See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES
General
The accompanying condensed consolidated
financial statements as of December 31, 2018 and for the three month periods ended December 31, 2018 and 2017 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 generally accepted accounting principles 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-month period ended December 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2019. 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, 2018 and footnotes thereto included
in the Annual Report on Form 10-K of Applied DNA Sciences, Inc. (the “Company”) filed with the SEC on December 18,
2018.
The condensed consolidated balance sheet
as of September 30, 2018 contained herein has been derived from the audited consolidated financial statements as of September 30,
2018, but does not include all disclosures required by GAAP.
Business and Basis of Presentation
The Company is principally devoted to developing
and marketing DNA technology solutions in the United States, Europe and Asia. These solutions are used in, among other things,
supply chain security, brand protection and drug and biologic applications. To date, the Company has produced limited recurring
revenues from its products and services and has incurred expenses and has sustained losses. Consequently, its operations are subject
to all the risks inherent in the establishment and development of a biotechnology company.
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, and LineaRx, Inc. (“LRx”). Significant inter-company transactions
and balances have been eliminated in consolidation.
Inventories
Inventories, which consist primarily of
raw materials, 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.
Revenue Recognition
In May 2014, the FASB issued
accounting standard updates which clarified principles for recognizing revenue arising from contracts with customers (ASC 606)
and superseded most current revenue recognition guidance, including industry-specific guidance. 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. The new guidance
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 adopted the new
revenue recognition standard at the beginning of the first quarter of fiscal 2019, using the modified retrospective method of
adoption and applied the guidance to those contracts that were not completed as of September 30, 2018. Comparative financial
information for reporting periods beginning prior to October 1, 2018, has not been restated and continues to be reported
under the previous reporting guidance. Under the modified retrospective method of adoption, the cumulative effect of applying
the new standard is recorded at the date of initial application, with no restatement of the comparative prior periods
presented.
Based on the evaluation, the Company has identified
certain customer contracts, which will require different recognition under the new guidance. The Company has determined that
the revenue under certain of its research and development contracts should be recognized on an overtime cost-to-cost basis as
compared to straightline over the contract term. Also, the shipment to the Company’s cotton customer during fiscal 2018
that included extended payment terms and was included in deferred revenue as of September 30, 2018, would have met the
criteria under the new guidance to be recognized as revenue upon shipment. The Company has determined that the cumulative
effect adjustment to opening retained earnings in fiscal 2019 was approximately $494,000.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
Revenue Recognition
, continued
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.
Under the new accounting guidance, 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.
Impact
of Adoption
A summary and discussion of such cumulative effect adjustment and the impact on
current period financial statements of adopting Topic 606 is as follows:
|
|
Three months ended December 31, 2018
(unaudited)
|
|
|
|
prior U.S. GAAP
|
|
|
Topic 606 impact
|
|
|
as reported
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
704,972
|
|
|
$
|
(383,097
|
)
|
|
$
|
321,875
|
|
Service
|
|
$
|
570,075
|
|
|
|
(7,628
|
)
|
|
|
562,447
|
|
Total revenues
|
|
|
1,275,047
|
|
|
|
(390,725
|
)
|
|
|
884,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
156,818
|
|
|
|
(3,333
|
)
|
|
|
153,485
|
|
Loss from operations
|
|
|
(2,808,768
|
)
|
|
|
(387,391
|
)
|
|
|
(3,196,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaids and other current assets
|
|
$
|
625,490
|
|
|
$
|
(3,333
|
)
|
|
$
|
622,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholder's equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
$
|
1,484,963
|
|
|
$
|
(109,467
|
)
|
|
$
|
1,375,496
|
|
Accumulated Deficit
|
|
|
(251,001,046
|
)
|
|
|
(106,134
|
)
|
|
|
(251,107,180
|
)
|
Product Revenues and Authentication
Services
The Company’s PCR-produced linear DNA products, including
molecular taggants 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 a performance obligation for customers with contractual
terms that are one year or less and has elected the practical expedient. Nearly all of the Company’s sales contracts reflect
market pricing at the time the contract is executed, 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. We invoice customers upon shipment, and our collection terms range, on
average from 30 to 60 days.
The cotton ginning season in the United
States takes place between September and March each year; therefore, revenues from these customer contracts may be seasonal and
recognized primarily during the first and fourth quarters of the Company’s fiscal year.
Authentication Services
The Company recognizes revenue for authentication services upon
satisfying its promises to 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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
Revenue Recognition
, continued
Research and Development Services
The Company records revenue for its research
and development contracts using the over-time revenue recognition model as a customer is invoiced or performance is satisfied.
Revenue is primarily measured using the cost-to-cost method, which the Company believes best depicts the transfer of control to
the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio
of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Revenues
are recorded proportionally as costs are incurred. For contracts where the total costs cannot be estimated, revenues are recognized
for the actual costs incurred during a period until the remaining costs to complete a contract can be estimated. The Company has
elected to not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one
year or less.
Disaggregation of Revenue
The following table presents revenues disaggregated
by our business operations and timing of revenue recognition:
|
|
Three Month Period Ended:
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Research and development services (over-time)
|
|
$
|
473,178
|
|
|
$
|
221,863
|
|
Product and authentication services (point-in-time):
|
|
|
|
|
|
|
|
|
Supply chain
|
|
|
250,098
|
|
|
|
69,852
|
|
Asset marking
|
|
|
161,046
|
|
|
|
248,024
|
|
Large scale DNA production
|
|
|
-
|
|
|
|
107,938
|
|
Total
|
|
$
|
884,322
|
|
|
$
|
647,677
|
|
Contract balances
As of December 31, 2018, 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:
|
|
Balance sheet classification
|
|
October 1,
2018
|
|
|
December 31,
2018
|
|
|
$
change
|
|
Contract liabilities
|
|
Deferred revenue
|
|
$
|
1,356,502
|
|
|
$
|
1,375,496
|
|
|
$
|
18,994
|
|
For the three months ended December
31, 2018, the Company recognized $329,535 of revenue that was included in Contract liabilities as of October 1, 2018.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
Use of Estimates
The preparation of the financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. The most complex and subjective estimates include revenue recognition, recoverability
of long-lived assets, including the values assigned to goodwill, intangible assets and property and equipment, fair value calculations
for stock based compensation, allowance for doubtful accounts and management’s anticipated liquidity. Management reviews
its estimates on a regular basis and the effects of any material revisions are reflected in the condensed consolidated financial
statements in the period they are deemed necessary. Accordingly, actual results could differ from those estimates.
Income Taxes
The Company recognizes deferred tax liabilities
and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates
the degree to which tax assets and credit carry forwards will result in a benefit based on expected profitability by tax jurisdiction.
In its interim financial statements, the
Company follows the guidance in ASC 270, “Interim Reporting” and ASC 740 “Income Taxes”, whereby the Company
utilizes the expected annual effective tax rate in determining its income tax provisions for the interim periods. That rate differs
from U.S. statutory rates primarily as a result of valuation allowance related to the Company’s net operating loss carryforward
as a result of the historical losses of the Company.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
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 and warrants.
For the three month periods ended December
31, 2018 and 2017, 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 month periods ended December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
18,508,527
|
|
|
|
12,275,455
|
|
Stock options
|
|
|
6,177,214
|
|
|
|
5,304,411
|
|
|
|
|
24,685,741
|
|
|
|
17,579,866
|
|
Stock-Based Compensation
The Company accounts for stock-based compensation
for employees and directors in accordance with ASC 718, Compensation (“ASC 718”). ASC 718 requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their
fair values. Under the provisions of ASC 718, stock-based compensation costs are measured at the grant date, based on the fair
value of the award, and are recognized as expense over the employee’s requisite service period (generally the vesting period
of the equity grant). The fair value of the Company’s common stock options are estimated using the Black Scholes option-pricing
model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company
expenses stock-based compensation by using the straight-line method. In accordance with ASC 718 and, excess tax benefits realized
from the exercise of stock-based awards are classified as cash flows from operating activities. All excess tax benefits and tax
deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or benefit
in the condensed consolidated statements of operations.
The Company accounts for stock-based compensation
awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or
the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines
enumerated in ASU 2018-07.
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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
The Company’s revenues earned from sale of products and
services for the three month period ended December 31, 2018 included an aggregate of 27%, 23%, 14% and 12% from four customers.
These customers accounted for approximately 76% of the Company’s total accounts receivable at December 31, 2018. At December
31, 2018, one customer accounted for an aggregate of 67% of the Company’s total accounts receivable.
The Company’s revenues earned from
sale of products and services for the three month period ended December 31, 2017 included an aggregate of 37%, 22% and 17% from
three customers. One customer accounted for 88% of the Company’s total accounts receivable at December 31, 2017.
Recent Accounting Pronouncements
In
November 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-18, “Collaborative Arrangements
(Topic 808): Clarifying the Interaction between Topic 808 and Topic 606” (“ASU 2018-18”). The amendments in this
update clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under
Topic 606. ASU 2018-18 is effective for public business entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Early adoption is permitted.
The Company is currently assessing the impact of ASU 2018-18
on its condensed consolidated financial statements.
In June 2018, the FASB issued ASU
2018-07, Compensation – “Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment
Accounting”, which addresses aspects of the accounting for nonemployee share-based payment transactions. This
pronouncement is effective for annual reporting periods and interim periods within those annual periods beginning after
December 15, 2019. The Company early adopted ASU 2018-07 on October 1, 2018 using the modified retrospective transition
approach. The cumulative effect adjustment to opening retained earnings was not material.
In July 2017, the FASB issued a two-part
ASU No. 2017-11, I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of
the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests With a Scope Exception (“ASU 2017-11”). ASU 2017-11 amends guidance in FASB ASC
260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments
in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features)
with down round features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite deferral of certain provisions
of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have
an accounting effect. ASU 2017-11 is effective for public business entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of
adopting this guidance.
In May 2017, FASB issued ASU 2017-09, Compensation
– “Stock Compensation (Topic 718): Scope of Modification Accounting”
,
which provides guidance about
which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic
718. This pronouncement is effective for annual reporting periods and interim periods within those annual periods beginning after
December 15, 2017. Early adoption is permitted. The Company adopted ASU 2017-09 during the three months ended December 31, 2018
and it did not have a material impact on its condensed consolidated financial statements and related disclosures.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
,
continued
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).
The purpose of the amendment is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from
the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s
goodwill with the carrying amount of that goodwill. For public entities, the amendments in ASU 2017-04 are effective for interim
and annual reporting periods beginning after December 15, 2019. The Company is currently assessing the impact of ASU 2017-04
on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842).” The objective of this update is to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods
and is to be applied utilizing a modified retrospective approach. The Company is currently evaluating the new guidance to determine
the impact it may have on its condensed consolidated financial statements.
NOTE B — GOING CONCERN AND MANAGEMENT’S
PLAN
The Company has recurring net losses, which
have resulted in an accumulated deficit of $251,107,180 as of December 31, 2018. The Company incurred a net loss of $3,234,320
and generated negative operating cash flow of $1,513,668 for the three-month period ended December 31, 2018. The Company also had
working capital of $1,866,846 and cash and cash equivalents of $3,137,844 as of December 31, 2018. These factors raise substantial
doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements.
The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its
business plan, raise capital, and generate revenues. The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
The Company’s current capital resources
include cash and cash equivalents, accounts receivable, and inventories. Historically, the Company has financed its operations
principally from the sale of equity and equity-linked securities.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE B — GOING CONCERN AND MANAGEMENT’S PLAN
(continued)
On January 29th and 30th, 2019, the
Company received written notices from the Listing Qualifications Department of The NASDAQ Stock Market notifying it that the
Company was not in compliance with the minimum bid price requirements as well as the market value of listed securities
requirements, or the alternative standards of the Nasdaq listing rule which requires the Company to have minimum stockholders
equity of $2.5 million, or for it to have had net income from continuing operations of at least $500 thousand in the latest
fiscal year or in two of the three last fiscal years. These notices do not impact the Company’s listing on the Nasdaq
Capital market at this time. Both notification letters state that the Company has 180 calendar days, or until July 29, 2019
to regain compliance. There is the possibility for an additional 180-day compliance period for the bid price compliance
violation. However, no additional compliance period is applicable to the market value noncompliance.
The Company intends to monitor the closing bid price of its common stock and may, if appropriate, consider
implementing available options, including, but not limited to, implementing a reverse stock split of its outstanding securities,
to regain compliance with the minimum bid price requirement under the Nasdaq Listing Rules. The Company will also consider available
options to resolve the other listing deficiencies and regain compliance with all applicable Nasdaq rules.
NOTE C — INVENTORIES
Inventories consist of the following:
|
|
December 31,
2018
|
|
|
September 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
172,768
|
|
|
$
|
147,984
|
|
Finished goods
|
|
|
52,521
|
|
|
|
73,385
|
|
Total
|
|
$
|
225,289
|
|
|
$
|
221,369
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE D — ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
Accounts payable and accrued liabilities
are as follows:
|
|
December 31,
2018
|
|
|
September 30,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Accounts payable
|
|
$
|
944,096
|
|
|
$
|
500,849
|
|
Accrued salaries payable
|
|
|
266,494
|
|
|
|
401,130
|
|
Other accrued expenses
|
|
|
147,122
|
|
|
|
63,188
|
|
Total
|
|
$
|
1,357,712
|
|
|
$
|
965,167
|
|
NOTE E — SECURED
CONVERTIBLE NOTES PAYABLE
On August 31, 2018, the Company entered
into a securities purchase agreement (the “Purchase Agreement”) with accredited investors and certain members of its
management team and Board of Directors (the “Purchasers”), pursuant to which the Company issued and sold an aggregate
of $1,650,000 in principal amount of secured convertible notes (the “August 31
st
Notes”) bearing interest
at a rate of 6% per annum. As part of the August 31
st
Notes, the Company’s management and Board of Directors purchased
August 31
st
Notes with a principal amount of $1,185,000.
The August 31
st
Notes are convertible,
in whole or in part, at any time, at the option of the Purchasers, into shares of the Company’s common stock, in an amount
determined by dividing the principal amount of each August 31
st
Note, together with any and all accrued and unpaid interest,
by the conversion price of $2.50. The Company has the right to require the Purchasers to convert all or any part of their August
31
st
Notes into shares of its Common Stock at a conversion price of $2.50 if the price of the Common Stock remains at
a closing price of $3.50 or more for a period of twenty consecutive trading days.
Upon any Change in Control (as defined
in the August 31
st
Notes), the Purchasers have the right to require the Company to redeem the August 31
st
Notes, in whole or in part, at a redemption price equal to such August 31
st
Notes’ outstanding principal balance
plus accrued interest.
The August 31
st
Notes contain
certain events of default that are customarily included in financing of this nature. If an event of default occurs, the Purchasers
may require the Company to redeem the August 31
st
Notes, in whole or in part, at a redemption price equal to such notes’
outstanding principal balance plus accrued interest.
The August 31
st
Notes bear interest
at the rate of 6% per annum, payable semi-annually in cash or in kind, at the Company’s option, and are due and payable in
full on August 30, 2021. Until the principal and accrued but unpaid interest under the August 31
st
Notes is paid in
full, or converted into shares of common stock pursuant to their terms, the Company’s obligations under the August 31
st
Notes will be secured by a lien on substantially all assets of the Company (excluding certain cash accounts) and the assets of
APDN (B.V.I.) Inc.
The Company has also entered into a registration
rights agreement, dated as of the date of the Purchase Agreement (the “Registration Rights Agreement”), with the Purchasers,
pursuant to which it has agreed to prepare and file a registration statement with the SEC to register under the Securities Act
of 1933, as amended (the “Securities Act”) resales from time to time of the common stock issued or issuable upon conversion
or redemption of the August 31
st
Notes. The Company is required to file a registration statement within 60 days of
receiving a demand registration request from holders of a majority of the outstanding principal balance of the August 31
st
Notes, and to cause the registration statement to be declared effective within 45 days (or 90 days if the registration statement
is reviewed by the SEC).
On November 29, 2018, the Company closed
a securities purchase agreement with its chairman, president and chief executive officer and one member of the management team,
pursuant to which the Company issued and sold an aggregate of $550,000 in principal amount of secured convertible notes bearing
interest at a rate of 6% per annum (the “November 29
th
Notes”). The November 29
th
Notes are
substantially similar to the Company’s August 31
st
Notes except with respect to maturity date, which is November
28, 2021 The November 29
th
Notes are secured on a pari passu basis with the same Company assets as the August 31
st
Notes.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE E — SECURED
CONVERTIBLE NOTES PAYABLE, continued
The Company recorded $64,848 to debt issuance
costs based on the cost incurred to complete the financing. During the three month period ended December 31, 2018, the Company
amortized $4,492 of debt issuance costs resulting in unamortized debt issuance costs of $58,876 and the secured notes payable of
$2,141,122 at December 31, 2018. The debt issuance cost will be amortized over the life of the Notes. During the three month period
ended December 31, 2018, the Company incurred approximately $27,120 of interest expense. The effective interest for the three month
period ended December 31, 2018 was 7.0%.
NOTE F — CAPITAL STOCK
On December 21, 2018, the Company entered
into an underwriting agreement (the “Agreement”) with Maxim Group LLC (“Maxim”), as the sole underwriter
and book running manager, with respect to the issuance and sale of an aggregate of 5,500,000 shares (the “Shares”)
of common stock, par value $0.001 per share, together with warrants to purchase an aggregate of 5,500,000 shares of common stock
(the “Warrants”) at an exercise price equal to $0.50 per share of common stock (the “Exercise Price”) in
an underwritten public offering. The public offering price for each Share together with the accompanying Warrant was $0.50. Pursuant
to the Agreement, the Company also granted Maxim a 45-day option to purchase an additional 825,000 Shares and/or additional Warrants
to purchase 825,000 Shares to cover any over-allotments made by the underwriters in the sale and distribution of the Shares and
Warrants. The gross proceeds of the offering, before deducting underwriter discounts and commissions and other offering expenses,
are $2.75 million, or approximately $3.16 million if the underwriters exercise in full their overallotment option. On
December 26, 2018, Maxim partially exercised its overallotment option and purchased an additional 800,000 Warrants at a price of
$0.0000001 per Warrant.
After deducting underwriting fees and other
expenses related to the offering, the aggregate net proceeds were approximately $2,262,000.
The Warrants are immediately exercisable
beginning on the date of issuance (the “Initial Exercise Date”). The Warrants will be exercisable for five years from
the Initial Exercise Date, but not thereafter.
The Warrants include an adjustment
provision that, subject to certain exceptions, reduces their exercise price if the Company issues common stock or common
stock equivalents at a price lower than the then-current exercise price of the Warrants, subject to a minimum exercise price
of $0.14 per share. The exercise price and number of the shares of the Company’s common stock issuable upon the
exercise of the Warrants will be subject to adjustment in the event of any stock dividends and splits, reverse stock split,
recapitalization, reorganization or similar transaction, as described therein. In addition, on or after any trading day 75
days after the closing date of the offering, if the daily volume weighted average price of the Company’s common stock
fails to exceed the Exercise Price, the aggregate number of warrant shares issuable in a cashless exercise shall equal the
product of (i) the aggregate number of warrant shares that would be issuable upon exercise of the Warrants if such exercise
were by means of a cash exercise and (ii) 0.70.
The offering closed on December 26, 2018.
As a result of this financing, the
exercise price of the 2,735,000 warrants issued during December 2017 was reduced to an exercise price of $0.44 per share in
accordance with the adjustment provision contained in the warrant agreement. The incremental change in fair value of these
warrants as a result of the triggering event was insignificant.
On January 25, 2019, the Company closed
on the underwriters’ partial exercise of its over-allotment option for 500,000 shares of common stock for gross proceeds
of $250,000.
The total number of common stock and warrants
issued under this offering, including the exercise of the over-allotment option was 6,000,000 and 6,300,000, respectively. The
gross proceeds to us were $3.0 million and net proceeds after deducting underwriting expenses and other estimated offering expenses
was approximately $2.5 million.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE G — STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes
in warrants outstanding. These warrants were granted in lieu of cash compensation for services performed or financing expenses
in connection with the sales of the Company’s common stock.
Transactions involving warrants (see Note
F) are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Balance at October 1, 2018
|
|
|
12,208,527
|
|
|
$
|
3.24
|
|
Granted
|
|
|
9,035,000
|
|
|
|
0.48
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
(2,735,000
|
)
|
|
|
2.00
|
|
Balance at December 31, 2018
|
|
|
18,508,527
|
|
|
$
|
2.08
|
|
Stock Options
In 2005, the Board of Directors and the
holders of a majority of the outstanding shares of common stock approved the 2005 Incentive Stock Plan (the “Incentive Plan”).
The number of shares of common stock that can be issued as stock awards and stock options thereunder is an aggregate of 8,333,333
shares and the number of shares of common stock that can be covered by awards made to any participant in any calendar year is 833,334
shares. The Incentive Plan’s expiration date is January 25, 2025.
The Incentive Plan is designed to retain
directors, executives, and selected employees and consultants by rewarding them for making contributions to the Company's success
with an award of options to purchase shares of common stock. As of December 31, 2018, a total of 275,752 shares have been issued
and options to purchase 6,698,115 shares have been granted under the Incentive Plan.
Transactions involving stock options issued
to employees and consultants are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Weighted Average Contractual Life (Years)
|
|
Outstanding at October 1, 2018
|
|
|
6,183,214
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,246,673
|
|
|
|
5.53
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(1,252,673
|
)
|
|
|
(5.54
|
)
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
6,177,214
|
|
|
$
|
3.13
|
|
|
|
|
|
|
|
6.15
|
|
Vested at December 31, 2018
|
|
|
5,511,025
|
|
|
$
|
3.29
|
|
|
$
|
-
|
|
|
|
7.05
|
|
Non-vested at December 31, 2018
|
|
|
666,189
|
|
|
$
|
1.76
|
|
|
$
|
-
|
|
|
|
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE G — STOCK OPTIONS AND WARRANTS
(continued)
Stock Options
, continued
The Company uses the Black Scholes Option
Pricing Model to determine the fair value of options granted. The following significant weighted average assumptions in the Black
Scholes Option Pricing Model were utilized to estimate the fair value of share based payment awards during the three month periods
ended December 31, 2018 and 2017:
|
|
Three
Month Period
Ended
December 31, 2018
|
|
|
Three
Month Period
Ended
December 31, 2017
|
|
Stock price
|
|
$
|
1.32
|
|
|
$
|
2.21
|
|
Exercise price
|
|
$
|
5.53
|
|
|
$
|
1.64
|
|
Expected term, years
|
|
|
2.43
|
|
|
|
8.89
|
|
Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Volatility
|
|
|
72
|
%
|
|
|
125
|
%
|
Risk free rate
|
|
|
2.84
|
%
|
|
|
2.36
|
%
|
The Company recorded $490,244 and $231,113
as stock compensation expense for the three-month periods ended December 31, 2018 and 2017, respectively. As of December 31, 2018,
unrecorded compensation cost related to non-vested awards was $347,592, which is expected to be recognized over a weighted average
period of approximately 0.32 years. The weighted average grant date fair value per share for options granted during the three month
period ended December 31, 2018 was $0.15.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2018
(unaudited)
NOTE H — COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under an
operating lease in Stony Brook, New York for its corporate headquarters. The lease is for a 30,000 square foot building. The term
of the lease commenced on June 15, 2013 and expired on May 31, 2016, with the option to extend the lease for two additional three-year
periods. The Company has exercised its option to extend the lease for one additional three-year period ending May 31, 2019. The
base rent during the additional three-year period is $458,098 per annum. In addition to the office space, the Company also has
1,500 square feet of laboratory space. The term of the lease commenced on November 1, 2015 and expired on October 31, 2018. Effective
November 20, 2017, the Company renewed this lease for one additional year, ending October 31, 2018. This lease is currently month
to month. The Company set up a satellite testing facility in Ahmedabad, India during fiscal 2018. On November 17, 2017, it leased
1,108 square feet for a three-year term beginning November 1, 2017. The base rent is approximately $6,500 per annum.
Total rent expense for the three month
periods ended December 31, 2018 and 2017 were $129,193 and $133,216, respectively.
Employment Agreement
The
Company has an employment agreement with Dr. James Hayward, its Chief Executive Officer (“CEO”) effective July
1, 2016. The initial term was through June 30, 2017, with automatic one-year renewal periods.
As of June 30,
2018, the employment contract renewed for an additional year.
Under the agreement,
the CEO will be eligible for a special cash incentive bonus of up to $800,000, $300,000 of which will be payable if and when
annual revenue reaches $8 million and $100,000 of which would be payable for each $2 million of annual revenue in excess of
$8 million. The CEO’s annual salary under the agreement was $400,000.
Effective May 7, 2016, the CEO’s
annual salary was voluntarily reduced by $100,000. Effective May 20, 2017, the CEO’s annual salary was voluntarily reduced
by an additional $50,000. Accordingly, his current annual base salary as of December 31, 2018 is $250,000.
Effective March 15, 2018, the Compensation
Committee of the Company’s Board of Directors, approved a bonus of $121,125 that would be payable to the CEO when the Company
reaches $3,000,000 in revenues for two consecutive quarters or $12,000,000 in revenues for a fiscal year, provided that the CEO
is still employed by the Company on such date (the “Revenue Bonus”). Effective May 2, 2018, the Compensation Committee
of the Company’s Board of Directors, increased the amount of the Revenue Bonus to $403,623. The accrual for the Revenue Bonus
of $397,812 is recorded to long term accrued liabilities on the balance sheet as of December 31, 2018.
Effective December 27, 2018, the compensation
committee approved a bonus opportunity of $150,000 for the calendar year-ended December 31, 2019 that would be payable to the CEO
under the same terms as described above.
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 I – GEOGRAPHIC AREA
INFORMATION
Net revenues by geographic location of
customers are as follows:
Three Month Period Ended December 31,
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
567,215
|
|
|
$
|
292,730
|
|
Europe
|
|
|
150,669
|
|
|
|
191,827
|
|
Asia and other
|
|
|
166,438
|
|
|
|
163,120
|
|
Total
|
|
$
|
884,322
|
|
|
$
|
647,677
|
|