APPLIED DNA SCIENCES INC

Item 1 - Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTE A — NATURE OF THE BUSINESS

Applied DNA Sciences, Inc. (“Applied DNA” or the “Company”) is a biotechnology company developing and commercializing technologies to produce and detect deoxyribonucleic acid (“DNA”) and ribonucleic acid (“RNA”). Using the polymerase chain reaction (“PCR”) to enable the production and detection of DNA and RNA, the Company currently operates inthree primary business markets: (i) the enzymatic manufacture of synthetic DNA for use in the production of nucleic acid - based therapeutics (including biologics and drugs) and, through the Company’s recent acquisition of Spindle Biotech, Inc. (“Spindle”), the development and sale of a proprietary RNA polymerase (“RNAP”) for use in the production of messenger RNA (“mRNA”) therapeutics (“Therapeutic DNA Production Services”); (ii) the detection of DNA and RNA in molecular diagnostics and genetic testing services (“MDx Testing Services”); and (iii) the manufacture and detection of DNA for industrial supply chain security services (“DNA Tagging and Security Products and Services”).

On April 24, 2024, the Company filed a Certificate of Amendment of its Certificate of Incorporation with the Secretary of State of the State of Delaware that effected aone-for-twenty (1:20) reverse stock split of its common stock, par value $0.001 per share (the “Common Stock”), effective 12:01 A.M. April 25, 2024 (the “April 2024 Reverse Stock Split”). All warrant, option, share, and per share information in the condensed consolidated financial statements gives retroactive effect to aone-for-twenty reverse stock split that was affected on April 25, 2024. Please see Note E for more information.

NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

Interim Financial Statements

The accompanying condensed consolidated financial statements as of June 30, 2024, and for the three and nine-month periods ended June 30, 2024 and 2023 are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Regulation S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended June 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2024. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the fiscal year ended September 30, 2023 and footnotes thereto included in the Annual Report on Form 10-K of the Company filed with the SEC on December 7, 2023, as amended. The condensed consolidated balance sheet as of September 30, 2023 contained herein has been derived from the audited consolidated financial statements as of September 30, 2023 but does not include all disclosures required by GAAP.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, APDN (B.V.I.) Inc., Applied DNA Sciences Europe Limited, Applied DNA Sciences India Private Limited, Applied DNA Clinical Labs, LLC (“ADCL”), Spindle and its majority-owned subsidiary, LineaRx, Inc. Significant inter-company transactions and balances have been eliminated in consolidation.

Going Concern and Management’s Plan

The Company has recurring net losses. The Company incurred a net loss of $3,774,563 and generated negative operating cash flow of $10,462,332 for the nine-month period ended June 30, 2024. At June 30, 2024, the Company had cash and cash equivalents of $10,442,131. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date of issuance of these 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.

Going Concern and Management’s Plan, continued

The Company’s current capital resources include cash and cash equivalents, accounts receivable and inventories. Historically, the Company has financed its operations principally from the sale of equity and equity-linked securities.

Use of Estimates

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

Revenue Recognition

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

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

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

Product Revenues and Authentication Services

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

Authentication Services

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

Revenue Recognition, continued

Clinical Laboratory Testing Services

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

Research and Development Services

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

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

Disaggregation of Revenue

The following table presents revenues disaggregated by our business operations and timing of revenue recognition:

Revenue Recognition, continued

Contract balances

As of June 30, 2024, the Company has entered into contracts with customers for which revenue has not yet been recognized. Consideration received from a customer prior to revenue recognition is recorded to a contract liability and is recognized as revenue when the Company satisfies the related performance obligations under the terms of the contract. The Company’s contract liabilities, which are reported as deferred revenue on the condensed consolidated balance sheet, consist almost entirely of research and development contracts where consideration has been received and the development services have not yet been fully performed.

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

For the three and nine-month periods ended June 30, 2024 the Company recognized $0 and $40,035, respectively of revenue that was included in Contract liabilities as of October 1, 2023, respectively.

Cash, Cash Equivalents, and Restricted Cash

For the purpose of the accompanying condensed consolidated financial statements, all highly liquid investments with a maturity of three months or less from when purchased are considered to be cash equivalents. The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the statement of cash flows.

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.

Net Income (Loss) Per Share

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

Securities that could potentially dilute basic net income (loss) per share in the future that were not included in the computation of diluted net income (loss) per share because to do so would have been anti-dilutive for the three and nine-month periods ended June 30, 2024 and 2023 are as follows:

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 June 30, 2024, the Company had cash and cash equivalents of approximately $10.1 million in excess of the FDIC insurance limit.

The Company’s revenues earned from sale of products and services for the three and nine-month periods ended June 30, 2024 included an aggregate of 28% and 26% fromone customer, respectively, within the MDx Testing Services segment and an aggregate of 27% and 18%, respectively fromone customer within the Therapeutic DNA Production Services segment.

The Company’s revenues earned from sale of products and services for the three and nine-month periods ended June 30, 2023 included an aggregate of 71% and 81%, respectively, fromtwo customers within the MDx Testing Services segment. Three customers accounted for 67% of the Company’s accounts receivable at June 30, 2024 andthree customers accounted for 60% of the Company’s accounts receivable at September 30, 2023.

Warrant Liabilities

The Company evaluates its issued warrants in accordance with ASC 480 “Distinguishing Liabilities from Equity” and ASC 815-40, “Derivatives and Hedging — Contracts in Entity’s Own Equity” and concluded that due to the terms of certain of its warrant agreements, the instruments do not qualify for equity treatment. As such, the Common Warrants, Series A Warrants and Private Common Warrants were recorded as a liability on the condensed consolidated balance sheet and measured at fair value at inception and at each reporting date in accordance with ASC 820, “Fair Value Measurement”, with changes in fair value recognized in the condensed consolidated statement of operations in the period of change.

Segment Reporting

The Company hasthree reportable segments. (1) Therapeutic DNA Production Services (2) MDx Testing Services, and (3) DNA Tagging and Security Products and Services. Resources are allocated by our Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”), Chief Financial Officer (“CFO”) and Chief Legal Officer (“CLO”) whom, collectively the Company has determined to be our Chief Operating Decision Maker (“CODM”). The following is a brief description of our reportable segments.

Therapeutic DNA Production Services — Segment operations consist of the enzymatic manufacture of synthetic DNA for use in the production of nucleic acid - based therapeutics and, the development and sale of a proprietary RNAP for use in the production of mRNA therapeutics.

MDx Testing Services— Segment operations consist of performing and developing clinical molecular diagnostic and genetic tests and clinical laboratory testing services. Under the Company’s MDx Testing Services, ADCL offers pharmacogenomics testing services that were approved by the New York State Department of Health (“NYSDOH”) during June 2024.

DNA Tagging and Security Products and Services — Segment operations consist of the manufacture and detection of DNA for industrial supply chains and security services.

The Company evaluates the performance of its segments and allocates resources to them based on revenues and operating income (losses). Operating income (loss) includes intersegment revenues, as well as a charge allocating all corporate headquarters costs. Since each vertical has shared employee resources, payroll and certain other general expense such as rent, and utilities were allocated based on an estimate by management of the percentage of employee time spent in each vertical. Segment assets are not reported to, or used by, the CODM to allocate resources to, or assess performance of, the segments and therefore, total segment assets have not been disclosed.

Fair Value of Financial Instruments

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.

For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, which reports to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.

As of June 30, 2024, there were no transfers between Levels 1,2 and 3 of the fair value hierarchy.

Recent Accounting Standards

In December 2023, the FASB issued Accounting Standards Update (ASU) No. 2023-09,Income Taxes (Topic 740): Improvements to Income Tax Disclosures, that enhances the transparency of income tax disclosures by expanding annual disclosure requirements related to the rate reconciliation and income taxes paid. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and should be applied prospectively with the option of retrospective application. The Company is currently evaluating the impact of adopting this ASU on its disclosures.

Recent Accounting Standards, continued

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure.” The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. These disclosures are required quarterly. The ASU is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024, with early adoption permitted. It is required to be adopted retrospectively for all prior periods presented in the financial statements The Company is currently evaluating the impact of adopting this ASU on its disclosures.

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

NOTE C — INVENTORIES

Inventories consist of the following:

NOTE D — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities are as follows:

NOTE E — CAPITAL STOCK

April 2024 Reverse Stock Split

On April 15, 2024, the Company held the special meeting of stockholders (the “April 2024 Special Meeting”) where its stockholders approved the April 2024 Reverse Split (the “Reverse Split Proposal”). The Company’s Board of Directors determined on April 21, 2024 that the split ratio of the April 2024 Reverse Stock Split should beone-for-twenty shares.

The April 2024 Reverse Stock Split was effected as of 12:01 a.m. Eastern Time on Thursday, April 25, 2024 and combined each twenty shares of the Company’s outstanding Common Stock intoone share of Common Stock, without any change in the par value per share. Moreover, the April 2024 Reverse Stock Split correspondingly adjusted, a) the per share exercise price and the number of shares issuable upon the exercise of all outstanding options, and b) the number of shares underlying any of our outstanding warrants by adjusting the conversion ratio for each instrument and increasing the applicable exercise price or conversion price in accordance with the terms of each instrument and based on the reverse stock split ratio. No fractional shares were issued in connection with the April 2024 Reverse Stock Split. Any fractional shares resulting from the April 2024 Reverse Stock Split were rounded up to the nearest whole share.

Public Offering

On May 28, 2024, the Company entered into a placement agency agreement (the “Placement Agreement”) with Craig-Hallum Capital Group LLC and Laidlaw & Company (UK) Ltd. (collectively, the “Placement Agents”) pursuant to which the Placement Agents agreed to serve as the co-placement agents, on a “reasonable best efforts” basis, in connection with the issuance and sale (the “Offering”) of 9,230,769 units (the “Units”), with each Unit consisting of either (A)one share of the Company’s Common Stock, , andone Series A warrant (the “ May 2024 Series A Warrant”) to purchaseone share of Common Stock andone Series B warrant to purchaseone share of Common Stock (the “May 2024 Series B Warrant” and, together with the May 2024 Series A Warrant, the “May 2024 Series Warrants”), or (B)one pre-funded warrant (each, a “May 2024 Pre-Funded Warrant”) to purchaseone share of Common Stock andone May 2024 Series A Warrant andone May 2024 Series B Warrant. In connection with the Offering, the Company also issued placement agent warrants (“Placement Agent Warrants”) to purchase up to 461,538 shares of Common Stock. The Offering closed on May 29, 2024. The purchase price of each Unit was $1.30, except for Units which include May 2024 Pre-Funded Warrants, which had a purchase price of $1.2999. The Units had no stand-alone rights and will not be certificated or issued as stand-alone securities.

The Company received net proceeds from the Offering, after deducting placement agent fees and other offering expenses payable by the Company, of approximately $10.5 million.

The exercisability of the May 2024 Series Warrants will be available only upon receipt of such stockholder approval as may be required by the applicable rules and regulations of the Nasdaq Capital Market (the “Warrant Stockholder Approval”). Each May 2024 Series A Warrant offered hereby will become exercisable beginning on the date of the Warrant Stockholder Approval at an exercise price of $1.99 per share of Common Stock, and will expire five years from the date of the Warrant Stockholder Approval. Each May 2024 Series B Warrant offered hereby will become exercisable beginning on the date of the Warrant Stockholder Approval at an exercise price of $1.99 per share of Common Stock, and will expire one year from the date of the Warrant Stockholder Approval.

As further detailed in Note J, the Company held a special meeting of stockholders on August 2, 2024 to obtain Warrant Stockholder Approval for the May 2024 Series Warrants (the “August 2024 Special Meeting”). The August 2024 Special meeting was adjourned without any action taken due to a lack of quorum as determined by the Company’s By-Laws. Pursuant to the terms of the May 2024 Series Warrants, since the Company did not obtain Warrant Stockholder Approval at the special meeting, it is obligated to call a subsequent stockholder meeting to seek to obtain Warrant Stockholder Approval. In the event that the Company is unable to obtain the Warrant Stockholder Approval, the May 2024 Series Warrants will not be exercisable and therefore will have no value.

Public Offering, continued

Under the alternate cashless exercise option of the May 2024 Series B Warrants, the holder of the May 2024 Series B Warrant has the right to receive an aggregate number of shares equal to the product of (x) the aggregate number of shares of Common Stock that would be issuable upon a cash exercise of the May 2024 Series B Warrant and (y) 3.0. In addition, the May 2024 Series A Warrants and May 2024 Series B Warrants include a provision that resets their respective exercise price in the event of a reverse split of the Company’s Common Stock, to a price equal to the lesser of (i) the then exercise price and (ii) lowest volume weighted average price (VWAP) during the period commencing five trading days immediately preceding and the five trading days commencing on the date the Company effects a reverse stock split in the future with a proportionate adjustment to the number of shares underlying the May 2024 Series A Warrants and May 2024 Series B Warrants.

Subject to certain exceptions, the May 2024 Series A Warrants provide for an adjustment to the exercise price and number of shares underlying the May 2024 Series A Warrants upon the Company’s issuance of Common Stock or Common Stock equivalents at a price per share that is less than the exercise price of the May 2024 Series A Warrants.

The Common Stock and May 2024 Pre-Funded Warrants were only sold with the accompanying May 2024 Series A Warrants and May 2024 Series B Warrants that are part of a Unit, but the components of the Units were immediately separable and were issued separately in this Offering. During the three-month period ended June 30, 2024, all of the May 2024 Pre-Funded Warrants were exercised.

Registered Direct Offering

On February 2, 2024, the Company closed on a registered direct public offering (the “RDO”) of 161,403 shares of the Company’s Common Stock and pre-funded warrants (“RDO Pre-Funded Warrants”) to purchase up to 120,800 shares of Common Stock, and in a concurrent private placement, unregistered common warrants (“Private Common Warrants”) to purchase up to 564,407 shares of Common Stock. In connection with the RDO, the Company entered into securities purchase agreements (the “Purchase Agreements”) with certain institutional investors (each, a “Purchaser” and, collectively, the “Purchasers”). The Company received net proceeds from the RDO, after deducting placement agent fees and other estimated offering expenses payable by the Company, of approximately $2.8 million.

The RDO Pre-Funded Warrants have an exercise price of $0.0001 per share and are immediately exercisable and can be exercised at any time after their original issuance until such RDO Pre-Funded Warrants are exercised in full. Each Share was sold at an offering price of $12.18 and each RDO Pre-Funded Warrant was sold at an offering price of $12.18 (equal to the purchase price per share of Common Stock minus the exercise price of the RDO Pre-Funded Warrant). Pursuant to the Purchase Agreements, the Company also agreed to issue to the Purchasers, in a concurrent private placement, the Private Common Warrants. Each Private Common Warrant has an exercise price of $12.18 per share, and became exercisable following shareholder approval obtained on April 15, 2024 and will expire on April 15, 2029. During the three-month period ended June 30, 2024, all of the 120,800 RDO Pre-Funded Warrants were exercised.

The Private Common Warrants and the shares of Common Stock issuable upon the exercise of the Private Common Warrants are not registered under the Securities Act. The Private Common Warrants and the shares of Common Stock issuable upon exercise thereof were issued or will be issued, respectively, in reliance on the exemptions from registration provided by Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder, for transactions not involving a public offering. Pursuant to the Purchase Agreements, within 45 calendar days from the date of the Purchase Agreements, the Company agreed to file a registration statement on Form S-3 (or other appropriate form if the Company is not then S-3 eligible) providing for the resale by the Purchasers of the Shares issuable upon exercise of the Private Common Warrants. The Company agreed to use commercially reasonable efforts to cause such registration statement to become effective within 90 days following the closing date of the Purchase Agreements and to keep such registration statement effective at all times until no Purchaser owns any Private Common Warrants or Shares issuable upon exercise thereof. The Company filed the registration statement on March 12, 2024, and the registration statement was declared effective on March 20, 2024.

Registered Direct Offering, continued

The Private Common Warrants are recorded as a liability in the condensed consolidated balance sheet and were recorded at fair value and will be marked to market at each period end (see Note I). Additionally, the Company incurred $633,198 of transaction costs related to the RDO which is included in the condensed consolidated statement of operations for the nine-month period ended June 30, 2024.

In connection with the RDO and the Purchase Agreements, the Company agreed to reduce the exercise price of warrants previously issued to the Purchasers with exercise prices ranging from $25.80 to $80.00 per warrant to $12.18 per warrant. The Company also agreed to extend the expiration dates for such warrants to August 2028. In addition,2,904 outstanding common stock warrants held by other investors who did not participate in the RDO had their exercise price reduced to $12.18 per warrant share and had their warrant expiration dates extended to August 2028. The foregoing reductions of the exercise price and extension of expiration dates of such warrants were approved by shareholders on April 15, 2024. The incremental change in fair value as a result of the modification for the warrants that are recorded as a liability was $1,633,767 and is recorded as a unrealized loss on the change in fair value of warrants classified as a liability in the condensed consolidated statement of operations for the nine-month period ended June 30, 2024. The incremental change in fair value as a result of the modification for the warrants that are recorded to equity was $155,330 and is recorded as a deemed dividend in the condensed consolidated statement of operations for the nine-month period ended June 30, 2024.

Nasdaq Stockholders’ Equity Requirement Deficiency Notice

On May 16, 2024, the Company received a deficiency letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it is not in compliance with the minimum stockholders’ equity requirement of at least $2,500,000 for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(1) (the “Stockholders’ Equity Requirement”). In the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, the Company reported stockholders’ equity of($175,385), which was below the Stockholders’ Equity Requirement. In accordance with Nasdaq rules, the Company had 45 calendar days, or until July 1, 2024, to submit a plan to the Staff to regain compliance with the Stockholders’ Equity Requirement.

As described above, on May 29, 2024, the Company closed the Offering and received net proceeds, after deducting placement agent fees and other offering expenses payable by the Company, of approximately$10.5 million. The Company reported on its Form 8-K filed on June 18, 2024 that it believed it regained compliance with the Stockholders’ Equity Requirement as a result of the Offering.

On June 27, 2024, the Company received formal notification from Nasdaq confirming that, based on the information contained in the Company’s Form 8-K, dated June 18, 2024, the Company complies with the Stockholders’ Equity Requirement.

ATM

On November 7, 2023, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Maxim Group LLC, as sales agent (the “Agent”), pursuant to which the Company may, from time to time, issue and sell shares of its Common Stock in an aggregate offering price of up to $6,397,939 through the Agent.

The offer and sales of the shares of Common Stock made pursuant to the Equity Distribution Agreement, will be made under the Company’s effective “shelf” registration statement on Form S-3. Under the terms of the Equity Distribution Agreement, the Agent may sell the shares of Common Stock at market prices by any method that is deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended. As of June 30, 2024, the Company has issued 4,501 shares of its Common Stock for net proceeds of approximately $64,397 under this Equity Distribution Agreement. Effective January 30, 2024, the Company terminated the Equity Distribution Agreement by providing notice of termination to the Agent in accordance with the terms of the Equity Distribution Agreement. As a result of terminating the Equity Distribution Agreement, the $217,000 of capitalized transaction costs were written off and are included in the condensed consolidated statement of operations for the – nine-month period ended June 30, 2024.

As a result of the issuance of Common Stock under this Equity Distribution Agreement, the exercise price of the 22,891 remaining warrants issued during November 2019 was reduced to$29.40 per share, the exercise price of 7,950 warrants issued during October 2020 was reduced to$30.20 per share and the exercise prices of 5,000 warrants issued during December 2020 was reduced to an exercise price of$26.20 per share for 2,500 warrants and an exercise price of$25.80 per share for the remaining 2,500 warrants. These exercise price adjustments are in accordance with the adjustment provisions contained in the respective warrant agreements. The incremental change in fair value of these warrants as a result of the triggering event was$77,757 and is recorded as a deemed dividend in the condensed consolidated statement of operations for the nine-month period ended June 30, 2024.

NOTE F —WARRANTS

Warrants

The following table summarizes the changes in warrants outstanding. These warrants were granted as part of financing transactions, as well as in lieu of cash compensation for services performed or as financing expenses in connection with the sales of the Company’s common stock.

The 19,748,143 warrants outstanding at June 30, 2024 includes 18,461,538 May 2024 Series Warrants whose exercise is subject to stockholder approval, as more fully discussed above in Note E.

NOTE G — COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases office space under an operating lease in Stony Brook, New York for its corporate headquarters. The lease is for a 30,000 square foot building. The Company entered into an amended lease agreement on February 1, 2023. The initial term is forthree years and expires on February 1, 2026. The lease for the corporate headquarters requires monthly payments of$48,861, which is adjusted annually based on the US Consumer Price Index (“CPI”). In lieu of a security deposit, the Company provided a standby letter of credit of$750,000. In addition, the Company also has 2,500 square feet of laboratory space, which it entered into an amended lease agreement for on February 1, 2023. The initial lease term for the laboratory space isone year from the commencement date. The lease requires monthly payments of$8,750. The Company also has a satellite testing facility in Ahmedabad, India which occupies 1,108 square feet for athree-year term beginning November 1, 2017. During August 2023, the Company renewed this lease with a new expiration date of July 31, 2024. The base rent is approximately$6,500 per annum. The laboratory lease, as well as the testing facility in Ahmedabad are both considered short-term lease obligations. As of June 30, 2024 the Company has ceased operations of its testing facility in India. The lease agreement is currently on a month-to-month basis and the Company expects to vacate the lease by August 31, 2024. The total rent expense for the three and nine-month periods ended June 30, 2024 was$183,658 and$538,666, respectively.

Employment Agreement

The employment agreement with Dr. James Hayward, the Company’s President and CEO, entered into in July 2016 provides that he will be the Company’s CEO and will continue to serve on the Company’s Board of Directors. The initial term was from July 1, 2016 through June 30, 2017, with automaticone-year renewal periods unless either party provides the other with 90 days’ advance written notice of non-renewal. On July 28, 2017, the employment agreement was renewed for a successiveone-year term and the employment agreement has been renewed for successiveone-year terms, most recently as of June 30, 2024. 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.

NOTE G — COMMITMENTS AND CONTINGENCIES, continued

Employment Agreement, continued

The employment agreement with the CEO also provides that if he is terminated before the end of the initial or a renewal term by the Company without cause or if the CEO terminates his employment for good reason, then, in addition to previously earned and unpaid salary, bonus and benefits, and subject to the delivery of a general release and continuing compliance with restrictive covenants, the CEO will be entitled to receive apro 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.

On October 29, 2021, the Board of Directors amended the existing compensatory arrangement with the CEO to increase his salary to $450,000, effective November 1, 2021. On January 4, 2024, in connection with certain cost management efforts, the Company entered into a letter agreement with the CEO to amend the CEO’s employment agreement with the Company and to provide for a temporary 45% reduction to the CEO’s annual base salary, from $450,000 to $250,000, for a period of three months, effective as of January 1, 2024 through March 31, 2024. On April 1, 2024, the CEO extended the voluntary salary reduction with all terms and conditions withstanding until May 15, 2024. The CEO also agreed to waive any right to resign for “good reason” under his employment agreement with the Company as a result of the foregoing salary reduction. The CEO’s salary was restored to $450,000 on May 25, 2024. While the compensation committee determined that the CEO was eligible to receive a discretionary bonus in the amount of $500,000 with respect to his performance for fiscal 2023, on January 19, 2024, the CEO elected not to receive any cash incentive or other bonus for fiscal 2023, in light of the Company’s cash position.

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 H – SEGMENT INFORMATION

As detailed in Note B above, the Company hasthree reportable segments; (1) Therapeutic DNA Production Services, (2) MDx Testing Services, and (3) DNA Tagging and Security Products and Services. Resources are allocated by our CEO, COO CFO and CLO whom, collectively the Company has determined to be our CODM.

Information regarding operations by segment for the three-month period ended June 30, 2024 is as follows:

Information regarding operations by segment for the three-month period ended June 30, 2023 is as follows:

Information regarding operations by segment for the nine-month period ended June 30, 2024 is as follows:

NOTE H – SEGMENT INFORMATION, continued

Information regarding operations by segment for the nine-month period ended June 30, 2023 is as follows:

The following shows reconciliation of loss from segment operations to Corporate (loss) income for the three-month periods ended:

The following shows reconciliation of loss from segment operations to Corporate loss for the nine-month periods ended:

NOTE I – 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 (loss) on change in fair value of the warrants classified as a liability in the condensed consolidated statements of operations. For additional disclosures regarding methods and assumptions used in estimating fair values of these financial instruments, see Note B.

The following table presents the fair value of the Company’s financial instruments as of June 30, 2024 and summarizes the significant unobservable inputs in fair value measurement of Level 3 financial assets and liabilities as of June 30, 2024. The Company did not have any assets or liabilities categorized as Level 1 or 2 as of June 30, 2024.

The change in fair value of the Common Warrants, the Series A Warrants and the Private Common Warrants for the three-month period ended June 30, 2024 is summarized as follows:

The change in fair value of the Common Warrants, the Series A Warrants and the Private Common Warrants for the nine-month period ended June 30, 2024 is summarized as follows:

NOTE J – SUBSEQUENT EVENTS

Nasdaq Minimum Bid Requirement Deficiency Notification

On July 12, 2024, the Company received written notice (the “Notification Letter”) from the Listing Qualifications Department of Nasdaq notifying the Company that it is not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of thirty (30) consecutive business days. Based on the closing bid price of the Company’s Common Stock for the thirty (30) consecutive business days from May 28, 2024 to July 11, 2024, the Company no longer meets the minimum bid price requirement.

The Company intends to implement a reverse stock split of its outstanding securities, subject to shareholder approval, to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules and to comply with the provisions of the Series Warrants unless the Company otherwise regains compliance with the minimum bid price requirements by January 8, 2025, or if granted a 180-calendar day extension to the compliance period, by July 7, 2025.

August 2024 Special Shareholder Meeting

On August 2, 2024, the Company held the August 2024 Special Meeting to obtain Warrant Stockholder Approval for the May 2024 Series Warrants. At the August 2024 Special Meeting, an aggregate of 4,056,202 shares of the Company’s Common Stock were present in person or by proxy and entitled to vote, which did not constitute a quorum determined in accordance with the Company’s By-Laws, which requires a majority of the Company’s issued and outstanding shares of Common Stock. Accordingly, no action was taken with respect to the proposal presented at the August 2024 Special Meeting, and the August 2024 Special Meeting was adjourned.

Pursuant to the terms of the May 2024 Series Warrants, since the Company did not obtain Warrant Stockholder Approval at the Special Meeting, it is obligated to call a subsequent stockholder meeting to seek to obtain Warrant Stockholder Approval.