BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

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, and Applied DNA Sciences India Private Limited, ADCL and its majority-owned subsidiary, LineaRx, Inc. (“LRx”). Significant inter-company transactions and balances have been eliminated in consolidation. The condensed consolidated balance sheet as of September 30, 2020 contained herein has been derived from the audited consolidated financial statements as of September 30, 2020 but does not include all disclosures required by GAAP.

COVID-19 Risks and Uncertainties

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which has spread throughout the world. The Company is monitoring this situation, and it is unable to predict the impact that COVID-19 will have on the Company’s future financial position and operating results due to numerous uncertainties. The Company believes that the COVID-19 pandemic adversely impacted the global textile industry, which has resulted in a reduction of textile related revenues, specifically as it relates to our cotton customer contract. On March 7, 2020 the Governor of New York declared a health emergency and issued an order (as amended) to close all nonessential businesses, which was followed by a phased reopening. Portions of the Company’s business were deemed to be an essential business, such as its government and pharmaceutical contracts, as well as its vaccine and diagnostic candidate development. However, the Company has experienced, and may continue to experience in the future, facility closures related to its “nonessential” businesses, and pursuant to the government order, the Company reduced the scope of its operations. The Company received a loan of approximately $847,000 on May 1, 2020 from Bank of America as lender pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As disclosed in Note E, the PPP loan was fully forgiven during February 2021.

As a result of COVID-19, the Company has experienced a decline in revenues from non-biological tagging and related services, primarily as it relates to its cotton customer contract. Historically revenues from the Company’s cotton customer contract are seasonal and recognized primarily during the Company’s first and fourth fiscal quarters.Due to the impacts of the COVID-19 global pandemic, the Company did not recognize revenue for the shipment of DNA concentrate relating to its cotton customer contract during the three or nine-month periods ended June 30, 2021. However, the Company has experienced an increase in its Biotherapeutic Contract Research and Manufacturing business as a result of COVID-19, specifically as it relates the Company’s COVID-19 Diagnostic Testing and COVID-19 Surveillance Testing. Due to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on the Company’s future operations and liquidity is uncertain as of the date of this Quarterly Report.

Revenue Recognition

The Company follows Financial Accounting Standards Board (“FASB”) issued accounting standard updates which clarify the principles for recognizing revenue arising from contracts with customers (“ASC 606” or “Topic 606”).

Revenue Recognition, continued

The core principle of the revenue standard is that an entity recognizes revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 applies a five-step model for revenue measurement and recognition and also requires increased disclosures including the nature, amount, timing, and uncertainty of revenue and cash flows related to contracts with clients.

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

The Company recognizes revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration it expects to receive for those goods or services, including any variable consideration.

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

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

Product Revenues and Authentication Services

The Company’s PCR-produced linear DNA products are manufactured in accordance with contracts with customers. The Company recognizes revenue upon satisfying its promises to transfer goods or services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time the Company transfers control of the goods to the customer, which in nearly all cases is when title to and risk of loss of the goods transfer to the customer. The timing of transfer of title and risk of loss is dictated by customary or explicitly stated contract terms. The Company does not consider payment terms of a performance obligation for customers with contractual terms that are one year or less and has elected the practical expedient. Nearly all the Company’s sales contracts reflect market pricing at the time the contract is executed, or are one year or less, and generally provide for shipment within 30 to 60 days after the price has been agreed upon with the customer. The Company invoices customers upon shipment, and its collection terms range, on average, from 30 to 60 days.

Linea^TM COVID-19 Assay Kit Contract

Under the Company’s Linea^TM COVID-19 Assay Kit contract, the customer purchases the Company’s COVID-19 Assay Kits and related consumables for the laboratory equipment. The customer also has the right to use certain laboratory equipment solely for the processing of the Company’s COVID-19 Assay Kit. The current contract has a term of twelve months and no minimum purchase requirements. The Company determines the amount of revenue allocated to the COVID-19 Assay Kits and related consumables based on the relative standalone selling prices. This contract has an embedded lease for the right to use the Company’s equipment and the Company determines the amount of lease revenue allocated to the equipment based on the relative standalone selling prices. The Company evaluated the terms of this embedded lease and determined its classification as an operating lease. The cost of the equipment is capitalized within property and equipment.

Equipment Lease Revenues

As discussed above, the Company leases certain laboratory equipment to a customer under its Linea^TM COVID-19 Assay Kit contract. The contract includes the sale of the Company’s Linea^TM COVID-19 Assay Kits (“COVID-19 Assay Kits”), as well as a lease for certain laboratory equipment for the processing of the COVID-19 Assay Kits. Revenues for the lease of equipment under this contract are recognized as an operating lease as the equipment is being utilized by the customer. This contract provides the customer the right to use the equipment for the term of the contract solely for the purpose of processing the Company’s COVID-19 Assay Kits. Lease revenue from this contract is presented in product revenues in the Company’s condensed consolidated statement of operations. Lease revenue was $43,960 and $150,048, respectively for the three and nine-month periods ended June 30, 2021. This performance obligation is satisfied over-time, as the equipment is being utilized by the customer to process the Company’s COVID-19 Assay Kits.

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

Authentication Services

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

Clinical Laboratory Testing Services

The Company records revenue for its clinical laboratory testing service contracts, which includes its COVID-19 Surveillance Testing, upon satisfying its promise to provide services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time that Company services are complete, which in nearly all cases is when the testing results are released to the customer.

Research and Development Services

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

Revenues are recorded proportionally as costs are incurred. For contracts where the total costs cannot be estimated, revenues are recognized for the actual costs incurred during a period until the remaining costs to complete a contract can be estimated. The Company has elected 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:


	Three Month Period Ended:
	June 30,		June 30,
	2021		2020
Research and development services (over-time)	$	197,812	$	343,624
Equipment lease services (over-time)		43,960		—
Clinical laboratory testing services (point-in-time)		826,613		—
Product and authentication services (point-in-time):
Supply chain		23,947		4,358
Asset marking		113,721		83,534
Large scale DNA production		—		—
Diagnostic kits		494,267		—
Total	$	1,700,320	$	431,516

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


	Nine Month Period Ended:
	June 30,		June 30,
	2021		2020
Research and development services (over-time)	$	586,285	$	996,597
Equipment lease services (over-time)		150,048		—
Clinical laboratory testing services (point-in-time)		3,154,263		—
Product and authentication services (point-in-time):
Supply chain		123,947		35,678
Asset marking		386,160		303,261
Large scale DNA production		—		281,972
Diagnostic kits		1,587,300		—
Total	$	5,988,003	$	1,617,508

Contract balances

As of June 30, 2021, the Company has entered into contracts with customers for which revenue has not yet been recognized. Consideration received from a customer prior to revenue recognition is recorded to a contract liability and is recognized as revenue when the Company satisfies the related performance obligations under the terms of the contract. The Company’s contract liabilities, which are reported as deferred revenue on the condensed consolidated balance sheet, consist almost entirely of research and development contracts where consideration has been received and the development services have not yet been fully performed.

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


		October 1,		June 30,		$
	Balance sheet classification	2020		2021		change
Contract liabilities	Deferred revenue	$	511,036	$	252,807	$	258,229

For the three and nine-month periods ended June 30, 2021, the Company recognized $83,082 and $275,249, respectively of revenue that was included in Contract liabilities as of October 1, 2020.

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives. The estimated useful life for computer equipment, lab equipment and furniture is 3 years and leasehold improvements are amortized over the shorter of their useful life or the remaining lease terms. As of June 30, 2021, and September 30, 2020 there was $177,533 and $785,541 of construction in progress that was included in lab equipment and leasehold improvements, respectively. In addition, as of June 30, 2021 there was $240,264 of laboratory equipment that is being leased to a customer. The lease was determined to be an operating lease.

Net Loss Per Share

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

For the three and nine-month periods ended June 30, 2021 and 2020, common stock equivalent shares are excluded from the computation of the diluted loss per share as their effect would be anti-dilutive.

Securities that could potentially dilute basic net income per share in the future were not included in the computation of diluted net loss per share because to do so would have been anti-dilutive for the three and nine-month periods ended June 30, 2021 and 2020 are as follows:


	2021	2020
Warrants	745,268	1,213,501
Stock options	452,485	321,357
Secured convertible notes	—	70,963
	1,197,753	1,605,821

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, 2021 and September 30, 2020, the Company had cash and cash equivalents of approximately $11,484,000 and $7,300,000, respectively in excess of the FDIC insurance limit.

The Company’s revenues earned from sale of products and services for the three-month period ended June 30, 2021 included an aggregate of 30% from one customer. The Company’s revenues earned from sale of products and services for the nine-month period ended June 30, 2021 included an aggregate of 28% and 12% from two customers, respectively.

The Company’s revenues earned from sale of products and services for the three-month period ended June 30, 2020 included an aggregate of 10%, 17% and 42% from three customers, respectively.

The Company’s revenues earned from sales of product and services for the nine-month period ended June 30, 2020 included an aggregate of 10%, 11%, 13%, 13% and 15% from five customers, respectively.

Two customers accounted for 47% of the Company’s accounts receivable at June 30, 2021. Four customers accounted for 74% of the Company’s accounts receivable at September 30, 2020.