greater stockholder.
Conversion of Notes. During September 2019, approximately
$2.2 million of the 2018 Notes were converted into 102,893 shares of our common stock. Included in the conversion, Dr. James
A. Hayward, our CEO, converted approximately $1.59 million of the 2018 Notes, into approximately 72,500 shares of our common stock.
In addition, other directors, officers, and affiliates of the Company converted approximately $409,000 of such 2018 Notes in September 2019
into 18,929 shares of our common stock.
Subsequent Events
Entry into Warrant Exercise Agreement
On October 7, 2020, we entered into
Warrant Exercise Agreements (each, a “Warrant Exercise Agreement”) with Dillon Hill Capital, LLC and its affiliate,
Dillon Hill Investment Company LLC (together, the “Investors”), whereby 318,000 of our 2019 Warrants were exercised.
The 2019 Warrants were issued as part of the Company’s November 15, 2019 underwritten public offering. The gross proceeds
to the Company from this partial exercise of the 2019 Warrants is $1,669,500.
In consideration of this partial exercise
of the 2019 Warrants and of the consent to repayment of the Notes, as described below, the Company agreed to issue, in addition
to the 318,000 shares of common stock issued upon exercise of the 2019 Warrants (the “Warrant Shares”), 159,000 replacement
warrants (the “Replacement Warrants”) to the Investors, which is an amount equal to one-half the amount of the 2019
Warrants exercised pursuant to the Warrant Exercise Agreements. The Replacement Warrants have an exercise price of $7.54, the
closing price on The Nasdaq Capital Market of the Company’s common stock on October 7, 2020. In addition, until January 5,
2021, if the Investors exercise additional 2019 Warrants, the Company will issue to the applicable Investor additional Replacement
Warrants in an amount equal to one-half the amount of such exercised 2019 Warrants with each such Replacement Warrant having an
exercise price equal to the closing price on The Nasdaq Capital Market of the Company’s common stock on such date that the
related 2019 Warrants are exercised.
Each Replacement Warrant will be exercisable
beginning on the date of issuance thereof and ending on the five year anniversary of such date. The exercise price and number
of shares of common stock issuable upon exercise of the Replacement Warrants will be subject to adjustment in the event of any
stock dividend, split, recapitalization, reorganization or similar transaction, as described in the Replacement Warrant. Subject
to limited exceptions, a holder of a Replacement Warrant will not have the right to exercise any portion of its Replacement Warrant
if the holder, together with its affiliates, would beneficially own in excess of 9.99% of the number of shares of common stock
outstanding immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided that
upon 61 days’ prior notice to the Company, the holder may elect to increase or decrease the Beneficial Ownership Limitation,
although in no event may the Beneficial Ownership Limitation exceed 9.99%. Each Replacement Warrant includes an adjustment provision
that, subject to certain exceptions, reduces its exercise price if the Company issues common stock or common stock equivalents
at a price lower than the then-current exercise price of such Replacement Warrant, subject to a minimum exercise price of 21%
of such Replacement Warrant’s initial exercise price per share. Under certain limited circumstances, including that the
daily volume weighted average price of the common stock for each of 20 consecutive trading days has exceeded three times the exercise
price of such Replacement Warrant, the Company may call for cancellation of all or any portion of such Replacement Warrant for
which a notice of exercise has not yet been delivered for consideration equal to $0.001 per Warrant Share.
The Replacement Warrants will not be registered
nor listed on any exchange but are the subject of registration rights agreements (each, a “Registration Rights Agreement”),
entered into with each Investor concurrently with the respective Warrant Exercise Agreement, pursuant to which the Company agrees
to file a registration statement by January 20, 2021 with respect to the common stock underlying the Replacement Warrants.
If at the time of exercise of the Replacement Warrants there is no effective registration statement registering, or the prospectus
contained therein is not available for the issuance of the Warrant Shares to the applicable Investor, then such Replacement Warrant
may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Investor will
be entitled to receive a number of Warrant Shares as determined by the terms of the Replacement Warrant.
The private placement of the Replacement
Warrants was completed in reliance upon the exemption from registration provided for by Section 4(a)(2) of the Securities
Act and by Rule 506 of Regulation D promulgated under the Securities Act. Each Investor represented to the Company in its
Warrant Exercise Agreement that it is an “accredited investor” as that term is defined in Rule 501 of Regulation
D.
On each of December 9 and 10, 2020, the Investors exercised
100,000 of their 2019 Warrants, for an aggregate exercise of 200,000 of their 2019 Warrants, resulting in total net proceeds to
the Company of approximately $1.1 million. As a result of these exercises, we issued to the Investors an aggregate of 100,000 additional
replacement warrants, which are substantially similar to the Replacement Warrants described above except that 50,000 of the newly-issued
replacement warrants have an exercise price of $6.57 and 50,000 of such replacement warrants have an exercise price of $6.46.
Repayment of secured convertible
notes
On October 9, 2020, the Company entered
into a letter agreement (the “Letter Agreement”) with Dillon Hill Capital, LLC (the “Noteholder”) as sole
holder of the secured convertible notes (the “Notes”) for the repayment in full of the Notes, in an aggregate amount
of $1,665,581 (the “Payoff Amount”), representing the outstanding principal amount of the Notes plus accrued but unpaid
interest through the scheduled maturity of the Notes. The Company paid the Payoff Amount to the Noteholder on October 9,
2020. Pursuant to the Letter Agreement, the Noteholder and the Collateral Agent agree that, upon the Noteholder’s receipt
of the Payoff Amount, the Notes and any other related documents and instruments will automatically terminate. Moreover, all of
the obligations and liabilities of the Company and its affiliates under the Notes, the Purchase Agreement, and the Security Agreements,
and any other related documents and instruments, will be automatically satisfied in full, and all related liens, mortgages or
other security interests will be automatically released.
Product Research and Development
We anticipate spending approximately $3,500,000 for product
research and development activities during the next twelve months.
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 during the fiscal years ended September 30, 2020 and 2019.
ITEM 7A.
|
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 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
See
pages F-1 through F-30 following
the Exhibit Index.
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Management Report on Internal Control
over Financial Reporting
Evaluation of Disclosure Controls and
Procedures
Under the supervision and with the participation of our management,
including, our Chief Executive Officer, along with the Chief Financial Officer, on September 30, 2020, we conducted an evaluation
of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) under
the Exchange Act, as of September 30, 2020. 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 September 30, 2020, our disclosure controls and procedures were
effective.
Management Report on Internal Control
over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Our internal control over financial reporting was designed to provide reasonable assurance to our management and board of directors
regarding the preparation and fair presentation of published consolidated financial statements. Internal control over financial
reporting is promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive
and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Internal control over financial reporting, no matter how well designed,
has inherent limitations and may not prevent or detect misstatements. Therefore, even effective internal control over financial
reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.
Our management has conducted, with the participation of our
CEO and CFO, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of September 30,
2020. Management’s assessment of internal control over financial reporting was based on assessment criteria established
in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on such evaluation, management concluded that our internal control over financial reporting
was effective as of September 30, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B.
|
OTHER INFORMATION.
|
None.
Part III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information called for by Items 10, 11, 12, 13 and 14 will
be included in our definitive proxy statement for the 2021 Annual Meeting of Stockholders, which will be filed with the SEC within
120 days after September 30, 2020. The relevant portions of such definitive proxy statement are incorporated herein by reference.
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|
(a)
|
We have filed the following documents as part of this Form 10-K:
|
1.
|
Consolidated Financial Statements
|
Our consolidated financial statements at September 30,
2020 and 2019 and for the years ended September 30, 2020 and 2019, and the notes thereto, together with the report of our
independent registered public accounting firm on those consolidated financial statements, are hereby filed as part of this report
beginning on page F-1.
2.
|
Financial Statement Schedules
|
All financial statement schedules have been omitted since the
required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because
the information required is included in the consolidated financial statements and notes thereto.
The information required by this item
is set forth on the exhibit index that follows the signature page of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
APPLIED DNA SCIENCES, INC.
|
|
|
Date: December 17, 2020
|
/s/ James A. Hayward
|
By:
|
James A. Hayward
|
|
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Name
|
|
Position
|
|
Date
|
|
|
|
|
|
/s/ JAMES A. HAYWARD
|
|
Chief Executive Officer (Principal Executive Officer),
|
|
December 17, 2020
|
James A. Hayward
|
|
President, Chairman of the Board of Directors and Director
|
|
|
|
|
|
|
|
/s/ BETH M. JANTZEN
|
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|
|
December 17, 2020
|
Beth M. Jantzen
|
|
|
|
|
|
|
|
|
/s/ JOHN BITZER, III
|
|
Director
|
|
December 17, 2020
|
John Bitzer, III
|
|
|
|
|
|
|
|
|
|
/s/ ROBERT CATELL
|
|
Director
|
|
December 17, 2020
|
Robert Catell
|
|
|
|
|
|
|
|
|
|
/s/ JOSEPH D. CECCOLI
|
|
Director
|
|
December 17, 2020
|
Joseph D. Ceccoli
|
|
|
|
|
|
|
|
|
|
/s/ SCOTT L. ANCHIN
|
|
Director
|
|
December 17, 2020
|
Scott L. Anchin
|
|
|
|
|
|
|
|
|
|
/s/ YACOV A. SHAMASH
|
|
Director
|
|
December 17, 2020
|
Yacov A. Shamash
|
|
|
|
|
|
|
|
|
|
/s/ SANFORD R. SIMON
|
|
Director
|
|
December 17, 2020
|
Sanford R. Simon
|
|
|
|
|
|
|
|
|
|
/s/ ELIZABETH M. SCHMALZ FERGUSON
|
|
Director
|
|
December 17, 2020
|
Betsy M. Schmalz Ferguson
|
|
|
|
|
EXHIBIT INDEX
The following exhibits are included as part of this Form 10-K.
References to “the Company” in this Exhibit List mean Applied DNA Sciences, Inc., a Delaware corporation.
4.12
|
|
Form of Common Stock Purchase Warrant
|
|
8-K
|
|
10.3
|
|
001-36745
|
|
10/14/2020
|
|
|
10.1†
|
|
Form of employee stock option agreement under the Applied DNA Sciences, Inc. 2005 Incentive Stock Plan
|
|
10-Q
|
|
4.1
|
|
002-90539
|
|
05/15/2012
|
|
|
10.2†
|
|
Applied DNA Sciences, Inc. 2005 Incentive Stock Plan, as amended and restated
|
|
DEF 14A
|
|
Appendix A
|
|
001-36745
|
|
04/04/2019
|
|
|
10.3†
|
|
Form of employee stock option agreement under the Applied DNA Sciences, Inc. 2005 Incentive Stock Plan, as amended
|
|
10-K
|
|
10.1
|
|
001-36745
|
|
12/14/2015
|
|
|
10.4†
|
|
Applied DNA Sciences, Inc. 2020 Equity Incentive Plan
|
|
DEF 14A
|
|
Appendix A
|
|
001-36745
|
|
08/03/2020
|
|
|
10.5†
|
|
Applied DNA Sciences, Inc. 2020 Equity Incentive Plan Stock Option Grant Notice and Award Agreement
|
|
S-8
|
|
10.3
|
|
333-249365
|
|
10/07/2020
|
|
|
10.6†
|
|
Employment Agreement, dated July 1, 2016, between James A. Hayward and Applied DNA Sciences, Inc.
|
|
8-K
|
|
10.1
|
|
001-36745
|
|
8/2/2016
|
|
|
10.7
|
|
Software Distribution Agreement, dated as of January 25, 2012, by and between Applied DNA Sciences, Inc. and DivineRune, Inc.
|
|
10-Q
|
|
10.1
|
|
002-90539
|
|
5/15/2012
|
|
|
10.8
|
|
Form of Subscription Agreement dated June 21, 2012, by and among Applied DNA Sciences, Inc. and the investor named on the signature page thereto
|
|
10-K
|
|
10.37
|
|
002-90539
|
|
12/20/2012
|
|
|
10.9†
|
|
Form of Indemnification Agreement dated as of September 7, 2012, by and between Applied DNA Sciences, Inc. and each of its directors and executive officers
|
|
8-K
|
|
10.1
|
|
002-90539
|
|
9/13/2012
|
|
|
10.10
|
|
Warrant Agreement, dated November 20,
2014, between Applied DNA Sciences, Inc. and American Stock Transfer & Trust Company, LLC as warrant
agent
|
|
8-K
|
|
4.1
|
|
001-36745
|
|
11/20/2014
|
|
|
10.11
|
|
First Amendment to Warrant Agreement dated April 1, 2015
between Applied DNA Sciences, Inc. and American Stock Transfer & Trust Company, LLC as warrant agent
|
|
8-K
|
|
4.1
|
|
001-36745
|
|
4/1/2015
|
|
|
10.12
|
|
Second Amendment to Warrant Agreement dated November 2,
2016
|
|
8-K
|
|
10.4
|
|
001-36745
|
|
11/2/2016
|
|
|
10.13
|
|
Asset Purchase Agreement dated September 11, 2015 between
Applied DNA Sciences, Inc. and Vandalia Research, Inc.
|
|
8-K
|
|
2.1
|
|
001-36745
|
|
9/17/2015
|
|
|
10.14
|
|
Placement Agency Agreement by and between Applied DNA Sciences, Inc.
and Maxim Group LLC, dated November 23, 2015
|
|
8-K/A
|
|
10.1
|
|
001-36745
|
|
11/23/2015
|
|
|
10.15
|
|
Form of Securities Purchase Agreement
|
|
8-K/A
|
|
10.2
|
|
001-36745
|
|
11/23/2015
|
|
|
10.16
|
|
Placement Agency Agreement between Maxim Group LLC, Imperial
Capital, LLC and Applied DNA Sciences, Inc. dated November 2, 2016
|
|
8-K
|
|
10.1
|
|
001-36745
|
|
11/2/2016
|
|
|
10.17
|
|
Securities Purchase Agreement dated November 2, 2016
|
|
8-K
|
|
10.2
|
|
001-36745
|
|
11/2/2016
|
|
|
10.18
|
|
Registration Rights Agreement dated November 2, 2016
|
|
8-K
|
|
10.3
|
|
001-36745
|
|
11/2/2016
|
|
|
10.19*
|
|
License Agreement with Himatsingka America, Inc. dated
June 23, 2017
|
|
10-Q
|
|
10.1
|
|
001-36745
|
|
8/10/2017
|
|
|
10.20
|
|
Placement Agency Agreement by and between Applied DNA Sciences, Inc.
and Maxim Group LLC, dated December 20, 2017.
|
|
8-K
|
|
10.1
|
|
001-36745
|
|
12/20/2017
|
|
|
10.21
|
|
Securities Purchase Agreement dated as of December 20,
2017, by and between Applied DNA Sciences, Inc. and the Purchasers named therein.
|
|
8-K
|
|
10.2
|
|
001-36745
|
|
12/20/2017
|
|
|
10.22
|
|
Registration Rights Agreement, dated November 29, 2018
|
|
8-K
|
|
10.2
|
|
001-36745
|
|
12/6/2018
|
|
|
10.26+
|
|
Patent and Know-How License and Cooperation Agreement, dated March 28, 2019, between the Company, APDN (B.V.I.), Inc.,
and ETCH BioTrace S.A.
|
|
10-Q
|
|
10.10
|
|
001-36745
|
|
5/9/2019
|
|
|
10.27
|
|
Registration Rights Agreement, dated July 16, 2019 by and among Applied DNA Sciences, Inc. and the investor
named on the signature page thereof.
|
|
8-K
|
|
10.2
|
|
001-36745
|
|
07/17/2019
|
|
|
10.28
|
|
Securities Purchase Agreement, dated July 16, 2019 by and among Applied DNA Sciences, Inc. and the investor
named on the signature page thereof.
|
|
8-K
|
|
10.3
|
|
001-36745
|
|
07/17/2019
|
|
|
10.29
|
|
Asset Purchase Agreement, dated July 29, 2019 by and between LineaRX, Inc. and Vitatex Inc.
|
|
8-K
|
|
10.1
|
|
001-36745
|
|
8/12/2019
|
|
|
10.30
|
|
Form of Subscription Agreement between investors and Applied DNA Sciences, Inc., dated August 22, 2019.
|
|
8-K
|
|
10.1
|
|
001-36745
|
|
8/26/2019
|
|
|
10.31
|
|
Underwriting Agreement entered into by and between Applied DNA Sciences, Inc. and Maxim Group LLC, as Representative
of the Underwriters listed in Schedule I hereto, dated November 13, 2019.
|
|
8-K
|
|
1.1
|
|
001-36745
|
|
11/14/2019
|
|
|
10.32
|
|
Warrant Agreement, dated November 15, 2019, between Applied DNA Sciences, Inc. and American Stock Transfer &
Trust Company, LLC
|
|
8-K
|
|
4.1
|
|
001-36745
|
|
11/18/2019
|
|
|
10.33†
|
|
Consulting Agreement, dated as of December 12, 2019, by and between Applied DNA Sciences, Inc. and Meadow Hill
Place, LLC
|
|
10.Q
|
|
10.1
|
|
001-36745
|
|
08/06/2020
|
|
|
10.34
|
|
Agreement of Lease dated June 14, 2013, between Applied DNA Sciences, Inc. and
Long Island High Technology Incubator, Inc.
|
|
10-Q
|
|
10.2
|
|
002-90539
|
|
8/13/2013
|
|
|
10.35
|
|
Agreement of Lease, dated November 1, 2015, by and between Applied DNA Sciences, Inc. and Long Island High Technology
Incubator, Inc.
|
|
10.Q
|
|
10.2
|
|
001-36745
|
|
08/06/2020
|
|
|
10.36
|
|
Option Exercise Notice, dated December 3, 2015, Pursuant to Lease dated June 14,
2013, between Applied DNA Sciences, Inc. and Long Island High Technology Incubator, Inc.
|
|
10.Q
|
|
10.2
|
|
001-36745
|
|
05/12/2016
|
|
|
10.37
|
|
Temporary Lease Extension Agreement, dated August 9, 2019, by and between Applied DNA Sciences, Inc. and Long
Island High Technology Incubator, Inc.
|
|
10.Q
|
|
10.3
|
|
001-36745
|
|
08/06/2020
|
|
|
10.38
|
|
Amendment to Leases, dated November 4, 2019, by and between Long Island High Technology Incubator, Inc. and
Applied DNA Sciences, Inc.
|
|
10.Q
|
|
10.4
|
|
001-36745
|
|
08/06/2020
|
|
|
10.39
|
|
Amendment to Leases, dated January 17, 2020, by and between Long Island High Technology Incubator, Inc. and
Applied DNA Sciences, Inc.
|
|
10.Q
|
|
10.5
|
|
001-36745
|
|
08/06/2020
|
|
|
10.40
|
|
Warrant Exercise Agreement, dated October 7, 2020, by and between Applied DNA Sciences, Inc. and Dillon Hill
Capital, LLC.
|
|
8-K
|
|
10.1
|
|
001-36745
|
|
10/14/2020
|
|
|
10.41
|
|
Warrant Exercise Agreement, dated October 7, 2020, by and between Applied DNA Sciences, Inc. and Dillon Hill
Investment Company LLC.
|
|
8-K
|
|
10.2
|
|
001-36745
|
|
10/14/2020
|
|
|
10.42
|
|
Registration Rights Agreement, dated October 7, 2020, by and between Applied DNA Sciences, Inc. and Dillon Hill
Capital, LLC.
|
|
8-K
|
|
10.4
|
|
001-36745
|
|
10/14/2020
|
|
|
10.43
|
|
Registration Rights Agreement, dated October 7, 2020, by and between Applied DNA Sciences, Inc. and Dillon Hill
Investment Company LLC.
|
|
8-K
|
|
10.5
|
|
001-36745
|
|
10/14/2020
|
|
|
10.44
|
|
Letter Agreement, dated October 9, 2020, by and among Applied DNA Sciences, Inc., Dillon Hill Capital, LLC,
and Delaware Trust Company, as Collateral Agent.
|
|
8-K
|
|
10.6
|
|
001-36745
|
|
10/14/2020
|
|
|
10.45
|
|
Consent, dated October 9, 2020, from Dillon Hill Capital, LLC to Applied DNA Sciences, Inc.
|
|
8-K
|
|
10.7
|
|
001-36745
|
|
10/14/2020
|
|
|
10.46+
|
|
Joint Development Agreement, dated September 11, 2018, between LineaRx, Inc., Takis S.R.L. and Evvivax S.R.L.,
as amended by that First Amendment, dated February 3, 2020
|
|
|
|
|
|
|
|
|
|
Filed
|
10.47
|
|
Animal Clinical Trial Agreement, dated September 14, 2020, between Applied DNA Sciences, Inc., Evvivax S.R.L.
and Veterinary Oncology Services, PLLC
|
|
|
|
|
|
|
|
|
|
Filed
|
21.1
|
|
Subsidiaries of Applied DNA Sciences, Inc.
|
|
|
|
|
|
|
|
|
|
Filed
|
23.1
|
|
Consent of Marcum LLP
|
|
|
|
|
|
|
|
|
|
Filed
|
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
|
|
|
|
|
|
|
|
|
|
Filed
|
† Indicates a management contract or any compensatory
plan, contract or arrangement.
* A request for confidentiality has been granted for certain
portions of the indicated document. Confidential portions have been omitted and filed separately with the SEC as required by Rule 24b-2
promulgated under the Exchange Act.
+ Portions of this exhibit have been omitted because the information
is both not material and would likely cause competitive harm to the registrant if publicly disclosed. The omissions have been
indicated by bracketed asterisks (“[***]”).
APPLIED DNA SCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Shareholders and Board of Directors
of
Applied DNA Sciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Applied DNA Sciences, Inc. (the “Company”) as of September 30, 2020 and 2019, and the related
consolidated statements of operations, equity (deficit) and cash flows for each of the two years in the period ended September 30,
2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019,
and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2020, in
conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note B, the
Company has recurring net losses. The Company incurred a net loss of $13,028,904 and generated negative operating cash flow of
$11,143,059 for the fiscal year ended September 30, 2020 and has a working capital deficiency of $4,811,847. These conditions
along with the COVID-19 risks and uncertainties raise substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note B. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2014.
Melville, NY
December 17, 2020
APPLIED DNA SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2020 AND 2019
APPLIED DNA SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,786,743
|
|
|
$
|
558,988
|
|
Accounts receivable, net of allowance of $11,968 and $4,500 at September 30, 2020 and 2019, respectively
|
|
|
194,319
|
|
|
|
839,951
|
|
Inventories
|
|
|
497,367
|
|
|
|
142,629
|
|
Prepaid expenses and other current assets
|
|
|
599,296
|
|
|
|
604,740
|
|
Total current assets
|
|
|
9,077,725
|
|
|
|
2,146,308
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,277,655
|
|
|
|
226,221
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Deferred offering costs
|
|
|
-
|
|
|
|
109,698
|
|
Deposits
|
|
|
95,083
|
|
|
|
62,351
|
|
Goodwill
|
|
|
285,386
|
|
|
|
285,386
|
|
Intangible assets, net
|
|
|
605,330
|
|
|
|
734,771
|
|
Total Assets
|
|
$
|
11,341,179
|
|
|
$
|
3,564,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,926,427
|
|
|
$
|
1,616,997
|
|
Promissory notes payable-current portion
|
|
|
329,299
|
|
|
|
-
|
|
Secured convertible notes payable , net of debt issuance costs
|
|
|
1,499,116
|
|
|
|
-
|
|
Deferred revenue
|
|
|
511,036
|
|
|
|
628,993
|
|
Total current liabilities
|
|
|
4,265,878
|
|
|
|
2,245,990
|
|
|
|
|
|
|
|
|
|
|
Long term accrued liabilities
|
|
|
848,307
|
|
|
|
621,970
|
|
Promissory notes payable-long term portion
|
|
|
517,488
|
|
|
|
-
|
|
Secured convertible notes payable, net of debt issuance costs
|
|
|
-
|
|
|
|
1,442,497
|
|
Secured convertible notes payable, recorded at fair value
|
|
|
-
|
|
|
|
102,777
|
|
Total liabilities
|
|
|
5,631,673
|
|
|
|
4,413,234
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applied DNA Sciences, Inc. Stockholders’ Equity (Deficit) :
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- shares issued and outstanding as of September 30, 2020 and 2019, respectively
|
|
|
-
|
|
|
|
-
|
|
Series A Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of September 30, 2020 and 2019, respectively
|
|
|
-
|
|
|
|
-
|
|
Series B Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of September 30, 2020 and 2019, respectively
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share; 200,000,000 and 500,000,000 shares authorized as of
September 30, 2020 and 2019, respectively; 5,142,779 and 1,207,993 shares issued and outstanding as of September 30, 2020
and 2019, respectively
|
|
|
5,144
|
|
|
|
1,208
|
|
Additional paid in capital
|
|
|
275,548,737
|
|
|
|
255,962,922
|
|
Accumulated deficit
|
|
|
(269,835,650
|
)
|
|
|
(256,805,589
|
)
|
Applied DNA Sciences, Inc. stockholders’ equity (deficit):
|
|
|
5,718,231
|
|
|
|
(841,459
|
)
|
Noncontrolling interest
|
|
|
(8,725
|
)
|
|
|
(7,040
|
)
|
Total equity (deficit)
|
|
|
5,709,506
|
|
|
|
(848,499
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity (deficit)
|
|
$
|
11,341,179
|
|
|
$
|
3,564,735
|
|
See the accompanying notes to the consolidated
financial statements
APPLIED DNA SCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
615,430
|
|
|
$
|
2,136,055
|
|
Service
|
|
|
1,316,067
|
|
|
|
3,253,034
|
|
Total revenues
|
|
|
1,931,497
|
|
|
|
5,389,089
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
720,900
|
|
|
|
877,613
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,138,103
|
|
|
|
10,278,045
|
|
Research and development
|
|
|
3,321,763
|
|
|
|
2,967,278
|
|
Depreciation and amortization
|
|
|
285,730
|
|
|
|
390,424
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
13,745,596
|
|
|
|
13,635,747
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(12,534,999
|
)
|
|
|
(9,124,271
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense (including related party interest of $46,586 for the year ended September 30, 2019)
|
|
|
(115,830
|
)
|
|
|
(162,432
|
)
|
Other expense, net
|
|
|
(378,075
|
)
|
|
|
(43,299
|
)
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(1,260,399
|
)
|
Unrealized gain on change in fair value of secured convertible notes payable
|
|
|
-
|
|
|
|
1,972,955
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(13,028,904
|
)
|
|
|
(8,617,446
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(13,028,904
|
)
|
|
|
(8,632,446
|
)
|
Less: Net loss (income) attributable to noncontrolling interest
|
|
|
1,685
|
|
|
|
9,323
|
|
NET LOSS attributable to Applied DNA Sciences, Inc.
|
|
|
(13,027,219
|
)
|
|
|
(8,623,123
|
)
|
Deemed dividend related to warrant modifications
|
|
|
2,842
|
|
|
|
(309,607
|
)
|
NET LOSS applicable to common stockholders
|
|
$
|
(13,030,061
|
)
|
|
$
|
(8,932,730
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share applicable to common stockholders-basic and diluted
|
|
$
|
(3.32
|
)
|
|
$
|
(9.69
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic and diluted
|
|
|
3,919,072
|
|
|
|
921,809
|
|
See the accompanying notes to the consolidated
financial statements
APPLIED DNA SCIENCES, INC.
CONSOLIDATED STATEMENTS OF (DEFICIT)
EQUITY
YEARS ENDED SEPTEMBER 30, 2020 and 2019
|
|
|
Common
|
|
|
|
Common
|
|
|
|
Additional
|
|
|
|
Accumulated
|
|
|
|
Noncontrolling
|
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
|
Stock
|
|
|
|
Paid
in
|
|
|
|
Deficit
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 1, 2018
|
|
|
752,802
|
|
|
$
|
753
|
|
|
$
|
249,119,833
|
|
|
$
|
(248,366,083
|
)
|
|
$
|
-
|
|
|
$
|
754,503
|
|
Other
|
|
|
7,594
|
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock issued in public offering, net of
offering costs
|
|
|
150,000
|
|
|
|
150
|
|
|
|
2,463,441
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,463,591
|
|
Common stock issued in private placement, net of
offering costs
|
|
|
38,704
|
|
|
|
39
|
|
|
|
402,342
|
|
|
|
-
|
|
|
|
-
|
|
|
|
402,381
|
|
Impact of adoption of new accounting pronouncements
included in accumulated deficit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
493,224
|
|
|
|
-
|
|
|
|
493,224
|
|
Exercise of warrants
|
|
|
55,376
|
|
|
|
55
|
|
|
|
987,446
|
|
|
|
-
|
|
|
|
-
|
|
|
|
987,501
|
|
Exercise of warrants cashlessly
|
|
|
100,617
|
|
|
|
100
|
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock issued in secured convertible note
conversion
|
|
|
102,900
|
|
|
|
103
|
|
|
|
1,440,402
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,440,505
|
|
Deemed dividend, warrant repricing
|
|
|
-
|
|
|
|
-
|
|
|
|
309,607
|
|
|
|
(309,607
|
)
|
|
|
-
|
|
|
|
-
|
|
Investment in LineaRx, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
110,849
|
|
|
|
-
|
|
|
|
2,283
|
|
|
|
113,132
|
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,129,110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,129,110
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,623,123
|
)
|
|
|
(9,323
|
)
|
|
|
(8,632,446
|
)
|
Balance, September 30, 2019
|
|
|
1,207,993
|
|
|
$
|
1,208
|
|
|
$
|
255,962,922
|
|
|
$
|
(256,805,589
|
)
|
|
$
|
(7,040
|
)
|
|
$
|
(848,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in public offering, net of
offering costs
|
|
|
2,285,000
|
|
|
|
2,285
|
|
|
|
10,527,745
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,530,030
|
|
Deemed dividend - warrant repricing
|
|
|
-
|
|
|
|
-
|
|
|
|
2,842
|
|
|
|
(2,842
|
)
|
|
|
-
|
|
|
|
-
|
|
Exercise of warrants
|
|
|
1,649,786
|
|
|
|
1,651
|
|
|
|
8,054,146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,055,797
|
|
Stock based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1,001,082
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,001,082
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,027,219
|
)
|
|
|
(1,685
|
)
|
|
|
(13,028,904
|
)
|
Balance, September 30,
2020
|
|
|
5,142,779
|
|
|
$
|
5,144
|
|
|
$
|
275,548,737
|
|
|
$
|
(269,835,650
|
)
|
|
$
|
(8,725
|
)
|
|
$
|
5,709,506
|
|
See the accompanying notes to the consolidated
financial statements
APPLIED DNA SCIENCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2020 AND 2019
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,028,904
|
)
|
|
$
|
(8,632,446
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
285,730
|
|
|
|
390,424
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
1,260,399
|
|
Unrealized gain on change in fair value of senior secured convertible notes
|
|
|
-
|
|
|
|
(1,972,955
|
)
|
Stock-based compensation
|
|
|
1,001,082
|
|
|
|
1,129,110
|
|
Non-cash in process research and development
|
|
|
-
|
|
|
|
251,420
|
|
Amortization of debt issuance costs
|
|
|
26,019
|
|
|
|
23,828
|
|
Provision for bad debts
|
|
|
45,280
|
|
|
|
7,624
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
600,352
|
|
|
|
638,339
|
|
Inventories
|
|
|
(354,738
|
)
|
|
|
78,740
|
|
Prepaid expenses and other current assets and deposits
|
|
|
(27,288
|
)
|
|
|
23,767
|
|
Accounts payable and accrued liabilities
|
|
|
427,365
|
|
|
|
667,898
|
|
Deferred revenue
|
|
|
(117,957
|
)
|
|
|
(727,920
|
)
|
Net cash used in operating activities
|
|
|
(11,143,059
|
)
|
|
|
(6,861,772
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,063,698
|
)
|
|
|
(67,438
|
)
|
Net cash used in investing activities
|
|
|
(1,063,698
|
)
|
|
|
(67,438
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from secured convertible notes payable (including related parties of $550,000 for the year ended September 30, 2019)
|
|
|
-
|
|
|
|
1,985,392
|
|
Proceeds from Promissory notes
|
|
|
846,789
|
|
|
|
-
|
|
Net proceeds from private placement
|
|
|
-
|
|
|
|
402,381
|
|
Net proceeds from exercise of warrants
|
|
|
8,055,797
|
|
|
|
987,501
|
|
Net proceeds from sale of common stock and warrants
|
|
|
10,639,728
|
|
|
|
2,463,591
|
|
Repayment of convertible notes
|
|
|
(107,802
|
)
|
|
|
-
|
|
Capitalized offering costs
|
|
|
-
|
|
|
|
(10,231
|
)
|
Net cash provided by financing activities
|
|
|
19,434,512
|
|
|
|
5,828,634
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
7,227,755
|
|
|
|
(1,100,576
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
558,988
|
|
|
|
1,659,564
|
|
Cash and cash equivalents at end of year
|
|
$
|
7,786,743
|
|
|
$
|
558,988
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid during period for interest
|
|
$
|
45,354
|
|
|
$
|
—
|
|
Cash paid during period for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Public offering costs included in accounts payable and accrued liabilities
|
|
$
|
-
|
|
|
$
|
99,468
|
|
Interest paid in kind (related party of $98,752 for the year ended September 30, 2019)
|
|
$
|
35,625
|
|
|
$
|
126,980
|
|
Property and equipment acquired, and included in accounts payable
|
|
$
|
144,025
|
|
|
$
|
-
|
|
Deemed dividend-warrant repricing
|
|
$
|
2,842
|
|
|
$
|
309,607
|
|
Impact of adoption of new accounting pronouncements included in accumulated deficit
|
|
$
|
-
|
|
|
$
|
493,223
|
|
Deferred offering costs reclassified to additional paid in capital
|
|
$
|
109,698
|
|
|
$
|
-
|
|
Warrants exercised cashlessly
|
|
$
|
-
|
|
|
$
|
100
|
|
Conversion of notes payable
|
|
$
|
-
|
|
|
$
|
1,440,505
|
|
See the accompanying notes to the consolidated
financial statements
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE A – NATURE OF THE BUSINESS
Applied DNA Sciences, Inc. (“Applied
DNA,” or the “Company”) develops and markets DNA-based technology solutions utilizing its LinearDNATM large-scale
polymerase chain reaction (“PCR”) based manufacturing platform which is capable of producing large scale DNA. The Company’s
proprietary platform produces large quantities of DNA for use in the nucleic acid-based in vitro 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”) applications.
In response to the COVID-19 pandemic, the Company developed a PCR-based molecular diagnostic test for COVID-19, which was granted
Emergency Use Authorization (EUA) in May 2020. The Company currently manufactures and sells its EUA authorized COVID-19 molecular
diagnostic test kit under the LineaTM COVID-19 Assay Kit trademark (“COVID-19
Diagnostic Testing”). In addition, and in further response to the COVID-19 pandemic, the Company developed and is currently
offering non-diagnostic COVID-19 pooled surveillance testing to detect instances of COVID-19 in defined populations. The Company’s
COVID-19 pooled surveillance testing services are currently offered under the safeCircleTM trademark (“COVID-19
Surveillance Testing”). The Company is also developing an invasive circulating tumor cell capture and identification technology
(“iCTC Technology”) which uses a patented functional assay to capture live invasive circulating tumor cell and associated
lymphocytes that can be identified and expanded for further analysis.
Applied DNA is currently engaged in the
large scale production of DNA via its LinearDNATM platform for two primary lines of services:
Biotherapeutic Contract Research and
Manufacturing
The Company’s patented continuous
flow PCR systems and other proprietary PCR-based production technologies and post-processing systems that comprise the LinearDNATM platform
allows for the large-scale production of specific DNA sequences. The LinearDNATM platform allows for the large-scale
production of specific DNA sequences. The LinearDNATM platform is currently being used for customers to manufacture
DNA 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), (anti-viral and cancer), RNA therapies, clustered regularly interspaced short palindromic
repeats (CRISPR) based therapies and gene therapies.
The Company provides preclinical contract
research and manufacturing services for the nucleic acid-based therapeutic markets. The Company works 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 its LinearDNATM platform. In addition, the Company provides 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, the Company also uses its LinearDNATM platform to produce very
large gram-scale quantities of DNA for the in vitro diagnostic market where its DNA is used for both commercially available diagnostics
and diagnostics under development.
The Company also seeks to develop, acquire,
and commercialize, itself 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. The Company is currently directly engaged in preclinical drug candidate development activities focusing on therapeutically-relevant
DNA constructs manufactured via its LinearDNATM platform in the fields of DNA-based anti-viral and anti-cancer
vaccines, CAR-T cell immunotherapy and the manufacture of rAAV vectors for gene therapy.
COVID-19 Diagnostic Testing
On May 13, 2020 the Company
received an EUA from the FDA for the clinical use of the LineaTM COVID-19 Assay Kit for the qualitative detection
of nucleic acid from SARS-CoV-2 in respiratory specimens including anterior nasal swabs, self-collected at a healthcare
location or collected by a healthcare worker, and nasopharyngeal and oropharyngeal swabs, mid-turbinate nasal swabs,
nasopharyngeal washes/aspirates or nasal aspirates, and bronchoalveolar lavage specimens collected by a healthcare worker
from individuals who are suspected of COVID-19 by their healthcare provider. Under the EUA, testing is limited to
laboratories certified under the Clinical Laboratory Improvement Amendments of 1988 , 42 U.S.C. §263a, that meet
requirements to perform high complexity tests, which certification we have applied for but have not yet obtained.
Subsequently, during July and November 2020, the Company was granted EUA amendments that expand the installed base
of PCR equipment platforms on which our LineaTM COVID-19 Assay Kit can be processed and significantly
increased the daily testing capacity of the LineaTM COVID-19 Assay Kit through the use of automation. The
scope of the EUA, as amended, is expressly limited to use consistent with the Instructions for Use by authorized
laboratories, certified under the Clinical Laboratory Improvement Amendments of 1988 (CLIA) to perform high complexity tests.
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. The Company’s LineaTM COVID-19 Assay Kit 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. The Company currently manufactures the LineaTM COVID-19 Assay Kit at its facilities in Stony Brook, New
York.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE A – NATURE OF THE BUSINESS, continued
COVID-19 Surveillance Testing
Starting in July 2020, the Company
under its wholly-owned subsidiary, ADCL, began offering COVID-19 pooled surveillance testing to customers as a Testing-as-a-Service
(TaaS) offering branded under the safeCircleTM trademark. Unlike diagnostic testing, which looks for the occurrence
of COVID-19 at the individual level, safeCircleTM surveillance testing looks for infections within a defined population
or community and can be used for making health management decisions at the population level. safeCircleTM surveillance
testing uses high-sensitivity pooled COVID-19 testing utilizing the LineaTM COVID-19 Assay Kit. Under the safeCircleTM
surveillance testing service, pooled test results are returned to the sponsoring organization in the aggregate only, not directly
to the participating individuals, and may be performed without CLIA certification. Once potentially infected portions of a defined
population are identified by the safeCircleTM surveillance testing service, the individuals comprising the potentially
infected portions of the defined population are referred to follow on diagnostic testing at a clinical lab to obtain individual
results. ADCL is offering its safeCircleTM surveillance testing in compliance with current CDC, FDA, CMS and New York
State Department of Health recommendations. The use of pooled sampling procedures for the safeCircleTM surveillance
testing service has been internally validated by ADCL in compliance with current CDC guidance. The use of pooled sampling procedures
is not included in the LineaTM COVID-19 Assay Kit EUA.
The Company seeks to commercialize the
safeCircleTM surveillance testing TaaS offering with institutional clients such as schools, colleges and businesses.
The Company currently provides safeCircleTM surveillance testing to several private schools, New York State-based small
enterprises and college athletic programs.
Clinical Testing Laboratory
Under its ADCL subsidiary, the Company
has applied to the New York State Department of Health for all necessary licensing to operate a New York State clinical diagnostics
laboratory. These applications are currently pending. The New York State Department of Health performed its initial inspection
of our clinical laboratory and identified deficiencies in the clinical standard of practice. These deficiencies need to be rectified
before we can submit a request for re-inspection. We are working to rectify these deficiencies now. Through ADCL, the Company seeks
to further commercialize its EUA authorized Linea COVID-19 Assay Kit and its iCTC Technology. ADCL is also performing testing services
in support of the Company’s safeCircleTM surveillance testing services in accordance with current CDC, FDA, CMS
and New York State Department of Health recommendations.
iCTC Technology
The Company previously acquired technology
that uses a patented functional assay to capture live invasive circulating tumor cell and associated lymphocytes. Currently, the
Company’s iCTC Technology is being used in a human cancer drug candidate clinical trial. The Company seeks to further develop
and commercialize this technology and to potentially integrate aspects of the iCTC Technology with the LinearDNATM platform
for cancer research and nucleic-acid based drug development.
Non-Biological Tagging and Related Services
The Company’s supply chain security
business allows its customers to use non-biologic DNA (molecular) tags, manufactured via its LinearDNATM platform,
to mark objects, and then identify these objects by detecting the absence or presence of the molecular tag. The Company’s
core products include:
|
·
|
SigNature® Molecular Tags produced by the Company’s LinearDNATM platform,
provide an approach to authenticate goods within large and complex supply chains for materials such as cotton, and leather, in-home
textiles and apparel, pharmaceuticals and nutraceuticals, cannabis and other products.
|
|
·
|
SigNify® IF portable DNA readers and SigNify consumable reagent test kits provide definitive
real-time authentication of molecular tags in the field, providing a front-line solution for supply chain integrity backed with
forensic-level molecular tag authentication. Applied DNA’s
software platform enables customers to track materials throughout a supply chain or product life.
|
|
·
|
CertainT® trademark indicates the use of Applied DNA’s tagging, testing and tracking
platforms and solutions, enabling manufacturers, brands and trade organizations to convey proof of their product claims.
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE B – GOING CONCERN AND MANAGEMENT’S PLAN
Applied DNA Sciences, Inc. (the “Company”)
has recurring net losses, which have resulted in an accumulated deficit of $269,835,650 as of September 30, 2020. The Company
incurred a net loss of $13,028,904 and generated negative operating cash flow of $11,143,059 for the fiscal year ended September 30,
2020. At September 30, 2019 the Company had cash and cash equivalents of $7,786,743 and working capital of $4,811,847. These
factors, along with the COVID-19 risks and uncertainties detailed below, raise substantial doubt about the Company’s ability
to continue as a going concern for one year from the issuance of the financial statements. The ability 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.
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.
COVID-19 Risks and Uncertainties
In March 2020, the World Health
Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which continues to spread
throughout the United States. The Company is monitoring this, and it is unable to predict the impact
that COVID-19 will have on the Company’s future financial position and operating results due to numerous
uncertainties. The Company believes that the COVID-19 pandemic adversely impacted the global textile industry, which has
resulted in a reduction of textile related revenues, specifically as it relates to our cotton customer contract. On
March 7, 2020 the Governor of New York declared a health emergency and issued an order (as amended) to close all
nonessential businesses, which was followed by a phased reopening. Portions of the Company’s business were deemed to be
an essential business, such as its government and pharmaceutical contracts, as well as its vaccine and diagnostic candidate
development. However, we have experienced, and may continue to experience in the future, facility closures related to our
“nonessential” businesses, and pursuant to the government order, the Company reduced the scope of its operations.
As discussed in Note G below, the Company received a loan of approximately $847 thousand on May 1, 2020 from Bank of
America as lender pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”) (See Note G for further details).
As a result of COVID-19 the Company has
experienced a decline in revenues from non-biological tagging and related services, primarily as it relates to our cotton customer
contract. Historically revenues from our cotton customer contracts are seasonal and recognized primarily during the Company’s
first and fourth fiscal quarters. However, due to the impacts of the COVID-19 global pandemic, the Company did not recognize revenue
for the shipment of DNA concentrate relating to its cotton customer contract during the twelve months ended September 30,
2020. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on
the Company's future operations and liquidity is uncertain as of the date of this Annual Report. While there could ultimately
be a material impact on operations and liquidity of the Company, at the time of issuance, the impact could not be determined.
NOTE C – BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES
On September 16, 2002, the Company
was incorporated under the laws of the State of Nevada. Effective December 2008, the Company reincorporated from the State
of Nevada to the State of Delaware. The Company is principally devoted to developing and marketing linear DNA technology
solutions in the United States, Europe and Asia. To date, the Company has produced limited recurring revenues from its products
and services; it has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent
in the establishment and development of a biotechnology company.
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, APDN (B.V.I.) Inc., Applied DNA Sciences Europe Limited, and Applied DNA Sciences
India Private Limited, Applied DNA Clinical Labs, LLC and its majority-owned subsidiary, LRx. Applied DNA Clinical Labs, LLC was
formed in Delaware on June 12, 2020. Significant inter-company transactions and balances have been eliminated in consolidation. To
facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform
to the current year’s presentation. To facilitate comparison of information across periods, certain reclassifications
have been made to prior year amounts to conform to the current year’s presentation.
On October 31, 2019, the Company filed a Certificate of
Amendment of its Certificate of Incorporation with the Secretary of State of the State of Delaware that effected a one-for-forty
(1:40) reverse stock split of its common stock, par value $.001 per share, effective November 1, 2019. All warrant, option,
share, and per share information in the consolidated financial statements gives retroactive effect to a one-for-forty reverse stock
split that was affected on November 1, 2019.
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 complex and subjective estimates include revenue recognition, recoverability of
long-lived assets, including the values assigned to goodwill, intangible assets and property and equipment, fair value
calculations for stock based compensation, contingencies, allowance for doubtful accounts 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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE C – BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES, continued
Revenue Recognition
We follow Financial Accounting Standards
Board (“FASB”) issued accounting standard updates which clarify the principles for recognizing revenue arising from
contracts with customers (“ASC 606” or “Topic 606”).
The core principle of the revenue standard
is that an entity recognizes revenue to depict the transfer of promised goods or services to clients in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 applies a five-step
model for revenue measurement and recognition and also requires increased disclosures including the nature, amount, timing, and
uncertainty of revenue and cash flows related to contracts with clients.
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.
The Company recognizes revenue upon transfer
of control of promised goods or services to customers in an amount that reflects the consideration it expects to receive for those
goods or services, including any variable consideration.
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 does not consider payment terms of a
performance obligation for customers with contractual terms that are one year or less and has elected the practical
expedient. Nearly all of the Company’s sales contracts reflect market pricing at the time the contract is executed, or
are one year or less, and generally provide for shipment within 30 to 60 days after the price has been agreed upon with the
customer. 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 Surveillance Testing, 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 is nearly all cases is when the testing results are released to the customer.
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 to not disclose the
value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE C – BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES, continued
Disaggregation of Revenue
The following table presents revenues disaggregated
by our business operations and timing of revenue recognition:
|
|
Fiscal Years Ended:
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Research and development services (over-time)
|
|
$
|
1,128,511
|
|
|
$
|
2,975,961
|
|
Clinical laboratory testing services (point-in-time)
|
|
|
81,947
|
|
|
|
--
|
|
Product and authentication services (point-in-time):
|
|
|
|
|
|
|
|
|
Supply chain
|
|
|
38,577
|
|
|
|
1,438,106
|
|
Asset marking
|
|
|
400,491
|
|
|
|
587,012
|
|
Large scale DNA production
|
|
|
281,971
|
|
|
|
388,010
|
|
Total
|
|
$
|
1,931,497
|
|
|
$
|
5,389,089
|
|
Contract balances
As of September 30, 2020, 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 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:
|
|
Balance sheet classification
|
|
October 1,
2019
|
|
|
September 30,
2020
|
|
|
$
change
|
|
Contract liabilities
|
|
Deferred revenue
|
|
$
|
628,993
|
|
|
$
|
511,036
|
|
|
($
|
117,957
|
)
|
For the fiscal year ended September 30,
2020, the Company recognized $591,360 of revenue that was included in Contract liabilities as of October 1, 2019.
Cash Equivalents
For the purpose of the accompanying consolidated financial statements,
all highly liquid investments with a maturity of three months or less are considered to be cash equivalents.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal
to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review
of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance
for doubtful accounts may change.
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The Company classifies receivable amounts as current or long-term based on expected payment and records long-term
accounts receivable when the collection period is expected to be greater than one year.
At September 30, 2020 and 2019, the Company has an allowance
for doubtful accounts of $11,968 and $4,500, respectively. The Company writes-off receivables that are deemed uncollectible.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE C – BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES, continued
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.
Income Taxes
The Company accounts for income taxes in accordance with ASC
740, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences
between taxable income reported for financial reporting purposes and income tax purposes include, but not limited to, accounting
for intangibles, equity based compensation and depreciation and amortization. The Company evaluates the recoverability of deferred
tax assets and establishes a valuation allowance when it is more likely than not that some portion or all of the deferred tax asset
will not be realized. During the fiscal years ended September 30, 2020 and 2019, the Company incurred losses from operations.
Based upon these results and the trends in the Company’s performance projected for fiscal year 2021, it is more likely than
not that the Company will not realize any benefit from the deferred tax assets recorded by the Company in previous periods. Management
makes judgments as to the interpretation of tax laws that might be challenged upon an audit and cause changes to previous estimates
of tax liability. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable
income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. The Company
has identified its federal tax return and its state tax return in New York as “major” tax jurisdictions. Based on the
Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in
the Company’s consolidated financial statements.
The Company believes that its income tax positions and deductions
will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.
It is the Company’s policy to accrue interest and penalties on unrecognized tax benefits as components of income tax provision.
The Company did not have any accrued interest or penalties as of September 30, 2020 and 2019. Tax years 2016 through 2019
remain subject to future examination by the applicable taxing authorities.
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.
Property and equipment consist of:
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Computer equipment
|
|
$
|
90,509
|
|
|
$
|
90,509
|
|
Lab equipment
|
|
|
3,036,397
|
|
|
|
2,060,520
|
|
Furniture
|
|
|
74,781
|
|
|
|
74,781
|
|
Leasehold improvements
|
|
|
524,485
|
|
|
|
293,672
|
|
Total
|
|
|
3,726,172
|
|
|
|
2,519,482
|
|
Accumulated depreciation
|
|
|
2,448,517
|
|
|
|
2,293,261
|
|
Property and equipment, net
|
|
$
|
1,277,655
|
|
|
$
|
226,221
|
|
As of September 30, 2020 there was
$214,101 and $571,440 of construction in progress that was included in lab equipment and leasehold improvements, respectively.
Depreciation expense for the fiscal years ended September 30, 2020 and 2019 were $156,290 and $260,992, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE C – BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES, continued
Impairment of Long-Lived Assets
The Company evaluates its long lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability
may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even
operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted
undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based
on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.
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, warrants and secured convertible notes.
For the fiscal years ended September 30, 2020 and 2019,
common stock equivalent shares are excluded from the computation of the diluted loss per share as their effect would be anti-dilutive.
Securities that could potentially dilute basic net income per
share in the future that were not included in the computation of diluted net loss per share because to do so would have been antidilutive
for the fiscal years ended September 30, 2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
1,038,919
|
|
|
|
263,592
|
|
Options
|
|
|
291,035
|
|
|
|
199,395
|
|
Secured convertible note
|
|
|
70,962
|
|
|
|
74,282
|
|
|
|
|
1,400,916
|
|
|
|
573,269
|
|
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 are 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 September 30, 2020 the Company had cash and cash equivalents of approximately $7.3 million in excess
of the FDIC insurance limit.
The Company’s revenues earned from sale of products and
services for the fiscal year ended September 30, 2020 included an aggregate of 13%, 12%, 11% and 10% respectively from four
customers.
The Company’s revenues earned from sale of products and
services for the fiscal year ended September 30, 2019 included an aggregate of 27%, 26% and 15%, respectively from three customers.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE C – BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES, continued
Four customers accounted for 74% of the Company’s accounts
receivable at September 30, 2020 and one customer accounted for an aggregate of 77% of the Company’s total accounts
receivable at September 30, 2019.
Research and Development
The Company accounts for research and development costs in accordance
with the ASC 730, Research and Development (“ASC 730”). Under ASC 730, all research and development costs must be charged
to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and
development costs are expensed when the contracted work has been performed. Company-sponsored research and development costs related
to both present and future products are expensed in the period incurred. During the fiscal years ended September 30, 2020
and 2019, the Company incurred research and development expenses of $3,321,763 and $2,967,278, respectively.
Advertising
The Company follows the policy of charging the costs of advertising
to expense as incurred. The Company charged to operations approximately $55,558 and $133,000, as advertising costs for the fiscal
years ended September 30, 2020 and 2019, respectively.
Goodwill and Other Intangible Assets
The Company amortizes its intangible assets using the straight-line
method over their estimated period of benefit. All of the Company’s intangible assets, except for goodwill are subject to
amortization.
Goodwill arises as a result of business acquisitions. Goodwill
consists of the excess of the cost of the acquisitions over the tangible and intangible assets acquired and liabilities assumed.
The Company evaluates goodwill for impairment at least annually.
The Company qualitatively and quantitatively determines whether, more likely than not, the fair value exceeds the carrying amount
of a reporting unit. There are numerous assumptions and estimates underlying the quantitative assessments including future earnings,
long-term strategies, and the Company’s annual planning and forecasts. If these planned initiatives do not accomplish the
targeted objectives, the assumptions and estimates underlying the quantitative assessments could be adversely affected and have
a material effect upon the Company’s financial condition and results of operations. As of September 30, 2020 and 2019,
the Company performed its qualitative assessment of goodwill and indicated that there was no impairment.
Internally
Developed Software
Internally developed software
products, consist of capitalized costs associated with the development of computer software to be sold, leased or otherwise marketed.
Software development costs associated with new products are expensed as incurred until technological feasibility, as defined in
FASB ASC Topic 985-20, has been established. Costs incurred thereafter are capitalized until the product is made generally available.
The stage during the Company’s development process for a new product or new release at which technological feasibility requirements
are established affects the amount of costs capitalized. Annual amortization of internally developed software products is the greater
of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future
gross revenues for that product or the straight-line method over the remaining estimated economic life of the software product,
generally estimated to be 3 years from the date the product became available for general release to customers. The Company
generally recognizes amortization expense for capitalized software costs using the straight-line method. Internally developed software
products are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable and its carrying amount exceeds its fair value.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE C – BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES, continued
Convertible
Instruments
The Company accounts for
convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host
instruments) in accordance with ASC 470-20, Debt with Conversion and Other Options. Accordingly, the Company records, when
necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based
upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and
the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of
the related debt to their earliest date of redemption.
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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE C – BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES, continued
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, who report 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 September 30, 2020, there were
no transfers between Levels 1, 2 and 3 of the fair value hierarchy.
Summary of Significant Valuation Techniques
Level 3 Measurements
Secured convertible notes payable:
For the Existing Notes (as defined in Note G), the Company has elected to record them at fair value. The fair value for the Existing
Notes is estimated using the Monte Carlo simulation model. Significant observable and unobservable inputs include stock price,
conversion price, annual risk free rate, term, likelihood of an event of default, and expected volatility. An increase or decrease
in these inputs could significantly increase or decrease the fair value of the secured convertible notes payable (see Note G).
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.
In February 2016, the FASB issued
ASU No. 2016-02, "Leases (Topic 842)." The objective of this update is to increase transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods
within those annual periods and is to be applied utilizing a modified retrospective approach. The Company adopted Topic 842 as
of October 1, 2019 utilizing the modified retrospective approach. The adoption of Topic 842 did not have a significant impact
on its consolidated financial statements, as the Company does not currently have any long-term lease obligations. The Company has
elected the short-term lease measurement and recognition exemption as all of the Company’s leases are for twelve months or
less.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE D– INVENTORIES
Inventories consist of the following at September 30, 2020
and 2019:
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
387,815
|
|
|
$
|
87,886
|
|
Work in progress
|
|
|
77,667
|
|
|
|
-
|
|
Finished goods
|
|
|
31,885
|
|
|
|
54,743
|
|
Total
|
|
$
|
497,367
|
|
|
$
|
142,629
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE E – INTANGIBLE ASSETS
Intangible assets at September 30, 2020 and 2019 are as
follows:
|
|
2020
|
|
|
2019
|
|
Internally developed software (5-year useful life)
|
|
$
|
157,221
|
|
|
$
|
157,221
|
|
Customer relationships (10-year useful life)
|
|
|
621,000
|
|
|
|
621,000
|
|
Intellectual property (5-15 years)
|
|
|
917,350
|
|
|
|
917,350
|
|
|
|
|
1,695,571
|
|
|
|
1,695,571
|
|
Less:
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
1,090,241
|
|
|
|
960,800
|
|
Intangible assets, net
|
|
$
|
605,330
|
|
|
$
|
734,771
|
|
Total amortization expense charged to operations
for the fiscal years ended September 30, 2020 and 2019 were $129,441 and $129,432, respectively.
The following table presents the estimated amortization expense
of the intangible assets for each of the five succeeding years as of September 30, 2020:
|
|
|
Amount
|
|
2021
|
|
|
$
|
91,967
|
|
|
|
|
|
|
|
2022
|
|
|
|
91,967
|
|
|
|
|
|
|
|
2023
|
|
|
|
91,967
|
|
|
|
|
|
|
|
2024
|
|
|
|
91,967
|
|
|
|
|
|
|
|
2025
|
|
|
|
89,379
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
148,083
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
605,330
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE F – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30,
2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
Accounts payable
|
|
$
|
1,250,021
|
|
|
$
|
1,152,103
|
|
Accrued salaries payable
|
|
|
525,602
|
|
|
|
319,260
|
|
Other accrued expenses
|
|
|
150,804
|
|
|
|
145,634
|
|
Total
|
|
$
|
1,926,427
|
|
|
$
|
1,616,997
|
|
NOTE G –NOTES PAYABLE
CARES Act Loan
The Company received a loan of approximately
$847 thousand on May 1, 2020 from Bank of America as lender pursuant to the PPP of the CARES Act.
All or a portion of the loan may be forgiven
by the U.S. Small Business Administration (“SBA”) upon application by the Company beginning 60 days but not later than
130 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act,
loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered
utilities during the covered period as defined by the CARES Act. The Company used the proceeds from the loan to retain employees,
maintain payroll and make lease and utility payments.
For purposes of the CARES Act, payroll
costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven
amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees
with salaries of $100,000 or less annually are reduced by more than 25%. In the event the loan, or any portion thereof, is forgiven
pursuant to the PPP, the amount forgiven is applied to outstanding principal.
The loan matures on May 1, 2022 and
bears interest at a rate of 1% per annum. Payments of principal and interest commence in November 2020. The loan may be prepaid
by the Company at any time prior to maturity with no prepayment penalties.
Secured Convertible Notes Payable
On August 31, 2018, the Company entered into a securities
purchase agreement (the “Purchase Agreement”) with accredited investors and certain members of its management team
and Board of Directors (the “Purchasers”), pursuant to which the Company issued and sold an aggregate of $1,650,000
in principal amount of secured convertible notes (the “August 2018 Notes”) bearing interest at a rate of 6% per
annum. As part of the August 2018 Notes, the Company’s management and Board of Directors purchased August 2018
Notes with a principal amount of $1,185,000.
The August 2018 Notes are convertible, in whole or in
part, at any time, at the option of the Purchasers, into shares of the Company’s common stock, in an amount determined by
dividing the principal amount of each August 2018 Note, together with any and all accrued and unpaid interest, by the conversion
price of $100.00.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE G – NOTES
PAYABLE, continued
The August 2018 Notes bear interest at the rate of 6% per
annum, payable semi-annually in cash or in kind, at the Company’s option, and were due and payable in full on August 30,
2021. Until the principal and accrued but unpaid interest under the August 2018 Notes is paid in full, or converted into shares
of common stock pursuant to their terms, the Company’s obligations under the August 2018 Notes were secured by a lien
on substantially all assets of the Company (excluding certain cash accounts) and the assets of APDN (B.V.I.) Inc.
On November 29, 2018, the Company closed a securities purchase
agreement with its chairman, president and chief executive officer and one member of the management team, pursuant to which the
Company issued and sold an aggregate of $550,000 in principal amount of secured convertible notes bearing interest at a rate of
6% per annum (the “November 2018 Notes”). The November 2018 Notes are substantially similar to the Company’s
August 2018 Notes except with respect to maturity date, which is November 29, 2021 The November 2018 Notes are secured
on a pari passu basis with the same Company assets as the August 2018 Notes.
On July 17, 2019, the Company closed $1.5 million in gross
proceeds in July 2019 Notes, bearing interest at a rate of 6% per annum, in a non-brokered private placement with an accredited
investor, Dillon Hill Capital, LLC (“Dillon Hill”) and simultaneously amended the terms of the 2018 Notes and, (together
with the July 2019 Notes, the “Company Notes”) to, among other amendments, (i) reduce the conversion price
of the 2018 Notes to $21.60 to facilitate their conversion into equity and (ii) change the maturity date of the August 2018
Notes to be November 28, 2021. In addition, Dillon Hill was granted a right to participate in certain future financing transactions
of the Company (each a “Subsequent Financing”) until July 16, 2020 equal to the amount required for Dillon Hill
to maintain its pro rata ownership of the Company as if the July 2019 Notes had been fully converted into common stock. Until
July 16, 2020, Dillon Hill has the right to participate in full for the first $1 million of such Subsequent Financing. This
right was exercised and Dillon Hill participated in the November 2019 underwritten public offering.
After giving effect to the amendments to the 2018 Notes, the
July 2019 Notes are substantially similar to the Existing Notes. The July 2019 Notes are secured on a pari passu basis
with the same Company assets as the 2018 Notes. In addition, on July 19, 2019, the Company also amended the security agreements
dated as of October 19, 2018, to among other amendments, exclude 20% of the Company’s equity interest in LRx from the
assets securing the Company Notes. The July 2019 Notes are convertible, in whole or in part, at any time, at the option of
Dillon Hill, into shares of common stock, in an amount determined by dividing the principal amount of the July 2019 Notes,
together with any and all accrued and unpaid interest, by the conversion price of $21.60 (the “Conversion Price”).
The July 2019 Notes are due and payable in full on November 28, 2021.
The Company has the right to require Dillon
Hill to convert all or any part of their Notes into shares of the Company’s common stock at the Conversion Price if the
price of the Common Stock remains at a closing price of $140.00 or more for a period of twenty consecutive trading days.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE G – NOTES
PAYABLE, continued
The amendments to the 2018 Notes resulted in a change in fair
value of the conversion option that exceeded ten percent of the carrying amount of the 2018 Notes. Accordingly, the amendment was
treated as an extinguishment of the 2018 Notes and a corresponding loss on extinguishment of debt of $1,260,399. The fair value
of the 2018 Notes immediately after the amendments (“Amended 2018 Notes”) was $3,498,457. Going forward, the Company
has elected to record the Amended 2018 Notes at fair value in accordance with ASC 825. As a result, the Company recorded a gain
on the change in fair value of $65,576 for the year ended September 30, 2019. The July 2019 Notes are recorded at carrying
value.
During September 2019, a total of $2.2 million of the Amended
2018 Notes was converted into 102,893 shares of the Company’s common stock. As part of the total amount converted, Dr. James
A. Hayward, our Chairman, Chief Executive Officer and President (“CEO”), converted approximately $1.59 million of the
Amended 2018 Notes, into approximately 73,400 shares of the Company’s common stock, and other directors, officers, and affiliates
of the Company converted approximately $409,000 of such 2018 Notes in September 2019 into 18,929 shares of the Company’s
common stock. The fair value of the Amended 2018 Notes was calculated immediately prior to conversion and resulted in a gain on
the change in fair value of the Amended 2018 Notes of approximately $1,907,379.
During December 2019, the remaining
outstanding balance of the 2018 Notes, for a total of $107,802, was repaid by the Company.
During the fiscal year ended September 30,
2020 and 2019, the Company reclassified $35,625 and $126,980, respectively from accrued liabilities to senior secured notes payable
to represent interest due to noteholders that was paid in kind and therefore increasing the convertible note balance outstanding
at September 30, 2020 and 2019.
The Company incurred $64,848 to debt issuance costs based on
the cost incurred to complete the 2018 Notes financing, which was written off as part of the extinguishment accounting discussed
above. The Company incurred $64,608 to debt issuance costs based on the cost incurred to complete the July 2019 Notes. During
the fiscal years ended September 30, 2020 and 2019 the Company amortized $26,019 and $23,828, respectively, of debt issuance
costs resulting in unamortized debt issuance costs of $34,094 and the secured notes payable of $1,499,116 at September 30,
2020. The debt issuance cost will be amortized over the life of the July 2019 Notes. During the fiscal years ended September 30,
2020 and 2019, the Company incurred $116,786 and $138,604, respectively of interest expense. The effective interest rate for the
fiscal years ended September 30, 2020 and 2019 was 8.0% and 7.5%, respectively.
As discussed more fully in Note O, the Company repaid the July 2019
Notes in full during October 2020.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE H – CAPITAL STOCK
On October 31, 2019, the Company filed a Certificate of
Amendment of its Certificate of Incorporation with the Secretary of State of the State of Delaware that effected a one-for-forty
(1:40) reverse stock split of its common stock, par value $.001 per share, effective November 1, 2019. All warrant, option,
share, and per share information in the consolidated financial statements gives retroactive effect to the one-for-forty reverse
stock split that was effected on November 1, 2019. On September 16, 2020, the Company filed a Certificate
of Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware that reduced its authorized
shares of common stock from 500,000,000 to 200,000,000.
Common Stock Transactions during the Fiscal Year Ended September 30,
2020:
On November 15, 2019, the Company
closed an underwritten public offering (the “Offering”) in which, pursuant to the Underwriting Agreement dated
November 13, 2019 by and between the Company and Maxim Group LLC (“Maxim”), as Representative of the Underwriters,
the Company issued and sold 2,285,000 shares of the Company’s common stock and 2,285,000 accompanying warrants each with
the right to purchase one share of common stock at an exercise price of $5.25 per share (the “Common Warrants”). The
shares of common stock and accompanying Common Warrants were sold at a combined offering price of $5.25 before underwriting discounts.
The common stock and the 2019 Warrants are collectively referred to herein as the “Securities.” As part of the Offering,
the Company granted Maxim a 45-day option to purchase an additional 342,750 shares of common stock and/or additional Common Warrants
to purchase 342,750 shares of common stock (the “Option Warrants”, together with the 2019 Warrants, the “Warrants”)
at the public offering price, less discounts and commissions, to cover any over-allotments made by the Underwriters in the sale
and distribution of the Securities.
The exercise price and number of the shares
of common stock issuable upon the exercise of the Common Warrant will be subject to adjustment in the event of any stock dividends
and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Warrant Agreement.
As a result of this financing, the exercise
price of the 8,375 remaining warrants issued during December 2018 was reduced to an exercise price of $5.60 per share in accordance
with the adjustment provision contained in the Warrant Agreement. The incremental change in fair value of these warrants as a result
of the triggering event was $2,842.
During the fiscal year ended September 30,
2020, 1,649,786 of the 2019 Warrants were exercised, resulting in net proceeds to the Company of approximately $8.1 million.
Subsequent to September 30, 2020,
an additional 518,551 warrants were exercised for total net proceeds, of approximately $2.6 million.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE H – CAPITAL STOCK, continued
Common Stock Transactions during the Fiscal Year Ended September 30,
2019:
On August 22, 2019, the Company issued and sold 38,704
shares of common stock at a price of $10.80 per share for total gross proceeds of $418,000 to a group of accredited investors,
including its chief executive officer, president and chairman of the board of directors, its chief information officer, and a 5%
or greater stockholder.
On December 21, 2018, the Company entered into an underwriting
agreement (the “Agreement”) with Maxim , as the sole underwriter and book running manager, with respect to the issuance
and sale of an aggregate of 137,500 shares (the “Shares”) of common stock, together with warrants to purchase an aggregate
of 137,500 shares of common stock (the “Warrants”) at an exercise price equal to $20.00 per share of common stock (the
“Exercise Price”) in an underwritten public offering. The public offering price for each Share together with the accompanying
Warrant was $20.00. Pursuant to the Agreement, the Company also granted Maxim a 45-day option to purchase an additional 20,625
Shares and/or additional Warrants to purchase 20,625 Shares to cover any over-allotments made by the underwriters in the sale and
distribution of the Shares and Warrants. The gross proceeds of the offering, before deducting underwriter discounts and commissions
and other offering expenses, were $2,750,000. The offering closed on December 26, 2018. On December 26, 2018, Maxim partially
exercised its overallotment option and purchased an additional 20,000 Warrants at a price of $0.0000004 per Warrant.
After deducting underwriting discounts and commissions and other
expenses related to the offering, the aggregate net proceeds were approximately $2,262,000.
On January 25, 2019, the Company closed on the underwriters’
partial exercise of its over-allotment option for 12,500 shares of common stock for gross proceeds of $250,000. After deducting
underwriting discounts and commissions and other expenses related to the over-allotment option, the aggregate net proceeds were
approximately $201,000.
The total number of common stock and Warrants issued under this
offering, including the exercise of the over-allotment option was 150,000 and 157,500, respectively. The gross proceeds to us were
approximately $3.0 million and net proceeds after deducting underwriting discounts and commissions and other estimated offering
expenses was approximately $2.5 million.
The Warrants are immediately exercisable
beginning on the date of issuance (the “Initial Exercise Date”). The Warrants will be exercisable for five years from
the Initial Exercise Date, but not thereafter.
The Warrants include an adjustment
provision that, subject to certain exceptions, reduces their exercise price if the Company issues common stock or common
stock equivalents at a price lower than the then-current exercise price of the Warrants, subject to a minimum exercise price
of $5.60 per share. The exercise price and number of the shares of the Company’s common stock issuable upon the
exercise of the Warrants will be subject to adjustment in the event of any stock dividends and splits, reverse stock split,
recapitalization, reorganization or similar transaction, as described therein. In addition, on or after any trading day 75
days after the closing date of the offering, if the daily volume weighted average price of the Company’s common stock
fails to exceed the Exercise Price, the aggregate number of warrant shares issuable in a cashless exercise shall equal the
product of (i) the aggregate number of warrant shares that would be issuable upon exercise of the Warrants if such
exercise were by means of a cash exercise and (ii) 0.70.
As a result of the 2019 private placement offering of the Company’s
common stock, the exercise price of these warrants was reduced to $12.00 per share. The incremental change in fair value of these
warrants as a result of the triggering event was $78,785. Subsequently, as a result of the underwritten public offering on November 15,
2019, the exercise price of these warrants was further reduced to $5.60 per share.
As a result of the Company’s stock price falling below
$20.00, 143,252 warrants have been cashlessly exercised. These exercises resulted in the issuance of 100,617 shares of the Company’s
common stock.
As a result of this financing, the exercise price of the 68,375
warrants issued during December 2017 was reduced to an exercise price of $17.60 per share in accordance with the adjustment
provision contained in the warrant agreement. The incremental change in fair value of these warrants as a result of the triggering
event was $281,042.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE I – STOCK OPTIONS AND WARRANTS
Warrants
Transactions involving warrants (see Note H) are summarized
as follows:
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price Per
Share
|
|
Balance at October 1, 2019
|
|
|
263,592
|
|
|
$
|
131.12
|
|
Granted
|
|
|
2,636,125
|
|
|
|
5.25
|
|
Exercised
|
|
|
(1,649,786
|
)
|
|
|
(5.25
|
)
|
Cancelled or expired
|
|
|
(211,012
|
)
|
|
|
(135.01
|
)
|
Balance, September 30, 2020
|
|
|
1,038,919
|
|
|
$
|
10.83
|
|
Stock Options
During June 2020, the Board of Directors and subsequently
during September 2020, the holders of a majority of the outstanding shares of common stock approved the 2020 Equity Incentive
Plan (the “2020 Incentive Plan”). The 2020 Incentive Plan, among other things, reserves an additional 3,500,000 shares
of the Company’s common stock for issuance in the form of equity-based awards to employees, directors, consultants, and other
service providers, and those of the Company’s affiliates. The maximum total grant date fair value of awards granted under
the 2020 Incentive Plan to individuals in their capacity as non-employee directors may not exceed $250,000 in any single calendar
year. The 2020 Incentive Plan’s expiration date is September 15, 2030.
The 2020 Incentive Plan is designed to
retain directors, executives, and selected employees and consultants by rewarding them for making contributions to the Company's
success with an award of options to purchase shares of common stock. As of September 30, 2020, a total of 6,894 shares have
been issued and options to purchase 303,911 shares have been granted under the Company’s Incentive Plans.
In 2005, the Board of Directors and the holders of a majority
of the outstanding shares of common stock approved the 2005 Incentive Stock Plan, as amended and restated as of January 21,
2015 (the “2005 Incentive Plan”, collectively with the 2020 Incentive Plan, the “Company’s Incentive Plans”).
Effective as of September 16, 2020, no further awards will be made under the Company’s 2005 Incentive Stock Plan, as
amended and restated.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE I – STOCK OPTIONS AND WARRANTS, continued
Stock Options, continued
Transactions involving stock options issued are summarized as
follows:
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price Per
Share
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted
Average
Contractual
Life (years)
|
|
Outstanding at October 1, 2019
|
|
|
199,395
|
|
|
$
|
99.68
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
155,395
|
|
|
|
8.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(63,755
|
)
|
|
|
42.08
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2020
|
|
|
291,035
|
|
|
$
|
63.25
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2020
|
|
|
200,407
|
|
|
$
|
87.22
|
|
|
$
|
-
|
|
|
|
6.67
|
|
Non-vested at September 30, 2020
|
|
|
90,628
|
|
|
$
|
10.25
|
|
|
$
|
-
|
|
|
|
9.61
|
|
For the fiscal year ended September 30, 2020, the Company
issued an aggregate of 155,395 options to employees and non-employee board of director members and consultants.
For the fiscal year ended September 30, 2019, the Company
issued an aggregate of 86,349 (including award modifications of 35,040) options to employees, consultants, members of the strategic
advisory board and non-employee board of director members.
The fair value of options granted during the fiscal years ended
September 30, 2020 and 2019 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 was calculated using the following weighted average assumptions:
|
|
2020
|
|
|
2019
|
|
Stock price
|
|
$
|
8.40
|
|
|
$
|
32.82
|
|
Exercise price
|
|
$
|
8.45
|
|
|
$
|
100.65
|
|
Expected term
|
|
|
6.85
|
|
|
|
4.40
|
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
Volatility
|
|
|
136
|
%
|
|
|
89
|
%
|
Risk free rate
|
|
|
0.86
|
%
|
|
|
2.43
|
%
|
The Company recorded $1,001,082 and $1,129,110
as stock compensation expense within selling, general and administrative for fiscal years ended September 30, 2020 and 2019,
respectively. Included in this amount is $221,046 for the fiscal year ended September 30, 2019 for employee stock option
modifications. As of September 30, 2020, unrecorded compensation cost related to non-vested awards was $540,594 which is
expected to be recognized over a weighted average period of approximately 0.79 years. The weighted average grant date fair value
per share for options granted during the fiscal years ended September 30, 2020 and 2019 was $7.49 and $11.51, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE J – INCOME TAXES
The income tax provision (benefit) for the fiscal years ended
September 30, 2020 and 2019 consists of the following:
|
|
2020
|
|
|
2019
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(2,914,000
|
)
|
|
|
(1,658,000
|
)
|
|
|
|
(2,914,000
|
)
|
|
|
(1,658,000
|
)
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(591,000
|
)
|
|
|
308,000
|
|
|
|
|
(591,000
|
)
|
|
|
308,000
|
|
Foreign:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
15,000
|
|
Deferred
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
15,000
|
|
Change in valuation allowance
|
|
|
3,505,000
|
|
|
|
1,350,000
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
15,000
|
|
The provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory rate to losses before income tax expense for the years ended September 30,
2020 and 2019 as follows:
|
|
2020
|
|
|
2019
|
|
Statutory federal income tax rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
Statutory state and local income tax rate (1%, as of September 30, 2019 and 2018), net of federal benefit
|
|
|
2.26
|
%
|
|
|
0.52
|
%
|
Stock based compensation
|
|
|
(1.60
|
)%
|
|
|
(1.62
|
)%
|
Other permanent differences
|
|
|
3.83
|
%
|
|
|
(3.15
|
)%
|
Change in deferred tax rate
|
|
|
1.66
|
%
|
|
|
(2.33
|
)%
|
Change in valuation allowance
|
|
|
(27.15
|
)%
|
|
|
(14.42
|
)%
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Deferred income taxes result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effect of these temporary differences
representing deferred tax asset and liabilities result principally from the following:
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
$
|
2,120,000
|
|
|
$
|
1,960,000
|
|
Depreciation and amortization
|
|
|
232,000
|
|
|
|
277,000
|
|
Net operating loss carry forward
|
|
|
17,499,000
|
|
|
|
14,091,000
|
|
Tax credits
|
|
|
1,227,000
|
|
|
|
1,171,000
|
|
Other
|
|
|
355,000
|
|
|
|
397,000
|
|
Less: valuation allowance
|
|
|
(21,433,000
|
)
|
|
|
(17,896,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE J– INCOME TAXES, continued
As of September 30, 2020, the Company
has approximately $72,475,000 of Federal and $46,066,000 of State net operating loss “NOL” carryforwards available
which begin to expire after 2022. Pursuant to Internal Revenue Code Section 382, the Company’s ability to utilize the
NOLs is subject to certain limitations due to changes in stock ownership in prior years as well as during the fiscal year ended
September 30, 2020. The annual limitation ranges between $94,000 and $1,103,000 and any unused amounts can be carried forward
to subsequent years.
The Company has provided a full valuation allowance against
all of the net deferred tax assets based on management’s determination that it is more likely than not that the net deferred
tax assets will not be realized in the future. The valuation allowance increased by $3,537,000.
The Company has Federal research and development credits of
approximately $840,000 that will begin to expire after 2034. The Company also has state investment tax credits of $345,000 that
will begin to expire after 2029.
NOTE K – 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 is $458,098 per annum. During 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. During October 2020, the Company
exercised the one-year renewal option, extending the term for this lease until January 15, 2022. 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 2020, the Company renewed this lease with a new expiration date of September 30, 2021. The base rent
is approximately $6,500 per annum. The Company’s total short-term lease obligation as of September 30, 2020 is $596,273.
Total rent expense for the fiscal years ended September 30,
2020 and 2019 were $585,189 and $516,988, respectively.
Future minimum rental payments (excluding
real estate tax and maintenance costs) as of September 30, 2020 are as follows:
For the fiscal year ending September 30,
2021
|
|
|
$
|
570,207
|
|
2022
|
|
|
|
188,261
|
|
Total
|
|
|
$
|
758,468
|
|
Employment and Consulting Agreements
Employment agreements
On July 11, 2011, the Company’s
Board of Directors approved the terms of employment for Dr. James A. Hayward, the Company’s CEO.
The CEO’s employment agreement provides that he will
be the Company’s CEO, and will continue to serve on the Company’s Board of Directors. On July 28, 2017, a
new employment agreement was entered into with the CEO effective July 1, 2017. The initial term was from July 1,
2017 through June 30, 2018, with automatic one-year renewal periods. As of June 30, 2020, the employment contract
renewed for an additional year. Under the new agreement, the CEO will be eligible for a special cash incentive bonus of up to
$800,000, $300,000 of which is payable if and when annual revenue reaches $8 million and $100,000 of which would be payable
for each $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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
NOTE K – COMMITMENTS AND CONTINGENCIES, continued
The 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.
Effective March 15, 2018, the Compensation Committee of
the Company’s Board of Directors, approved a bonus of $121,125 that would be payable to the CEO when the Company reaches
$3,000,000 in revenues for two consecutive quarters or $12,000,000 in revenues for a fiscal year, provided that the CEO is still
employed by the Company on such date (the “Revenue Bonus”).
Effective May 2, 2018, the Compensation Committee of the
Company’s Board of Directors, increased the amount of the Revenue Bonus to $403,623. Effective December 27, 2018, the
compensation committee approved an additional bonus opportunity of $150,000 for the calendar year-ended December 31, 2019
that would be payable to the CEO under the same terms as described above.
The accrual for the Revenue Bonus of $816,840 is recorded to
long term accrued liabilities on the balance sheet as of September 30, 2020.
The CEO voluntarily reduced his salary for the fiscal years
ended September 30, 2020 and 2019. His base salary for the majority of the 2019 fiscal year was $250,000. During September 2019,
the CEO further voluntarily reduced his salary from the then-current rate of $250,000 to $50,000. The CEO’s salary was subsequently
increased to $150,000 during December 2019. The Company has as of October 3, 2020 re-affirmed the employment agreement’s
annual salary of $400,000, and from that date the CEO’s salary will be paid at such rate.
On October 19, 2020, the Company awarded the CEO, a one-time
discretionary bonus, to be paid in cash, of $250,000, in recognition of his contributions to the Company.
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 L – GEOGRAPHIC AREA INFORMATION
The Company attributes net revenues from external customers
according to the geographic location of the customer. Net revenues by geographic location of customers are as follows:
|
|
Year Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Americas
|
|
$
|
1,165,320
|
|
|
$
|
4,166,315
|
|
Europe
|
|
|
266,701
|
|
|
|
600,374
|
|
Asia and other
|
|
|
499,476
|
|
|
|
622,400
|
|
Total
|
|
$
|
1,931,497
|
|
|
$
|
5,389,089
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020 and 2019
Note M – 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 secured convertible
notes payable in the consolidated statements of operations. For additional disclosures regarding methods and assumptions used in
estimating fair values of these financial instruments, see Note C.
The following table presents carrying amounts and fair values
of the Company's financial instruments as of September 30, 2019 and summarizes the significant unobservable inputs in
fair value measurement of Level 3 financial assets and liabilities as of September 30, 2019. The Company did not have any
assets or liabilities categorized as Level 1 or 2 as of September 30, 2019.
|
|
Fair value at
September 30,
2019
|
|
|
Carrying value at
September 30,
2019
|
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Range
|
|
|
Weighted
Average
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Convertible Notes (“2018 Notes”)
|
|
$
|
102,777
|
|
|
$
|
104,482
|
|
|
Monte Carlo simulation
|
|
Annualized volatility
|
|
|
87.22% - 92.66%
|
|
|
|
87.39
|
%
|
NOTE N — RELATED PARTY TRANSACTIONS
On December 12, 2019, the Company
entered into a consulting agreement, with Meadow Hill Place, LLC (“Meadow Hill”), a company wholly owned by Scott L.
Anchin (“Mr. Anchin”), a board member, whereby Meadow Hill will provide certain advisory services to the Company.
The initial term of the agreement ended on June 12, 2020. The agreement provided for compensation in the form of both cash
and equity. Meadow Hill was eligible to receive $125,000 for the initial six month term. In addition, in satisfaction of the equity
compensation portion of the agreement, (i) the Company granted an option to purchase 20,834 shares of its common stock to
Mr. Anchin on December 12, 2019 at an exercise price equal to $4.26 per share, which vested on June 12, 2020, and
(ii) the Company granted an option to purchase 20,786 shares of its common stock to Mr. Anchin on January 2, 2020
at an exercise price equal to $4.43 per share, of which 9,121 vested on July 2, 2020. The consulting agreement was completed
on June 12, 2020 in full satisfaction of all obligations. As a result, the agreement was not extended and therefore expired
on June 12, 2020. As a result, 11,665 of the options granted on January 2, 2020, which were related to the extension
period, did not vest and were cancelled on June 12, 2020.
On each of December 9 and 10, 2020, the Investors exercised
100,000 of their 2019 Warrants, for an aggregate exercise of 200,000 of their 2019 Warrants, resulting in total net proceeds to
the Company of approximately $1.1 million. As a result of these exercises, we issued to the Investors an aggregate of 100,000 additional
replacement warrants, which are substantially similar to the Replacement Warrants described above except that 50,000 of the newly-issued
replacement warrants have an exercise price of $6.57 and 50,000 of such replacement warrants have an exercise price of $6.46.
NOTE O – SUBSEQUENT EVENTS
Warrant Exercise Agreement
On October 7, 2020, the Company entered
into Warrant Exercise Agreements with Dillon Hill and its affiliate, Dillon Hill Investment Company LLC (together, the “Investors”),
whereby 318,000 of the 2019 Warrants with an exercise price of $5.25 per share were exercised. The gross proceeds to the Company
from this partial exercise of the 2019 Warrants is $1,669,500. Approximately 661,000 2019 Warrants currently remain outstanding.
In consideration of this partial
exercise of the 2019 Warrants and of the consent to repayment of the July 2019 Notes, as described below, the Company
agreed to issue, 159,000 replacement warrants (the “Replacement Warrants”) to the Investors, which is an amount
equal to one-half the amount of the 2019 Warrants exercised pursuant to the Warrant Exercise Agreements. The Replacement
Warrants have an exercise price of $7.54. In addition, until January 5, 2021, if the Investors exercise additional 2019
Warrants, the Company will issue to the applicable Investor additional Replacement Warrants in an amount equal to one-half
the amount of such exercised 2019 Warrants with each such Replacement Warrant having an exercise price equal to the closing
price on The Nasdaq Capital Market of the Company’s common stock on such date that the related 2019 Warrants are
exercised.
Each Replacement Warrant will be exercisable
beginning on the date of issuance thereof and ending on the five year anniversary of such date. The exercise price and number of
shares of common stock issuable upon exercise of the Replacement Warrants will be subject to adjustment in the event of any stock
dividend, split, recapitalization, reorganization or similar transaction, as described in the Replacement Warrant.
On each of December 9 and 10, 2020, the Investors exercised
100,000 of their 2019 Warrants, for an aggregate exercise of 200,000 of their 2019 Warrants, resulting in total net proceeds to
the Company of approximately $1.1 million. As a result of these exercises, we issued to the Investors an aggregate of 100,000 additional
replacement warrants, which are substantially similar to the Replacement Warrants described above except that 50,000 of the newly-issued
replacement warrants have an exercise price of $6.57 and 50,000 of such replacement warrants have an exercise price of $6.46.
Repayment of the July 2019 Notes
On October 9, 2020, the Company entered
into a letter agreement (the “Letter Agreement”) with Dillon Hill, as sole holder of the July 2019 Notes for
the repayment in full of the July 2019 Notes, in an aggregate amount of $1,665,581 (the “Payoff Amount”), representing
the outstanding principal amount of the July 2019 Notes plus accrued but unpaid interest through the scheduled maturity of
the July 2019 Notes. The Company paid the Payoff Amount to Dillon Hill on October 9, 2020. As of October 9, 2020,
all of the obligations and liabilities of the Company and its affiliates under the July 2019 Notes, the Purchase Agreement,
and the Security Agreements, and any other related documents and instruments, was automatically satisfied in full, and all related
liens, mortgages or other security interests were automatically released. Dillon Hill is a greater than 5% shareholder in the
Company’s common stock.
Applied DNA Sciences (NASDAQ:APDN)
Historical Stock Chart
From Mar 2024 to Apr 2024
Applied DNA Sciences (NASDAQ:APDN)
Historical Stock Chart
From Apr 2023 to Apr 2024