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Applied DNA Sciences(APDN) - 2022 Q4 - Annual Report

Part I Business Applied DNA Sciences operates in Therapeutic DNA Production, MDx Testing, and DNA Tagging segments, focusing growth on its linearDNA platform for nucleic acid therapies and veterinary health - The company operates in three primary business segments: Therapeutic DNA Production Services, MDx (Molecular Diagnostics) Testing Services, and DNA Tagging and Security Products and Services16 - The company's growth strategy is to primarily focus resources on the development and commercialization of its Therapeutic DNA Production Services, including expanding its CDMO operations and developing veterinary health product candidates17 Research and Development Expenses | Fiscal Year | R&D Expenses (Approx.) | | :--- | :--- | | 2022 | $3.9 million | | 2021 | $4.2 million | Therapeutic DNA Production Services This segment, through LinearRx, focuses on the linearDNA platform for cell-free synthetic DNA manufacturing, targeting nucleic acid-based therapies and veterinary health with a cGMP facility planned for 2023 - The linearDNA platform is an enzymatic, cell-free manufacturing process for synthetic DNA, positioned as an alternative to traditional plasmid-based methods20 - Key advantages of the linearDNA platform are cited as speed, scalability, purity (no antibiotic resistance genes), simplicity, and flexibility in producing complex DNA sequences222324 - The company is in the design phase for a cGMP manufacturing facility, with manufacturing expected to begin in the second half of calendar 2023 to meet requirements for direct clinical use of linearDNA26 - The company is developing a therapeutic DNA vaccine candidate for canine lymphoma, licensed from Takis S.R.L and EvviVax, S.R.L., leveraging the linearDNA platform28 MDx Testing Services Through its CLIA-certified subsidiary ADCL, the company provides clinical molecular diagnostics, primarily COVID-19 testing, with a future strategy to shift towards high-complexity, high-value tests like pharmacogenetics - The safeCircle™ service provides large-scale COVID-19 testing using a high-throughput, robotically-pooled RT-PCR workflow, with results typically returned in 24-48 hours30 - The company is validating pharmacogenetics (PGx) testing services, designed to analyze over 35 genes to guide drug therapy decisions in areas like cardiology, mental health, and pain management32 - The business strategy is to evolve into a clinical reference laboratory, focusing on high-complexity MDx testing services to leverage PCR expertise and target a national customer base33 DNA Tagging and Security Products and Services This segment offers supply chain security solutions via the CertainT® platform, using DNA tags and portable readers for authentication, with significant application in cotton tracking and potential growth from UFLPA regulations - The CertainT® platform uses non-biologic DNA tags (SigNature®) and portable readers (SigNify®) to authenticate goods and ensure supply chain integrity3536 - The largest commercial application is in the cotton industry, with tagged products sold at retailers like Costco® and Bed Bath & Beyond®37 - The Uyghur Forced Labor Prevention Act (UFLPA) is identified as a potential driver for increased demand, as its implementation strategy lists DNA tagging as evidence importers can use to prove goods did not originate from forced labor in the XUAR region of China38 Customer Concentration The company faces significant customer concentration risk, with one MDx Testing Services customer accounting for 58% of fiscal year 2022 revenues and two customers representing 89% of accounts receivable Customer Concentration Analysis | Metric | Fiscal Year 2022 | Fiscal Year 2021 | | :--- | :--- | :--- | | Revenue Concentration | 58% from one customer | 18% and 13% from two customers | | Accounts Receivable Concentration | 89% from two customers | 67% from two customers | Intellectual Property The company protects its technology through patents, trade secrets, and trademarks, with the largest patent portfolio in DNA Tagging and Security, while Therapeutic DNA Production Services is an earlier-stage portfolio Patent Portfolio as of December 9, 2022 | Business Segment | U.S. Patents (Issued/Pending) | Foreign Patents (Issued/Pending) | | :--- | :--- | :--- | | Therapeutic DNA Production | 5 / 10 | 11 / 5 | | MDx Testing Services | 5 / 1 | 4 / 1 | | DNA Tagging & Security | 28 / 5 | 47 / 14 | Government Regulation The company's operations are subject to extensive government regulation, including FDA and USDA for therapeutic products, and CLIA/NYSDOH for MDx testing services, with potential future changes to LDT regulation - The demand for linearDNA is partly dependent on customers' ability to obtain FDA approval for drugs or biologics using the technology, a process involving IND applications, clinical trials, and NDAs or BLAs606668 - Veterinary products, such as the company's planned canine lymphoma vaccine, are regulated by the USDA's Center for Veterinary Biologics and must be shown to be pure, safe, and effective6780 - The company's clinical laboratory (ADCL) is CLIA-certified and NYSDOH-permitted. Its diagnostic tests are LDTs, which are currently under FDA enforcement discretion, but could face stricter regulation in the future (e.g., via the VALID Act)598183 Risk Factors The company faces numerous risks, including limited revenue, potential dilution from financing, a material weakness in internal controls, customer concentration, and the obsolescence of COVID-19 testing services - The company has a history of limited revenue, making future prospects difficult to evaluate97105 - A material weakness in internal control over financial reporting has been identified, specifically concerning the accounting for complex financial instruments like warrants97119 - Significant customer concentration risk exists, with one customer accounting for 58% of revenue in FY202297120 - The company's COVID-19 testing services could become obsolete due to the end of the pandemic or the development of widespread vaccines, diminishing its utility100151152 - Failure to comply with Nasdaq's continued listing standards, such as the $1.00 minimum bid price, could result in delisting103224 Properties The company's corporate headquarters and main laboratory facilities are located in a 30,000 square foot leased building at Stony Brook University, with a lease renewal expiring January 31, 2023 - The main corporate headquarters is a 30,000 sq. ft. leased facility at Stony Brook University, with the lease expiring January 31, 2023228 Legal Proceedings The company is not currently aware of any legal proceedings expected to have a material adverse effect on its business, financial condition, or operating results - The company is not currently aware of any material legal proceedings230 Part II Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is listed on The Nasdaq Capital Market under "APDN", with 126 holders of record as of December 9, 2022, and no history or plans for cash dividends - Common stock is listed on The Nasdaq Capital Market under the symbol "APDN"230 - As of December 9, 2022, there were 126 holders of record of the common stock231 - The company has never declared or paid cash dividends and does not plan to in the foreseeable future231 Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2022, total revenues more than doubled to $18.2 million, driven by a 224% increase in COVID-19 testing services, leading to a reduced net loss of $8.3 million due to a significant unrealized gain on warrant liabilities Comparison of Financial Results (Fiscal Years 2022 vs. 2021) | Financial Metric | FY 2022 | FY 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $18,168,677 | $9,027,738 | +101.3% | | Product Revenues | $1,882,804 | $3,295,849 | -42.9% | | Service Revenues | $759,138 | $937,735 | -19.0% | | Clinical Laboratory Service Revenues | $15,526,735 | $4,794,154 | +223.8% | | Gross Profit | $5,053,640 | $4,482,906 | +12.7% | | Gross Margin | 27.8% | 49.7% | -21.9 pts | | Loss from Operations | ($13,969,763) | ($13,348,641) | +4.7% | | Net Loss | ($8,270,059) | ($14,278,439) | -42.1% | | Net Loss per Share | ($0.93) | ($2.07) | -55.1% | - The 224% increase in clinical laboratory service revenue was primarily due to a full twelve months of the contract with the City University of New York (CUNY), which contributed an increase of $9.3 million year-over-year259 - The net loss for FY2022 was significantly reduced by a $18.0 million unrealized gain on the change in fair value of common warrants, which are classified as liabilities269272 - The company raised approximately $10.7 million in net proceeds from a public offering in August 2022 and received $3.7 million from warrant exercises, alleviating substantial doubt about its ability to continue as a going concern275 Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of September 30, 2022, due to a material weakness in internal control over financial reporting related to complex financial instruments, for which a remediation plan is being implemented - As of September 30, 2022, management concluded that disclosure controls and procedures were not effective307 - A material weakness was identified in internal control over financial reporting for FY2022 and FY2021 related to the accounting for complex financial instruments, such as warrants, and their tax impact309 - A remediation plan is being implemented to expand and improve the review process for complex financial instruments and their related tax implications, involving both internal personnel and third-party professionals310 Part III Directors, Executive Officers, and Corporate Governance Information regarding directors, executive officers, and corporate governance will be incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders - The required information is incorporated by reference from the forthcoming 2023 proxy statement312 Executive Compensation Information regarding executive compensation will be incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders - The required information is incorporated by reference from the forthcoming 2023 proxy statement313 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership will be incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders - The required information is incorporated by reference from the forthcoming 2023 proxy statement314 Certain Relationships and Related Transactions, and Director Independence This section discloses that Dillon Hill Capital, LLC, a former greater than 5% shareholder, exercised 200,000 warrants in December 2020, with further information to be incorporated by reference from the 2023 proxy statement - In December 2020, related party Dillon Hill Capital, LLC (a >5% shareholder at the time) exercised 200,000 warrants. As of September 30, 2022, they are no longer a >5% shareholder315 Principal Accountant Fees and Services Information regarding principal accountant fees and services will be incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting of Stockholders - The required information is incorporated by reference from the forthcoming 2023 proxy statement317 Part IV Exhibits and Financial Statement Schedules This section confirms that the consolidated financial statements for fiscal years 2022 and 2021, along with the independent auditor's report, are filed as part of this report, with all financial statement schedules omitted as not applicable - The consolidated financial statements and the independent auditor's report are filed with this Form 10-K318 Financial Statements and Supplementary Data Consolidated Financial Statements The consolidated financial statements present the company's financial position, operations, and cash flows, showing a net loss of $8.3 million for FY 2022, an improvement from FY 2021, largely due to non-cash gains on warrant liabilities Consolidated Balance Sheet Highlights (as of Sept 30) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $15,215,285 | $6,554,948 | | Total current assets | $19,943,129 | $11,297,801 | | Total assets | $22,265,114 | $14,416,756 | | Total current liabilities | $4,185,308 | $3,272,343 | | Common Warrant liability | $5,139,400 | $0 | | Total liabilities | $9,356,175 | $3,303,810 | | Total equity | $12,908,939 | $11,112,946 | Consolidated Statement of Operations Highlights (for year ended Sept 30) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total revenues | $18,168,677 | $9,027,738 | | Gross profit | $5,053,640 | $4,482,906 | | Loss from operations | ($13,969,763) | ($13,348,641) | | Unrealized gain on change in fair value of warrants | $17,999,521 | $0 | | Net loss | ($8,270,059) | ($14,278,439) | Notes to Consolidated Financial Statements The notes detail the alleviation of going concern doubt, disaggregate revenue by business operation, disclose a goodwill impairment in FY2021, and explain the classification and fair value measurement of warrant liabilities from 2022 offerings - Management has alleviated substantial doubt about the company's ability to continue as a going concern, estimating it has sufficient cash to fund operations for the next twelve months following the August 2022 financing365 Disaggregation of Revenue (FY 2022) | Business Operation | Revenue | | :--- | :--- | | Clinical laboratory testing services | $15,526,735 | | Product and authentication services | $2,469,863 | | Research and development services | $592,001 | | Total | $18,168,677 | - In FY2021, the company recorded a full impairment charge of $821,741 to write off goodwill and intangible assets related to the Triathlon DNA production system technology, which is no longer in use391415 - Warrants issued in the February and August 2022 offerings are classified as liabilities and measured at fair value, with changes recognized in the statement of operations. As of Sept 30, 2022, the fair value of these warrant liabilities was $5,139,400403469