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Applied DNA Sciences(APDN) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and related notes for the period ended June 30, 2023, covering financial position, operations, equity, and cash flows, along with key accounting policies and recent events Item 1 - Condensed Consolidated Financial Statements (unaudited) This section presents the company's unaudited condensed consolidated financial statements and related notes for the period ended June 30, 2023, covering financial position, operations, equity, and cash flows, along with key accounting policies and recent events Condensed Consolidated Balance Sheets This table provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of June 30, 2023, and September 30, 2022 | Metric | June 30, 2023 (unaudited) | September 30, 2022 | | :-------------------------- | :------------------------ | :----------------- | | Cash and cash equivalents | $10,756,235 | $15,215,285 | | Accounts receivable, net | $682,701 | $3,067,544 | | Inventories | $276,422 | $602,244 | | Total current assets | $12,240,262 | $19,943,129 | | Total assets | $15,789,534 | $22,265,114 | | Total current liabilities | $2,891,218 | $4,185,308 | | Warrants classified as a liability | $4,804,700 | $5,139,400 | | Total liabilities | $8,595,466 | $9,356,175 | | Total equity | $7,194,068 | $12,908,939 | Condensed Consolidated Statements of Operations This table presents the company's financial performance, including revenues, expenses, and net loss, for the three and nine months ended June 30, 2023 and 2022 | Metric (3 Months Ended June 30) | 2023 | 2022 | Change (%) | | :------------------------------ | :------------ | :------------ | :--------- | | Total revenues | $2,917,341 | $4,296,371 | -32.1% | | Product revenues | $316,950 | $219,765 | +44.2% | | Service revenues | $425,694 | $182,796 | +132.9% | | Clinical laboratory service revenues | $2,174,697 | $3,893,810 | -44.1% | | Gross profit | $1,269,318 | $1,039,258 | +22.1% | | Loss from operations | $(2,859,109) | $(2,856,644) | -0.1% | | Unrealized (loss) gain on change in fair value of warrants classified as a liability | $(278,400) | $1,758,200 | -115.8% | | NET LOSS | $(3,114,195) | $(1,124,796) | +176.9% | | Net loss per share (basic and diluted) | $(0.24) | $(0.13) | +84.6% | | Metric (9 Months Ended June 30) | 2023 | 2022 | Change (%) | | :------------------------------ | :------------ | :------------ | :--------- | | Total revenues | $12,587,707 | $14,609,360 | -13.8% | | Product revenues | $1,130,800 | $1,454,427 | -22.3% | | Service revenues | $826,813 | $570,759 | +44.9% | | Clinical laboratory service revenues | $10,630,094 | $12,584,174 | -15.5% | | Gross profit | $5,454,436 | $4,636,881 | +17.6% | | Loss from operations | $(6,782,469) | $(9,717,457) | -30.2% | | Unrealized gain on change in fair value of warrants classified as a liability | $334,700 | $2,540,700 | -86.8% | | NET LOSS | $(6,407,265) | $(7,605,505) | -15.8% | | Net loss per share (basic and diluted) | $(0.49) | $(0.94) | -47.9% | Condensed Consolidated Statements of Stockholders' Equity This table details changes in the company's stockholders' equity, including net loss and stock-based compensation, for the nine-month period ended June 30, 2023 | Metric (Nine-Month Period ended June 30, 2023) | Amount | | :--------------------------------------------- | :------------ | | Balance, October 1, 2022 | $12,908,939 | | Stock based compensation expense | $692,394 | | Net loss | $(3,099,766) | | Balance, June 30, 2023 | $7,194,068 | Condensed Consolidated Statements of Cash Flows This table summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended June 30, 2023 and 2022 | Metric (Nine Months Ended June 30) | 2023 | 2022 | | :--------------------------------- | :------------ | :------------ | | Net cash used in operating activities | $(3,537,911) | $(5,718,086) | | Net cash used in investing activities | $(171,139) | $(246,892) | | Net cash provided by financing activities | $0 | $4,091,908 | | Net decrease in cash, cash equivalents and restricted cash | $(3,709,050) | $(1,873,070) | | Cash, cash equivalents and restricted cash at end of period | $11,506,235 | $4,681,878 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's accounting policies, financial instruments, segment information, and other significant financial disclosures NOTE A — NATURE OF THE BUSINESS This note describes the company's core biotechnology business, focusing on DNA/RNA production and detection across therapeutic, MDx testing, and DNA tagging markets - The company is a biotechnology firm developing and commercializing DNA and RNA production and detection technologies19 - The company operates in three primary markets: therapeutic DNA production services (including the recent Spindle Biotech acquisition), MDx testing services (including COVID-19 testing via ADCL), and DNA tagging and security products and services19 NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES This note outlines the basis for preparing interim financial statements, consolidation principles, going concern considerations, use of estimates, and key accounting policies Interim Financial Statements This section clarifies that interim financial statements are unaudited and prepared under GAAP and SEC regulations, not necessarily indicative of full-year results - Interim financial statements are unaudited, prepared under US GAAP and SEC Regulation S-X, and do not include all disclosures required for complete financial statements20 - Operating results for the three and nine months ended June 30, 2023, are not necessarily indicative of expected results for the fiscal year ending September 30, 202321 Principles of Consolidation This section details the entities included in the consolidated financial statements and the elimination of intercompany transactions - The condensed consolidated financial statements include the accounts of the company, its wholly-owned subsidiaries (APDN (B.V.I.) Inc., Applied DNA Sciences Europe Limited, Applied DNA Sciences India Private Limited, ADCL, and Spindle Acquisition Corp.), and its majority-owned subsidiary LineaRx, Inc., with significant intercompany transactions and balances eliminated22 Going Concern and Management's Plan This section addresses the company's significant doubt about its ability to continue as a going concern due to recurring losses and negative cash flows, outlining management's plans - As of June 30, 2023, the company has incurred recurring losses, with an accumulated deficit of $298,854,88323 - For the nine months ended June 30, 2023, the company reported a net loss of $6,407,265 and negative operating cash flow of $3,537,911, raising substantial doubt about its ability to continue as a going concern for the next year23 - The company's ability to continue as a going concern is dependent upon its ability to further implement its business plan, raise capital, and generate revenue23 Use of Estimates This section highlights management's use of estimates and assumptions in financial reporting, particularly for revenue, long-term assets, and fair value measurements - Management makes estimates and assumptions in preparing financial statements, primarily concerning revenue recognition, recoverability of long-lived assets, fair value calculations for warrants, contingencies, and expected liquidity26 Revenue Recognition This section details the company's revenue recognition policies under ASC 606, distinguishing between point-in-time and over-time revenue streams - The company recognizes revenue under ASC 606 when control of promised goods or services is transferred to customers, either at a point in time or over time27 | Revenue Type (3 Months Ended June 30) | 2023 | 2022 | | :------------------------------------ | :---------- | :---------- | | Research and development services (over-time) | $135,622 | $152,732 | | Clinical laboratory testing services (point-in-time) | $1,521,315 | $2,506,976 | | Clinical laboratory testing services (over-time) | $653,382 | $1,386,834 | | Product and authentication services (point-in-time): | | | | Supply chain | $242,826 | $43,243 | | Large Scale DNA Production | $271,884 | — | | Asset marking | $92,312 | $127,075 | | MDx test kits and supplies | — | $79,511 | | Total | $2,917,341 | $4,296,371 | | Revenue Type (9 Months Ended June 30) | 2023 | 2022 | | :------------------------------------ | :------------ | :------------ | | Research and development services (over-time) | $349,587 | $472,539 | | Clinical laboratory testing services (point-in-time) | $7,596,748 | $8,712,565 | | Clinical laboratory testing services (over-time) | $3,033,346 | $3,871,609 | | Product and authentication services (point-in-time): | | | | Supply chain | $682,799 | $570,252 | | Large Scale DNA Production | $653,015 | — | | Asset marking | $272,212 | $380,039 | | MDx test kits and supplies | — | $602,356 | | Total | $12,587,707 | $14,609,360 | | Contract Liabilities | June 30, 2023 | September 30, 2022 | Change | | :------------------- | :------------ | :----------------- | :----- | | Deferred revenue | $275,885 | $563,557 | $(287,672) | Inventories This section describes the company's inventory valuation methods, including raw materials, work-in-progress, and finished goods - Inventories, primarily raw materials, work-in-progress, and finished goods, are measured at the lower of cost or net realizable value, with cost determined using the first-in, first-out (FIFO) method40 Net Loss Per Share This section explains the calculation of net loss per share, including the treatment of anti-dilutive securities - Dilutive common stock equivalents (warrants, restricted stock units, and stock options) are excluded from the calculation of diluted net loss per share if their inclusion would be anti-dilutive43 | Anti-Dilutive Securities | 2023 | 2022 | | :----------------------- | :---------- | :---------- | | Warrants | 7,295,588 | 2,239,963 | | Restricted Stock Units | 282,640 | — | | Stock options | 2,198,971 | 1,063,143 | | Total | 9,777,199 | 3,303,106 | Cash and Cash Equivalents and Restricted Cash This section provides a breakdown of cash, cash equivalents, and restricted cash, explaining the nature of restricted funds | Cash Components | June 30, 2023 | June 30, 2022 | | :----------------------------------- | :------------ | :------------ | | Cash and cash equivalents | $10,756,235 | $4,681,878 | | Restricted cash | $750,000 | — | | Total cash, cash equivalents and restricted cash | $11,506,235 | $4,681,878 | - Restricted cash of $750,000 is maintained by the company as a contractual obligation under a standby letter of credit agreement related to a new operating lease in February 202346 Concentrations This section identifies significant customer concentrations in revenue and accounts receivable, particularly within MDx testing services - For the three and nine months ended June 30, 2023, two customers in the MDx testing services segment accounted for 71% and 81% of the company's total revenue, respectively50 - The COVID-19 testing contract with CUNY (terminated in June 2023) accounted for 53% and 69% of revenue for the three and nine months ended June 30, 2023, respectively50 - As of June 30, 2023, two customers accounted for 86% of the company's accounts receivable50 Segment Reporting This section outlines the company's three reportable segments and how their performance is evaluated based on revenue and operating profit or loss - The company has three reportable segments: Therapeutic DNA Production Services, MDx Testing Services, and DNA Tagging and Security Products and Services51 - Segment performance is evaluated based on revenue and operating profit or loss, with all corporate overhead costs allocated53 Fair Value of Financial Instruments This section explains the fair value hierarchy for financial instruments and the valuation techniques used for various assets and liabilities - Fair value measurements for financial instruments use observable and unobservable inputs, categorized into three levels: Level 1 (quoted prices in active markets), Level 2 (quoted prices for similar assets/liabilities or verifiable market data), and Level 3 (unobservable inputs unsupported by market activity)54 - There were no transfers between fair value levels during the period ended June 30, 202355 Recent Accounting Standards This section discusses the anticipated impact of recently adopted accounting standards on the company's consolidated financial statements - The company does not expect the adoption of ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) to have a material impact on its condensed consolidated financial statements56 - The company does not expect the adoption of ASU 2020-06 (Convertible Debt and Contracts on an Entity's Own Equity) to have a material impact on its condensed consolidated financial statements57 NOTE C — INVENTORIES This note provides a detailed breakdown of the company's inventory components as of June 30, 2023, and September 30, 2022 | Inventory Component | June 30, 2023 (unaudited) | September 30, 2022 | | :------------------ | :------------------------ | :----------------- | | Raw materials | $212,965 | $471,947 | | Work-in-progress | $26,425 | $55,817 | | Finished goods | $37,032 | $74,480 | | Total | $276,422 | $602,244 | NOTE D — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES This note details the composition of accounts payable and accrued liabilities, including salaries and other expenses, at period-end | Liability Component | June 30, 2023 (unaudited) | September 30, 2022 | | :------------------------- | :------------------------ | :----------------- | | Accounts payable | $1,051,723 | $1,744,105 | | Accrued salaries payable | $999,952 | $1,458,661 | | Other accrued expenses | $76,233 | $418,985 | | Total | $2,127,908 | $3,621,751 | NOTE E — WARRANTS, STOCK OPTIONS AND RESTRICTED STOCK UNITS This note provides information on the company's outstanding warrants, stock options, and restricted stock units, including activity and valuation Warrants This section details the activity and weighted average exercise price of the company's warrants for the period | Warrants Activity | Number of Shares | Weighted Average Exercise Price Per Share | | :------------------------- | :--------------- | :---------------------------------------- | | Balance at October 1, 2022 | 7,313,963 | $3.68 | | Cancelled or expired | (18,375) | $17.60 | | Balance at June 30, 2023 | 7,295,588 | $3.65 | Options This section describes the stock options granted, their fair value calculation, and key assumptions used in the Black-Scholes model - For the nine months ended June 30, 2023, the company granted 308,333 options to executives (vesting 25% annually) and 694,670 options to non-employee directors (vesting after one year)66 - The weighted average grant-date fair value of options granted was $1.20, calculated using the Black-Scholes option pricing model with assumptions including a stock price of $1.27, exercise price of $1.27, expected term of 5.74 years, dividend yield of 0%, volatility of 157%, and risk-free interest rate of 3.64%67 Restricted Stock Units This section outlines the restricted stock units granted to executives, their vesting schedule, and fair value - For the nine months ended June 30, 2023, the company granted 282,640 restricted stock units (RSUs) to executives, vesting one year from the grant date, with fair value based on the closing stock price on the grant date68 NOTE F — COMMITMENTS AND CONTINGENCIES This note discloses the company's operating lease commitments, employment agreements, and current litigation status Operating Leases This section details the company's operating lease agreements, including terms, costs, and related security arrangements - In February 2023, the company amended its operating lease agreement for its corporate headquarters, with a three-year term, monthly rent of $48,861, and a $750,000 standby letter of credit as security69 | Lease Cost (3 Months Ended June 30, 2023) | Amount | | :---------------------------------------- | :---------- | | Operating lease cost | $244,306 | | Short-term lease cost | $43,750 | | Total lease cost | $288,056 | | Lease Cost (9 Months Ended June 30, 2023) | Amount | | :---------------------------------------- | :---------- | | Operating lease cost | $342,028 | | Short-term lease cost | $260,725 | | Total lease cost | $602,753 | - The weighted average remaining lease term for operating leases is 2.6 years, with a weighted average discount rate of 9.1%72 Employment Agreement This section outlines the key terms of the CEO's employment agreement, including compensation, bonuses, and severance provisions - The employment agreement for Dr. James Hayward, President and CEO, was renewed through June 30, 2023, with an annual salary of $450,000 and eligibility for an annual cash incentive bonus of up to $800,000 based on revenue milestones7477 - For the nine months ended June 30, 2023, the CEO earned a $500,000 bonus due to company revenues exceeding $12 million, which is included in accounts payable and accrued liabilities77 - The agreement provides for severance and benefits, including salary continuation and accelerated vesting of equity incentives, in cases of termination without cause, resignation for good reason, or change in control of the company75 Litigation This section confirms the company is not currently involved in any pending legal proceedings - The company is not currently involved in any pending legal proceedings78 NOTE G – SEGMENT INFORMATION This note provides detailed financial performance data for each of the company's reportable segments, including revenues and operating results | Metric (3 Months Ended June 30, 2023) | Therapeutic DNA Production Services | MDx Testing Services | DNA Tagging and Security Products | Consolidated | | :------------------------------------ | :---------------------------------- | :------------------- | :-------------------------------- | :----------- | | Total revenues | $405,506 | $2,174,697 | $337,138 | $2,917,341 | | Gross profit | $290,541 | $829,798 | $148,979 | $1,269,318 | | (Loss) income from segment operations | $(717,126) | $14,742 | $(998,966) | $(1,701,350) | | Metric (9 Months Ended June 30, 2023) | Therapeutic DNA Production Services | MDx Testing Services | DNA Tagging and Security Products | Consolidated | | :------------------------------------ | :---------------------------------- | :------------------- | :-------------------------------- | :----------- | | Total revenues | $994,287 | $10,630,094 | $963,326 | $12,587,707 | | Gross profit | $676,942 | $4,413,130 | $364,364 | $5,454,436 | | (Loss) income from segment operations | $(2,623,502) | $1,616,914 | $(2,388,417) | $(3,395,005) | | Reconciliation (3 Months Ended June 30) | 2023 | 2022 | | :-------------------------------------- | :-------------- | :-------------- | | Loss from operations of reportable segments | $(1,701,350) | $(1,989,061) | | General corporate expenses | $(1,157,759) | $(867,583) | | Interest income | $26,783 | — | | Unrealized (loss) gain on change in fair value of warrants classified as a liability | $(278,400) | $1,758,200 | | Other expense, net | $(3,469) | $(26,352) | | Consolidated loss before provision for income taxes | $(3,114,195) | $(1,124,796) | | Reconciliation (9 Months Ended June 30) | 2023 | 2022 | | :-------------------------------------- | :-------------- | :-------------- | | Loss from operations of reportable segments | $(3,395,005) | $(5,402,678) | | General corporate expenses | $(3,387,464) | $(4,314,779) | | Interest income | $34,108 | $5,813 | | Unrealized gain on change in fair value of warrants classified as a liability | $334,700 | $2,540,700 | | Transaction costs allocated to warrant liabilities | — | $(391,335) | | Other income (expense), net | $6,396 | $(43,226) | | Consolidated loss before provision for income taxes | $(6,407,265) | $(7,605,505) | NOTE H – FAIR VALUE OF FINANCIAL INSTRUMENTS This note details the fair value measurements of the company's financial liabilities, specifically warrants, and changes in their fair value | Liabilities (June 30, 2023) | Fair value | Valuation Technique | Unobservable Input | Weighted Average | | :-------------------------- | :----------- | :------------------ | :----------------- | :--------------- | | Common Warrants | $1,629,000 | Monte Carlo simulation | Annualized volatility | 160.00 % | | Series A Warrants | $3,153,000 | Monte Carlo simulation | Annualized volatility | 160.00 % | | Series B Warrants | $22,700 | Monte Carlo simulation | Annualized volatility | 130.00 % | | Change in Fair Value (3 Months Ended June 30, 2023) | Common Warrants | Series A Warrants | Series B Warrants | Totals | | :-------------------------------------------------- | :-------------- | :---------------- | :---------------- | :---------- | | Fair value at April 1, 2023 | $1,429,000 | $2,768,000 | $329,300 | $4,526,300 | | Change in fair value | $200,000 | $385,000 | $(306,600) | $278,400 | | Fair Value at June 30, 2023 | $1,629,000 | $3,153,000 | $22,700 | $4,804,700 | | Change in Fair Value (9 Months Ended June 30, 2023) | Common Warrants | Series A Warrants | Series B Warrants | Totals | | :-------------------------------------------------- | :-------------- | :---------------- | :---------------- | :---------- | | Fair value at October 1, 2022 | $1,477,000 | $2,883,000 | $779,400 | $5,139,400 | | Change in fair value | $152,000 | $270,000 | $(756,700) | $(334,700) | | Fair Value at June 30, 2023 | $1,629,000 | $3,153,000 | $22,700 | $4,804,700 | NOTE I – SUBSEQUENT EVENTS This note describes significant events occurring after the reporting period, including the acquisition of Spindle Biotech Inc. and its integration - On July 12, 2023, the company, through its wholly-owned subsidiary Spindle Acquisition Corp., acquired Spindle Biotech Inc., an early-stage biotechnology company developing next-generation RNA manufacturing technologies96 - The acquisition consideration included $625,000 in cash, 750,000 shares of restricted common stock, and potential additional issuance of up to 1,000,000 restricted shares upon patent issuance and sales milestones97 - The company has integrated the acquired technology into its Therapeutic DNA Production Services business unit, launching the Linea™ IVT platform to offer LinearDNA IVT templates and Spindle's proprietary engineered RNA polymerase to mRNA contract development and manufacturing organizations and mRNA therapeutic developers98 Item 2. — Management's Discussion and Analysis of Financial Condition and Results of Operations. This section analyzes the company's financial condition and operating results for the period ended June 30, 2023, addressing business segments, operating plans, financial performance, liquidity, and critical accounting policies, with a focus on ongoing losses and the impact of reduced COVID-19 testing demand Forward-Looking Statements This section cautions that the report contains forward-looking statements subject to risks and uncertainties, and actual results may differ materially from expectations - This quarterly report contains 'forward-looking statements' regarding future events, operating results, or financial condition, which are subject to known and unknown risks, uncertainties, and other factors101 - Actual results and the timing of events may differ from those expressed or implied in forward-looking statements due to factors such as future revenues, expenses, funding needs, going concern ability, material weaknesses in internal control, business strategies, demand for services (e.g., therapeutic DNA production, DNA tagging, MDx testing), regulatory approvals, and the anticipated benefits of the Spindle acquisition103105 - Forward-looking statements are based on current expectations, assumptions, estimates, and projections, and the company undertakes no obligation to update any forward-looking statements or risk factors unless required by law103106 Introduction This section introduces the company as a biotechnology firm leveraging PCR technology for DNA/RNA production and detection across therapeutic, MDx testing, and DNA tagging markets - The company is a biotechnology firm leveraging PCR technology to develop and commercialize DNA and RNA production and detection technologies110 - The company operates in three primary markets: therapeutic DNA production services (including the recent Spindle Biotech acquisition), MDx testing services, and DNA tagging and security products and services110 - The company's current growth strategy focuses on further development, commercialization, and customer adoption of therapeutic DNA production services, including expanding its CDMO business and developing DNA product candidates for veterinary health111 Therapeutic DNA Production Services This section details the company's linearDNA platform for nucleic acid therapy, including the Linea™ IVT platform and strategic plans for CDMO and veterinary health markets - Through its LineaRx, Inc. subsidiary, the company is developing and commercializing the linearDNA platform, enabling rapid, efficient, and large-scale cell-free production of high-fidelity DNA sequences for nucleic acid therapies, offering advantages over plasmid DNA manufacturing in speed, scalability, purity, simplicity, and flexibility112114115116 - Through the recent acquisition of Spindle Biotech, the company combines linearDNA IVT templates with Spindle's proprietary high-performance RNA polymerase to form the Linea™ IVT platform, expected to prevent or reduce double-stranded RNA (dsRNA) contamination, increase target mRNA yield, and deliver IVT templates within 14 to 30 days, thereby reducing mRNA manufacturing complexity113117 - The strategy for this business segment includes: securing supply contracts with mRNA manufacturers via the Linea™ IVT platform; engaging preclinical and indirect clinical therapeutic developers with existing GLP linearDNA production capabilities; entering direct clinical use supply contracts with clinical-stage therapeutic developers and commercial manufacturers upon cGMP linearDNA production facility development; and developing and commercializing linearDNA-based veterinary health vaccines121122 MDx Testing Services This section describes the company's clinical molecular diagnostics and genetic testing services, highlighting the impact of declining COVID-19 testing demand and future PGx plans - Through its clinical laboratory subsidiary ADCL, the company provides and develops clinical molecular diagnostics and genetic testing services using PCR technology, including validated pharmacogenomics (PGx) testing services (pending NYSDOH approval) and COVID-19 testing services marketed under the safeCircle™ trademark123124 - Historically, COVID-19 testing services were the primary revenue source for MDx testing services, but demand has significantly declined with the end of the US national emergency, notably with the CUNY contract terminating in June 2023, which accounted for 58% of the company's revenue in fiscal year 2022128 - Upon NYSDOH approval, PGx testing services are planned for large entities and self-insured employers, aiming to reduce population healthcare costs and improve overall population health124 DNA Tagging and Security Products and Services This section outlines the company's DNA tagging and security solutions, sold under the CertainT® trademark, for supply chain authentication and potential benefits from UFLPA - Leveraging its expertise in DNA manufacturing and PCR detection, the company offers DNA tagging and security products and services, sold under the CertainT® trademark, enabling customers to uniquely mark items with non-biological DNA tags and identify them by detecting the presence or absence of these tags, thereby securing industrial supply chains130 - Core products include SigNature® molecular tags for supply chain authentication, SigNify® IF portable DNA readers and SigNify consumable kits for on-site authentication, and fiberTyping® for cotton variety and product traceability certification130131 - The company believes the Uyghur Forced Labor Prevention Act (UFLPA) may help increase demand for its DNA tagging and security products and services, as DNA tagging is listed as one method for importers to demonstrate goods were not produced with forced labor133135 Plan of Operations This section discusses the company's future revenue expectations, anticipated decline in COVID-19 testing revenue, and capital allocation for business expansion amidst liquidity constraints - The company's future revenues are expected to primarily derive from therapeutic DNA production services and MDx testing services, followed by DNA tagging and security products and services136 - Revenue from safeCircle COVID-19 testing solutions is expected to significantly decrease due to the substantial decline in COVID-19 testing demand and the termination of the CUNY contract in June 2023136 - The company will continue to invest capital to expand its operations to meet current and future demand, but faces limited sources of liquidity136 Comparison of Results of Operations for the Three-Month Periods Ended June 30, 2023 and 2022 This section compares the company's financial performance for the three months ended June 30, 2023 and 2022, analyzing changes in revenues, costs, and net loss Revenues This section analyzes revenue changes across product, service, and clinical laboratory segments for the three months ended June 30, 2023 and 2022 - Product revenues increased 44% to $316,950, primarily driven by approximately $230,000 growth in large-scale DNA manufacturing business138 - Service revenues increased 133% to $425,964, primarily due to approximately $184,000 growth in isotope detection services and $68,000 from new customers in the textile and biopharmaceutical markets139 - Clinical laboratory service revenues decreased 44% to $2,174,697, primarily due to declining COVID-19 testing demand and the termination of the CUNY contract in mid-June 2023140 Cost and Expenses This section details changes in gross profit, operating expenses, interest income, and fair value adjustments for the three months ended June 30, 2023 and 2022 - Gross profit increased 22% to $1,269,318, with gross margin rising from 24% to 44%, primarily due to improved MDx testing service gross margins and an increased proportion of COVID-19 surveillance testing services141 - Selling, general, and administrative expenses increased 9% to $3,292,304, mainly due to bad debt allowance adjustments, isotope detection costs, system automation implementation, and increased legal fees142 - Research and development expenses decreased 3% to $836,123, primarily due to reduced contract services supporting animal vaccine research143 - Interest income was $26,783 (compared to $0 in the prior year period), primarily due to high-interest money market accounts and higher cash balances144 - Unrealized loss on change in fair value of warrants classified as a liability was $278,400, primarily due to an increase in stock price during the period and a shorter remaining term for Series B warrants146 Net Loss This section summarizes the increase in net loss for the three months ended June 30, 2023, driven by various revenue and expense factors - Net loss for the three months ended June 30, 2023, increased 177% to $3,114,195, compared to $1,124,796 in the prior year period, influenced by the factors mentioned above149 Comparison of Results of Operations for the Nine-Month Periods Ended June 30, 2023 and 2022 This section compares the company's financial performance for the nine months ended June 30, 2023 and 2022, analyzing changes in revenues, costs, and net loss Revenues This section analyzes revenue changes across product, service, and clinical laboratory segments for the nine months ended June 30, 2023 and 2022 - Product revenues decreased 22% to $1,130,800, primarily due to a reduction of approximately $602,000 in Linea™ COVID-19 test kit sales, partially offset by a $560,000 increase in large-scale DNA production orders for the biopharmaceutical market149 - Service revenues increased 45% to $826,813, primarily due to approximately $198,000 growth in isotope detection services for the textile market and $43,000 in the biopharmaceutical market150 - Clinical laboratory service revenues decreased 16% to $10,630,094, primarily due to declining COVID-19 testing demand and the termination of the CUNY COVID-19 testing contract in June 2023151 Cost and Expenses This section details changes in gross profit, operating expenses, interest income, and fair value adjustments for the nine months ended June 30, 2023 and 2022 - Gross profit increased 18% to $5,454,436, with gross margin rising from 32% to 43%, primarily due to improved cost management efficiency in MDx testing services and a reduced negative impact on gross profit from testing pool size adjustments due to lower COVID-19 positivity rates152 - Selling, general, and administrative expenses decreased 17% to $9,440,734, primarily attributable to a $1,553,000 reduction in stock-based compensation expense153 - Research and development expenses decreased 7% to $2,796,171, primarily due to a reduction of approximately $180,000 in outsourced service contracts and laboratory supplies157 - Interest income was $34,108, compared to $5,813 in the prior year period157 - Unrealized gain on change in fair value of warrants classified as a liability was $334,700, primarily due to a decrease in stock price during the period158 Net Loss This section summarizes the decrease in net loss for the nine months ended June 30, 2023, influenced by various revenue and expense factors - Net loss for the nine months ended June 30, 2023, decreased 16% to $6,407,265, compared to $7,605,505 in the prior year period, influenced by the factors mentioned above158 Liquidity and Capital Resources This section discusses the company's working capital, cash flows, and the significant impact of the CUNY contract termination on liquidity and going concern - As of June 30, 2023, the company's working capital was $9,349,044159 - For the nine months ended June 30, 2023, operating activities used $3,537,911 in cash, and investing activities used $171,139 in cash159 - The termination of the CUNY COVID-19 testing contract (which accounted for 58% of fiscal year 2022 revenue) is expected to result in a significant decline in future revenues and negatively impact the company's liquidity160 - The company's recurring losses and negative operating cash flows raise substantial doubt about its ability to continue as a going concern, with its continuation dependent on further business plan implementation, capital raising, and revenue generation161 Critical Accounting Estimates and Policies This section outlines the company's critical accounting policies and estimates, including revenue recognition, equity compensation, and warrant valuation Critical Accounting Estimates This section identifies key areas requiring management judgment and estimation, such as revenue recognition, long-term assets, and fair value measurements - Critical accounting policies include revenue recognition, stock-based compensation, and warrants classified as liabilities164 - Management makes significant estimates in revenue recognition, recoverability of long-lived assets, fair value calculations for warrants, contingencies, and expected liquidity165 Revenue Recognition This section elaborates on the company's revenue recognition principles under ASC 606 for various product and service offerings - The company recognizes revenue under ASC 606 when control of promised goods or services is transferred to customers, either at a point in time or over time166 - Product revenue, authentication service revenue, and clinical laboratory testing service revenue (point-in-time) are recognized when control is transferred or services are completed168170 - Research and development service revenue and fixed monthly fee clinical laboratory testing service revenue are recognized over time, with R&D services primarily measured using the cost method170171 Warrants classified as a liability This section explains the accounting treatment of warrants classified as liabilities, measured at fair value with changes recognized in operations - Warrants (common stock, Series A, and Series B) are classified as liabilities under ASC 480 and ASC 815-40, measured at fair value on the balance sheet, with changes in fair value recognized as non-cash gains or losses in the statements of operations172 Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements for the company - The company does not have any off-balance sheet arrangements173 Inflation This section states that inflation has not had a significant impact on the company's revenues and operating results - Inflation has not had a significant impact on the company's revenues and operating results173 Item 3. — Quantitative and Qualitative Disclosures About Market Risk. The company has elected to use the scaled disclosure requirements applicable to smaller reporting companies, thus the market risk information required under this item is not applicable - The company has elected to use the scaled disclosure requirements applicable to smaller reporting companies, thus the market risk information required under this item is not applicable173 Item 4. — Controls and Procedures. This section discusses the evaluation of the company's disclosure controls and procedures as of June 30, 2023, concluding their ineffectiveness due to a material weakness in internal control over financial reporting related to complex financial instruments, for which a remediation plan is underway Evaluation of Disclosure Controls and Procedures This section reports the conclusion that the company's disclosure controls and procedures were ineffective as of June 30, 2023, due to a material weakness - As of June 30, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were ineffective due to a material weakness in internal control over financial reporting175 Material Weakness in Internal Control Over Financial Reporting This section identifies a material weakness in internal control over financial reporting related to the accounting for complex financial instruments and their tax implications - During the audits of the fiscal year 2022 and 2021 consolidated financial statements, the company identified a material weakness in internal control over financial reporting175 - This material weakness relates to controls over the accounting for complex financial instruments, such as outstanding warrants, and their related tax implications175 - Despite the material weakness, the company believes it does not require restatement or changes to any prior interim period consolidated financial statements175 Remediation of Material Weakness This section outlines the company's remediation plan to address the identified material weakness, involving enhanced review processes and external expertise - The company is implementing a remediation plan to expand and improve its review processes for complex financial instruments and their related tax implications, involving internal personnel and third-party professional advisors176 - The material weakness will be considered remediated once the relevant controls have operated effectively for a sufficient period and have been tested by management176 Changes in Internal Control over Financial Reporting This section confirms no other significant changes in internal control over financial reporting during the fiscal quarter ended June 30, 2023, beyond the aforementioned remediation plan - During the fiscal quarter ended June 30, 2023, there were no other significant changes in internal control over financial reporting beyond the aforementioned remediation plan177 PART II - OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1 – Legal Proceedings The company is not currently involved in any pending legal proceedings - The company is not currently involved in any pending legal proceedings178 Item 1A – Risk Factors The company reiterates previously disclosed risk factors, emphasizing significant doubt about its ability to continue as a going concern due to recurring losses and negative operating cash flows, with future operations dependent on raising additional capital and generating revenue - Due to recurring losses, with an accumulated deficit of $298,854,883 as of June 30, 2023, significant doubt exists about the company's ability to continue as a going concern179 - The company's ability to continue as a going concern is dependent upon its ability to raise additional working capital and generate revenue179 - Failure to raise additional working capital or unfavorable terms for such capital would materially adversely affect the business, prospects, financial condition, and results of operations, potentially leading to the company's inability to continue as a going concern179 Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds during this reporting period - There were no unregistered sales of equity securities or use of proceeds during this reporting period180 Item 3 – Defaults Upon Senior Securities There were no defaults upon senior securities during this reporting period - There were no defaults upon senior securities during this reporting period180 Item 4 – Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the company180 Item 5 – Other Information There is no other information to report under this item - There is no other information to report under this item180 Item 6 – Exhibits This section lists exhibits filed with Form 10-Q, including the equity purchase agreement for Spindle Biotech Inc., articles of incorporation, bylaws, and certifications from the CEO and CFO, with some exhibits incorporated by reference or furnished - Exhibits include the equity purchase agreement for Spindle Biotech Inc., articles of incorporation, bylaws, and certifications from the CEO and CFO181 - Exhibits 32.1 and 32.2 (CEO/CFO certifications) are furnished rather than 'filed' and are therefore not subject to the liability provisions of Section 18 of the Exchange Act182