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
See the accompanying notes to the unaudited
condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE A — NATURE OF THE BUSINESS
Applied DNA Sciences, Inc. (“Applied
DNA,” or the “Company”) develops and markets DNA-based technology solutions utilizing its LinearDNATM
large-scale polymerase chain reaction (“PCR”) based manufacturing platform which is capable of producing large scale
DNA. The Company’s proprietary platform produces large quantities of DNA for use in the nucleic acid-based in vitro diagnostics
and preclinical nucleic-acid based drug development and manufacturing markets including its patent-pending diagnostic (LineaTM
COVID-19 Assay Kit) used to detect the presence of SARS-COV-2. The Company also produces large quantities of DNA for supply
chain security, anti-counterfeiting and anti-theft applications. The Company is also developing its invasive circulating tumor
cell capture and identification technology (“iCTC Technology”) which uses a patented functional assay to capture live
invasive circulating tumor cell and associated lymphocytes that can be identified and expanded for further analysis. Applied DNA’s
LinearDNATM PCR platform is capable of producing large scale DNA.
Applied DNA is currently engaged in the
large scale production of DNA via its LinearDNATM platform for two primary lines of services:
Biotherapeutic Contract Research and
Manufacturing
The Company’s patented continuous
flow PCR systems and other proprietary PCR-based production technologies allow for the large-scale production of specific DNA
sequences. The Company has the ability to manufacture DNA sequences for use in nucleic acid-based therapeutics such as adoptive
cell therapies (CAR T and TCR therapies), DNA vaccines, RNA therapies, gene therapy and nucleic acid-based in vitro diagnostics.
|
·
|
Nucleic Acid Therapeutic and Diagnostic
Manufacturing: The Company uses its LinearDNATM platform to rapidly produce customized DNA for use by its
customers engaged in preclinical nucleic acid-based drug development. Through the Company’s proprietary technology it
produces large quantities of DNA used in various nucleic acid-based drug candidates including adoptive cell therapies,
vaccines (including anti-viral and cancer), gene therapies, RNA-based therapies, clustered regularly interspaced short
palindromic repeats (CRISPR) based therapies and other nucleic acid-based therapies. In addition, the Company uses its
LinearDNATM platform to produce very large gram-scale quantities of DNA for the in vitro diagnostic market where
the Company’s DNA is used for both commercially available diagnostics and diagnostics under development. The
Company has also developed a patent-pending nucleic acid-based in vitro diagnostic (LineaTM COVID-19 Assay Kit) to
detect the presence of SARS-CoV-2 (the virus that causes COVID-19) RNA in patient specimens. During April 2020, the Company
entered into an agreement with Stony Brook University Hospital for the validation of its LineaTM COVID-19 Assay
Kit. On May 13, 2020 the Company received Emergency Use Authorization (“EUA”) from the FDA for the clinical use
of the Linea COVID-19 Assay Kit for the qualitative detection of nucleic acid from SARS-CoV-2 in respiratory specimens
including anterior nasal swabs, self-collected at a healthcare location or collected by a healthcare worker, and
nasopharyngeal and oropharyngeal swabs, mid-turbinate nasal swabs, nasopharyngeal washes/aspirates or nasal
aspirates, and bronchoalveolar lavage specimens collected by a healthcare worker from individuals who are suspected of
COVID-19 by their healthcare provider. Under the EUA, testing is limited to laboratories certified under the Clinical
Laboratory Improvement Amendments of 1988, 42 U.S.C. §263a, that meet requirements to perform high complexity tests
which certification the Company has applied for but has not yet obtained. Subsequently, during July 2020, the
Company was granted two EUA amendments that expand the installed base of PCR equipment platforms on which the Company’s
LineaTM COVID-19 Assay Kit can be processed and increases the throughput of the LineaTM COVID-19 Assay
Kit through the use of automated RNA extraction. The scope of the EUA, as amended, is expressly limited to use consistent
with the Instructions for Use by authorized laboratories, certified under the Clinical Laboratory Improvement Amendments of
1988 (CLIA) to perform high complexity tests. The EUA will be effective until the declaration that circumstances exist
justifying the authorization of the emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 is
terminated or until the EUA’s prior termination or revocation. The Company’s LineaTM COVID-19 Assay
Kit has not been FDA cleared or approved, and the EUA’s limited authorization is only for the detection of nucleic acid
from SARS-CoV-2, not for any other viruses or pathogens.
|
|
·
|
Contract Research: The Company provides preclinical contract research services for the preclinical nucleic acid-based therapeutic markets. The Company works with biotech and pharmaceutical companies to adapt plasmid-based and/or viral transduction-based preclinical biotherapeutics into PCR produced linear DNA-based forms that can be manufactured on its LinearDNATM platform. In addition, the Company provides contract research services to RNA therapeutic biotechnology customers for preclinical studies. These services include the design, development and manufacture of PCR-produced DNA templates for RNA therapeutic candidates.
|
Non-Biological Tagging and Related Services
The Company’s supply chain security
business allows its customers to use non-biologic DNA (molecular) tags, manufactured via its LinearDNATM platform, to
mark objects, and then identify these objects by detecting the absence or presence of the molecular tag. The Company’s core
products include:
|
·
|
SigNature® Molecular Tags produced by the Company’s LinearDNATM platform, provide an approach to authenticate goods within large and complex supply chains for materials such as cotton, and leather, in-home textiles and apparel, pharmaceuticals and nutraceuticals, cannabis and other products.
|
|
·
|
SigNify® IF portable DNA readers and SigNify consumable reagent test kits provide definitive real-time authentication of molecular tags in the field, providing a front-line solution for supply chain integrity backed with forensic-level molecular tag authentication. Applied DNA’s software platform enables customers to track materials throughout a supply chain or product life.
|
|
·
|
CertainT® trademark indicates the use of Applied DNA’s tagging, testing and tracking platforms and solutions, enabling manufacturers, brands and trade organizations to convey proof of their product claims.
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE A — NATURE OF THE BUSINESS (continued)
iCTC Technology
The Company recently acquired technology
that uses a patented functional assay to capture live invasive circulating tumor cell and associated lymphocytes. Currently, the
Company’s iCTC Technology is being used in a human cancer drug candidate clinical trial. The Company seeks to further develop
and commercialize this technology and to potentially integrate aspects of the iCTC Technology with the LinearDNATM platform
for cancer research and nucleic-acid based drug development.
Clinical Testing Laboratory
On June 12, 2020 the Company formed Applied DNA Clinical Labs,
LLC (“ADCL”) as a wholly owned subsidiary of Applied DNA. Under ADCL, the Company has applied to the New York State
Department of Health for all necessary licensing to operate a New York State clinical diagnostics laboratory. These applications
are currently pending. Through ADCL, the Company seeks to further commercialize its EUA approved Linea COVID-19 Assay Kit and its
iCTC Technology.
NOTE B — BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES
Interim Financial Statements
The accompanying condensed consolidated
financial statements as of June 30, 2020 and for the three and nine month periods ended June 30, 2020 and 2019 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, 2020 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2020. 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, 2019 and footnotes thereto
included in the Annual Report on Form 10-K of the Company filed with the SEC on December 12, 2019, as amended.
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, Applied DNA Clinical Labs LLC and its majority-owned subsidiary, LineaRx,
Inc. (“LRx”). Applied DNA Clinical Labs LLC was formed in Delaware on June 12, 2020. Significant inter-company transactions
and balances have been eliminated in consolidation. To facilitate comparison of information across periods, certain reclassifications
have been made to prior year amounts to conform to the current year’s presentation. The condensed consolidated balance sheet
as of September 30, 2019 contained herein has been derived from the audited consolidated financial statements as of September 30,
2019 but does not include all disclosures required by GAAP.
On October 31, 2019, the Company filed
a Certificate of Amendment of its Certificate of Incorporation with the Secretary of State of the State of Delaware that effected
a one-for-forty (1:40) reverse stock split of its common stock, par value $.001 per share (“Common Stock”), effective
November 1, 2019. All warrant, option, share, and per share information in the condensed consolidated financial statements gives
retroactive effect to a one-for-forty reverse stock split that was affected on November 1, 2019.
Liquidity
The Company has recurring net losses, which
have resulted in an accumulated deficit of $265,712,717 as of June 30, 2020. The Company incurred a net loss of $8,907,128 and
generated negative operating cash flow of $8,159,954 for the nine month period ended June 30, 2020. At June 30, 2020 the Company
had cash and cash equivalents of $10,924,968 and working capital of $9,707,376.
The Company has historically financed its
activities through the sale of Common Stock and warrants. Through June 30, 2020, the Company has dedicated most of its financial
resources to research and development, including the development and validation of its own technologies as well as, advancing its
intellectual property, and general and administrative activities.
As discussed in Note F, on November 15,
2019, the Company closed on an underwritten public offering of 2,285,000 shares of Common Stock and warrants to purchase up to
an aggregate of 2,285,000 shares of Common Stock. Each share of Common Stock was sold together with one warrant to purchase one
share of Common Stock at a combined effective price to the public of $5.25 per share and accompanying warrant. Gross proceeds,
before underwriting discounts and commissions and estimated offering expenses, were approximately $12.0 million. After deducting
underwriting discounts and commissions and other offering expenses, the total net proceeds were $10.5 million. In addition, during
the nine month period ended June 30, 2020, 1,475,204 of these warrants were exercised, resulting in net proceeds to the Company
of approximately $7.2 million. Subsequent to June 30, 2020 an additional $852 thousand of net proceeds was received from the exercise
of these warrants.
The Company expects to finance its operations
primarily through cash received from the November 2019 underwritten public offering and the subsequent warrant exercises, discussed
above, as well as collection of its accounts receivable. The Company estimates that it will have sufficient cash and cash equivalents
to fund operations for the next twelve months from the date of filing of this quarterly report. 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
June 30, 2020
(unaudited)
NOTE B — BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES (continued)
The Company may require additional funds
to complete the continued development of its products, product manufacturing, and to fund expected additional losses from operations
until revenues are sufficient to cover its operating expenses. In addition, if the Company is successful with any of its preclinical
vaccine candidates, the Company would require additional funds to complete the vaccine candidate development. If revenues are not
sufficient to cover the Company’s operating expenses, and if the Company is not successful in obtaining the necessary additional
financing, the Company will most likely be forced to reduce operations.
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 continues to spread
throughout the United States. The Company is monitoring this, and although operations have not been materially affected by
the COVID-19 outbreak as of and for the three and nine months ended June 30, 2020, we are unable to predict the impact
that COVID-19 will have on our 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 may have resulted in a
reduction of textile related revenues. 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, we have experienced, and may continue to experience in the
future, facility closures related to our “nonessential” businesses, and pursuant to the government order, the
Company reduced the scope of its operations. As
discussed in Note E below, the Company received a loan of approximately $847 thousand 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”) (See Note E for further details).
As a result of COVID-19 the Company has
experienced a decline in revenues from non-biological tagging and related services. 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. While there could ultimately be a material impact on operations and liquidity of
the Company, at the time of issuance, the impact could not be determined.
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 and convertible promissory notes, contingencies, 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.
The impact of the COVID-19 pandemic as
of and for the three and nine months ended June 30, 2020 did not have a material impact on the valuation of the Company’s
intangible assets or reporting units that contain goodwill. As such, we concluded that a triggering event, which would require
interim impairment testing for any intangible assets, or reporting units that contain goodwill, did not occur. The Company will
continue to evaluate the nature and extent of impacts related to COVID-19 on its business and any impact they may have on management's
estimates. The duration and severity of the outbreak and its long-term impact on the Company’s business is uncertain at this
time.
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”).
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE B — BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES (continued)
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.
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 of 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. 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 are 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 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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE B — BASIS OF PRESENTATION
AND 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. 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:
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
Research and development services (over-time)
|
|
$
|
343,624
|
|
|
$
|
1,608,448
|
|
Product and authentication services (point-in-time):
|
|
|
|
|
|
|
|
|
Supply chain
|
|
|
4,358
|
|
|
|
161,926
|
|
Asset marking
|
|
|
83,534
|
|
|
|
140,562
|
|
Large scale DNA production
|
|
|
-
|
|
|
|
142,521
|
|
Total
|
|
$
|
431,516
|
|
|
$
|
2,053,457
|
|
|
|
Nine Month Period Ended:
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
Research and development services (over-time)
|
|
$
|
996,597
|
|
|
$
|
2,657,560
|
|
Product and authentication services (point-in-time):
|
|
|
|
|
|
|
|
|
Supply chain
|
|
|
35,678
|
|
|
|
406,543
|
|
Asset marking
|
|
|
303,261
|
|
|
|
469,035
|
|
Large scale DNA production
|
|
|
281,972
|
|
|
|
183,109
|
|
Total
|
|
$
|
1,617,508
|
|
|
$
|
3,716,247
|
|
Contract balances
As of June 30,
2020, 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,
2019
|
|
|
June 30,
2020
|
|
|
$
change
|
|
Contract liabilities
|
|
Deferred revenue
|
|
$
|
628,993
|
|
|
$
|
431,214
|
|
|
$
|
197,779
|
|
For the three
and nine month periods ended June 30, 2020, the Company recognized $252,658 and $610,933, respectively, of revenue that was included
in Contract liabilities as of October 1, 2019.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE B — BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES (continued)
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.
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 a valuation allowance related to the Company’s net operating loss carryforward
as a result of the historical losses of the Company.
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, 2020 and 2019, 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, 2020 and 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
1,213,501
|
|
|
|
423,089
|
|
Stock options
|
|
|
321,357
|
|
|
|
198,237
|
|
Secured convertible notes
|
|
|
70,963
|
|
|
|
104,865
|
|
|
|
|
1,605,821
|
|
|
|
726,191
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE B — BASIS OF PRESENTATION
AND SUMMARY OF ACCOUNTING POLICIES (continued)
Stock-Based Compensation
The Company accounts for stock-based compensation
for employees, directors and nonemployees in accordance with ASC 718, Compensation (“ASC 718”). ASC 718 requires all
share-based payments, 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 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 740, 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.
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.
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 revenue earned from sale of products 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.
The Company’s revenues earned from
sale of products and services for the three month period ended June 30, 2019 included an aggregate of 55% and 12% from two customers,
respectively. The Company’s revenues earned from sale of products and services for the nine month period ended June 30, 2019
included an aggregate of 37%, 20%, and 11% from three customers, respectively.
Four customers accounted for 37%, 16%,
17% and 11% of the Company’s accounts receivable at June 30, 2020 and one customer accounted for an aggregate of 77% of the
Company’s accounts receivable at September 30, 2019.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE B — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING
POLICIES (continued)
Recent Accounting Standards
In February 2016, the FASB issued ASU No.
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 adopted Topic 842 as of October 1, 2019 utilizing
the modified retrospective approach. The adoption of Topic 842 did not have a significant impact on its condensed consolidated
financial statements, as the Company does not currently have any long-term lease obligations. The Company has elected the short-term
lease measurement and recognition exemption as all of the Company’s leases are for twelve months or less.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE C — INVENTORIES
Inventories consist of the following:
|
|
June 30,
2020
|
|
|
September 30,
2019
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Raw materials
|
|
$
|
421,300
|
|
|
$
|
87,886
|
|
Finished goods
|
|
|
23,340
|
|
|
|
54,743
|
|
Total
|
|
$
|
444,640
|
|
|
$
|
142,629
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE D — ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
Accounts payable and accrued liabilities
are as follows:
|
|
June 30,
2020
|
|
|
September 30,
2019
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,131,427
|
|
|
$
|
1,152,103
|
|
Accrued salaries payable
|
|
|
305,630
|
|
|
|
319,260
|
|
Other accrued expenses
|
|
|
203,495
|
|
|
|
145,634
|
|
Total
|
|
$
|
1,640,552
|
|
|
$
|
1,616,997
|
|
NOTE E —NOTES PAYABLE
CARES Act Loan
The Company received a loan of approximately
$847 thousand on May 1, 2020 from Bank of America as lender pursuant to the PPP of the CARES Act.
All or a portion of the loan may be forgiven
by the U.S. Small Business Administration (“SBA”) upon application by the Company beginning 60 days but not later than
130 days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act,
loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered
utilities during the covered period as defined by the CARES Act. Applied DNA intends to use all proceeds from the loan to
retain employees, maintain payroll and make lease and utility payments.
For purposes of the CARES Act, payroll
costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven
amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees
with salaries of $100,000 or less annually are reduced by more than 25%. In the event the loan, or any portion thereof, is forgiven
pursuant to the PPP, the amount forgiven is applied to outstanding principal.
The loan matures on May 1, 2022 and bears
interest at a rate of 1% per annum. Payments of principal and interest commence in November 2020. The loan may be prepaid by the
Company at any time prior to maturity with no prepayment penalties.
Secured Convertible Notes Payable
During December 2019, the remaining outstanding
balance of the secured convertible notes payable, including accrued interest, entered into during August and November 2018 (the
“Existing Notes”), for a total of $107,802, was repaid by the Company.
During the three and nine month periods
ended June 30, 2020, the Company reclassified $0 and $35,625, respectively from accrued liabilities to senior secured notes payable
to represent interest due to noteholders that was paid in kind and therefore increased the convertible note balance outstanding
at June 30, 2020.
The Company incurred $64,608 of debt issuance
costs based on the cost incurred to issue the secured convertible notes payable that were issued during July 2019 (the “July
2019 Notes”). As disclosed in Note F, the holder of the July 2019 Notes also participated in the November 15, 2019 underwritten
public offering. During the three and nine month periods ended June 30, 2020 the Company amortized $6,691 and $19,195, respectively,
of debt issuance costs resulting in unamortized debt issuance costs of $40,503 and the secured notes payable of $1,492,292 at June
30, 2020. During the three and nine month period ended June 30, 2019 the Company amortized $4,826 and $13,947, respectively. The
debt issuance cost will be amortized over the life of the July 2019 Notes. During the three and nine month periods ended June 30,
2020, the Company incurred $22,677 and $67,707 of interest expense, respectively. The effective interest rate for the three and
nine month periods ended June 30, 2020 was 8.0%. During the three and nine month periods ended June 30, 2019, the Company incurred
$33,351 and $94,745, respectively of interest expense. The effective interest for the three and nine month periods ended June 30,
2019 was 7.0%.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE F — CAPITAL STOCK
On November 15, 2019, the Company closed
an underwritten public offering (the “Offering”) in which, pursuant to the Underwriting Agreement dated November
13, 2019 by and between the Company and Maxim Group LLC (“Maxim”), as Representative of the Underwriters, the Company
issued and sold 2,285,000 shares of the Company’s Common Stock and 2,285,000 accompanying warrants each with the right to
purchase one share of Common Stock at an exercise price of $5.25 per share (the “Common Warrants”). The shares of Common
Stock and accompanying Common Warrants were sold at a combined offering price of $5.25 before underwriting discounts. The Common
Stock and the Common Warrants are collectively referred to herein as the “Securities.” As part of the Offering, the
Company granted Maxim a 45-day option to purchase an additional 342,750 shares of Common Stock and/or additional Common Warrants
to purchase 342,750 shares of Common Stock (the “Option Warrants”, together with the Common Warrants, the “Warrants”)
at the public offering price, less discounts and commissions, to cover any over-allotments made by the Underwriters in the sale
and distribution of the Securities.
On December 17, 2019, the Company closed
on the Underwriters’ partial exercise of its over-allotment option for 342,750 Common Warrants for gross proceeds of $3,428.
The total number of Common Stock and Warrants
issued under this offering, including the exercise of the over-allotment option was 2,285,000 and 2,627,750, respectively. The
gross proceeds to us were approximately $12.0 million and net proceeds after deducting underwriting expenses and other estimated
offering expenses was approximately $10.5 million.
Pursuant to the Warrant Agreement, each
Common Warrant will be exercisable beginning on the date of issuance thereof and ending on November 15, 2024.
The Common 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 Common Warrants, subject to a minimum exercise price of
$1.47 per share.
Subject to limited exceptions, a holder
of a Common Warrant will not have the right to exercise any portion of its Common Warrant if the holder, together with its affiliates,
would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of Common Stock outstanding
immediately after giving effect to such exercise (the “Beneficial Ownership Limitation”); provided, however, that
upon 61 days’ prior notice to us, the holder may increase the Beneficial Ownership Limitation, provided that in no event
shall the Beneficial Ownership Limitation exceed 9.99%.
The exercise price and number of the shares
of Common Stock issuable upon the exercise of the Common Warrant will be subject to adjustment in the event of any stock dividends
and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Warrant Agreement.
As a result of this financing, the exercise
price of the 8,375 remaining warrants issued during December 2018 was reduced to an exercise price of $5.60 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 $2,842.
During the nine-month period ended June
30, 2020, 1,475,204 of the Common Warrants were exercised, resulting in net proceeds to the Company of approximately $7.2 million.
Subsequent to June 30, 2020, an additional
174,582 warrants were exercised for total net proceeds, of approximately $852 thousand.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE G —WARRANTS AND STOCK OPTIONS
Warrants
The following table summarizes the changes
in warrants outstanding. These warrants were granted in lieu of cash compensation for services performed or as 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, 2019
|
|
|
263,592
|
|
|
$
|
131.12
|
|
Granted
|
|
|
2,636,125
|
|
|
|
5.25
|
|
Exercised
|
|
|
(1,475,204
|
)
|
|
|
5.25
|
|
Cancelled or expired
|
|
|
(211,012
|
)
|
|
|
135.01
|
|
Balance at June 30, 2020
|
|
|
1,213,501
|
|
|
$
|
10.03
|
|
Options
During the three month period ended June 30, 2020 the Company
granted a total of 20,895 options to officers of the Company. These options have a ten year term and vested immediately on the
date of grant. During the three month period ended June 30, 2020, the Company also granted a total of 80,628 options to certain
members of its board of directors as their annual compensation. These options have a ten year term and vest on the one year anniversary
of their grant date.
During the nine months ended June 30, 2020 the Company granted
a total of 41,620 options to Mr. Scott L. Anchin, a member of the Company’s board of directors for his consulting services
(see Note I). Also during the nine months ended June 30, 2020, the Company granted a total of 20,895 options to officers of the
Company, and the Company also granted a total of 80,628 options to certain members of its board of directors
as their annual compensation, in each case as detailed above.
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, 2017, 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. During November 2019, the Company extended this lease
until January 15, 2020. In addition to the office space, the Company also has 2,200 square feet of laboratory space. On January
20, 2020, the Company entered into an agreement to amend both of these leases, extending the term for the corporate headquarters
as well as the laboratory space until January 15, 2021, with a one-year renewal option. The Company also has a satellite testing
facility in Ahmedabad, India, which occupies 1,108 square feet for a three-year term beginning November 1, 2017. The base rent
is approximately $6,500 per annum. The Company’s total short-term lease obligation as of June 30, 2020 is $347,297.
The total rent expense for the three and
nine month periods ended June 30, 2020 were $150,353 and $437,603, respectively. Total rent expense for the three and nine month
periods ended June 30, 2019 were $129,250 and $387,672, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE H — COMMITMENTS AND CONTINGENCIES
(continued)
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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2020
(unaudited)
NOTE I — RELATED PARTY TRANSACTIONS
On December 12, 2019, the Company
entered into a consulting agreement, with Meadow Hill Place, LLC (“Meadow Hill”), a company wholly owned by Scott
L. Anchin (“Mr. Anchin”), a board member, whereby Meadow Hill will provide certain advisory services to the
Company. The initial term of the agreement ended on June 12, 2020. The agreement provided for compensation in the form of
both cash and equity. Meadow Hill was eligible to receive $125,000 for the initial six month term. In addition, in
satisfaction of the equity compensation portion of the agreement, (i) the Company granted an option to purchase 20,834 shares
of its Common Stock to Mr. Anchin on December 12, 2019 at an exercise price equal to $4.26 per share, which vested on June
12, 2020, and (ii) the Company granted an option to purchase 20,786 shares of its Common Stock to Mr. Anchin on January 2,
2020 at an exercise price equal to $4.43 per share, of which 9,121 vested on July 2, 2020. The consulting agreement was
completed on June 12, 2020 in full satisfaction of all obligations. As a result, the agreement was not extended and
therefore expired on June 12, 2020. As a result, 11,665 of the options granted on January 2, 2020, which were related to the
extension period, did not vest and were cancelled on June 12, 2020.