NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES
General
The accompanying condensed consolidated financial statements as of December 31, 2013 and for the three months ended December 31, 2013 and 2012 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 Rule 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, 2013 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 2014. The unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements as of and for the year ended September
30, 2013 and footnotes thereto included in the Company’s Annual Report on Form 10-K and Form 10-K/A filed with the
SEC.
The condensed consolidated balance sheet as of September 30, 2013 contained herein has been derived from the audited consolidated financial statements as of September 30, 2013, but do not include all disclosures required by GAAP.
Business and Basis of Presentation
On
September 16, 2002, Applied DNA Sciences, Inc. (the “Company”) was incorporated under the laws of the State of Nevada. Effective
December 17, 2008, the Company reincorporated from the State of Nevada to the State of Delaware. The Company is principally
devoted to developing DNA embedded biotechnology security solutions in the United States and Europe. To date, the
Company has had a limited operating history, and as a result, its operations have produced limited recurring
revenues from its services and products; it has incurred expenses and has sustained losses. Consequently, its operations
are subject to all the risks inherent in the establishment of a biotechnology company. For the period from inception through December
31, 2013, the Company has accumulated losses of $192,985,259.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Applied DNA Operations Management, Inc., APDN (B.V.I.) Inc. and Applied DNA Sciences Europe Limited, which currently have no operations.
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; recoverability of long-lived assets, including the value assigned to intangible assets and property and equipment, fair value calculations for warrants, contingencies and allowance for doubtful accounts. Management reviews its estimates on a regular basis and the effects of any material revisions are reflected in the condensed consolidated interim financial statements in the period they are deemed necessary. Accordingly, actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and/or service has been performed; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered or services provided and the collectability of those amounts. Provisions for allowances and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered, service has not been provided, or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered, the service has been provided, or no refund will be required. At December 31, 2013 and September 30, 2013, the Company recorded deferred revenue of $324,988 and $148,503, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition
, continued
Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer. Consideration received is allocated among the separate units of accounting based on their respective selling prices. The selling price for each unit is based on vendor-specific objective evidence, or VSOE, if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third party is available. The applicable revenue recognition criteria are then applied to each of the units.
Revenue for a government contract award, which supports our development efforts on specific projects, is recognized as milestones are achieved as per the contract. The Company recognized revenue of approximately $25,000 from this contract during the three months ended December 31, 2013.
Cash Equivalents
For the purpose of the accompanying unaudited condensed consolidated financial statements, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. At December 31, 2013 and September 30, 2013, the Company has an allowance for doubtful accounts of $52,415 and $62,415, respectively. The Company writes off receivables that are deemed uncollectible. The Company wrote-off $25,000 of accounts receivable that was previously reserved for during the three months ended December 31, 2013.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes include, but not limited to, accounting for intangibles, warrants, equity based compensation and depreciation and amortization.
The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all of the deferred tax asset will not be realized. During the year ended September 30, 2013 and the three months ended December 31, 2013, the Company incurred losses from operations. Based upon these results and the trends in the Company’s performance projected for the remainder of fiscal year 2014, it is more likely than not that the Company will not realize any benefit from the deferred tax assets recorded by the Company in previous periods. Management makes judgments as to the interpretation of tax laws that might be challenged upon an audit and cause changes to previously estimates of tax liability. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. The Company has identified its federal tax return and its state tax return in New York as “major” tax jurisdictions. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company condensed consolidated financial statements.
The Company’s evaluation was performed for tax years 2009 through 2012. The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. It is the Company’s policy to accrue interest and penalties on unrecognized tax benefits as components of income tax provision. The Company did not have any accrued interest or penalties as of December 31, 2013 and September 30, 2013.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
Property Plant and Equipment
Property plant and equipment are stated at cost and depreciated using the straight line method over their estimated useful lives. The estimated useful lives for computer equipment, lab equipment and furniture is 3 to 5 years and leasehold improvements are amortized over the shorter of their useful life or the lease term. Property plant and equipment consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
(unaudited)
|
|
|
September 30,
2013
|
|
Computer equipment
|
|
$
|
59,849
|
|
|
$
|
43,555
|
|
Lab equipment
|
|
|
734,629
|
|
|
|
657,735
|
|
Furniture
|
|
|
164,997
|
|
|
|
164,997
|
|
Leasehold improvements
|
|
|
248,931
|
|
|
|
239,337
|
|
Total
|
|
|
1,208,406
|
|
|
|
1,105,624
|
|
Accumulated depreciation
|
|
|
491,643
|
|
|
|
409,629
|
|
Property and equipment, net
|
|
$
|
716,763
|
|
|
$
|
695,995
|
|
Depreciation expense for the three months ended December 31, 2013and 2012 was $82,014 and $20,995, respectively
Impairment of Long-Lived Assets
The Company accounts for its long-lived assets in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”). ASC 360 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
Segment Information
The Company follows the provisions of ASC 280, Segment Reporting (“ASC 280”). ASC 280 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein, materially represents all of the financial information related to the Company’s single principal operating segment.
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 months ended December 31, 2013 and 2012, common stock equivalent shares are excluded from the computation of the diluted loss per share as their effect would be anti-dilutive.
Fully diluted shares outstanding were 931,778,806 and 783,834,587 for the three months ended December 31, 2013 and 2012, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
Stock Based Compensation
The
Company accounts for stock-based compensation 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 is measured
at the grant date, based on the fair value of the award, and is 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, excess tax benefits realized from the exercise of stock-based awards are classified in cash
flows from financing activities. The future realization of the reserved deferred tax assets related to these tax benefits associated
with the exercise of stock options will result in a credit to additional paid in capital if the related tax deduction reduces
taxes payable. The Company has elected the “with and without approach” regarding ordering of windfall tax benefits
to determine whether the windfall tax benefit did reduce taxes payable in the current year. Under this approach, the windfall
tax benefit would be recognized in additional paid-in-capital only if an incremental tax benefit is realized after considering
all other benefits presently available. Stock-based compensation expense recognized under ASC 718 for the three months
ended December 31, 2013 and 2012 was $765,546, and $417,866, respectively.
As of December 31, 2013, 189,984,972 employee stock options were outstanding with options to purchase 128,582,972 shares vested and exercisable.
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 temporary cash investments 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 months ended December 31, 2013 and 2012 included an aggregate of 11% and 65% from one and two customers of the Company’s total revenues, respectively. One and three customers accounted for 22% and 43% of the Company’s total accounts receivable at December 31, 2013 and September 30, 2013, respectively.
Research and Development
The Company accounts for research and development costs in accordance with the ASC730, Research and Development (“ASC 730”). Under ASC 730, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company incurred research and development expenses of $459,304 and $147,666 for the three month periods ended December 31, 2013 and 2012, respectively.
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred. The Company charged to operations $75,642 and $37,459 as advertising costs for the three month periods ended December 31, 2013 and 2012, respectively.
Intangible Assets
The Company amortizes its intangible assets using the straight-line method over their estimated period of benefit. The estimated useful life for patents is five years while other intellectual property uses a seven year useful life. The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of the Company’s intangible assets are subject to amortization.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments
The
Company’s financial instruments are primarily composed of cash, accounts receivable, accounts payable and accrued liabilities,
and warrants. The fair value of cash, accounts receivable, accounts payable and accrued liabilities, as reflected in the condensed
consolidated balance sheet, approximate its fair value due to the short-term maturity of these instruments.
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value
hierarchy:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or
liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.
For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who
report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable
inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance
department and are approved by the Chief Financial Officer.
As of December 31, 2013, there were no transfers in or out of Level 3 from other levels.
The
fair value of each warrant is estimated using the Binomial Lattice option pricing model. Significant observable and unobservable
inputs include stock price, exercise price, annual risk free rate, term, and expected volatility, and are classified within Level
3 of the valuation hierarchy. An increase or decrease in volatility, in isolation, can significantly increase or decrease the
fair value of the warrant. See Note H.
Recent Accounting Pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s unaudited condensed consolidated financial position, results of operations or cash flows.
Subsequent Events
The Company has evaluated events that occurred subsequent to the balance sheet date and through the date the financial statements were available to be issued. Other than those events disclosed in the notes to these condensed consolidated financial statements, management concluded that no additional subsequent events required disclosure in the condensed consolidated financial statements.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE B – LIQUIDITY AND MANAGEMENT’S PLAN
The Company incurred a net loss of $6,291,650 and generated negative operating cash flow of $2,066,448 for the three months ended December 31, 2013. However, the Company has attained positive working capital of $3,540,145 as of December 31, 2013.
Management
believes that the Company’s positive cash balance and working capital as of December 31, 2013 along with its current customer
base, projected cash flow and the minimum projected revenues for this remaining fiscal year will allow the Company to have
sufficient capital resources to meet projected cash flow requirements for the next twelve months from the filing date of this
report. However, if the Company does not meet its minimum revenue projections for this remaining fiscal year, the Company will
be required to seek additional capital. The Company is currently in discussions with investment bankers regarding
possible financing. However, the Company has no commitments for any future funding, and may not be able to obtain additional
financing or grants on terms acceptable to it, if at all, in the future. If the Company is unable to obtain additional capital
this could restrict its ability to grow. Financing transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. Even if the Company is able to raise the funds required, it is possible
that it could incur unexpected costs and expenses, fail to collect significant amounts owed to the Company, or experience unexpected
cash requirements that would force the Company to seek alternative financing.
NOTE C – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2013 and September 30, 2013 are as follows:
|
|
December 31,
|
|
|
|
|
|
|
2013
(unaudited)
|
|
|
September 30,
2013
|
|
Accounts payable
|
|
$
|
769,856
|
|
|
$
|
641,302
|
|
Accrued consulting fees
|
|
|
102,500
|
|
|
|
102,500
|
|
Accrued salaries payable
|
|
|
330,274
|
|
|
|
220,175
|
|
Other accrued expenses
|
|
|
7,344
|
|
|
|
3,000
|
|
Total
|
|
$
|
1,209,974
|
|
|
$
|
966,977
|
|
NOTE D – WARRANT LIABILITY
On
December 16, 2013, Crede CG III, Ltd (“Crede”) effected the cashless exercise of 10,695,187 Series A Warrants and
7,000,000 Series B Warrants. At December 16, 2013 (date of exercise), the Company determined the fair value of the
Warrants to be $2,455,042 using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common
Stock $0.18 per share; dividend yield 0%; expected term: 4.55 years; risk free interest rate: 1.55%; expected volatility of: 118.89%;
and an exercise price of $0.2431. The change in fair value of the warrant liability on the day of exercise amounted to
a loss of $1,288,752 and was included in the results of operations. Upon
exercise, the fair value of the Series A and 7,000,000 of the Series B Warrants were reclassified to equity.
As of December 31, 2013 the fair value of the remaining 22,411,764 Series B Warrants was $2,823,165. The fair value was determined using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.16 per share; dividend yield 0%; expected terms 4.55 years; risk free interest rate: 1.75%; expected volatility of: 119.09%; and the expected price at which holders are likely to exercise their Warrants of $0.2431 per share.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE E - CAPITAL STOCK
The Company is authorized to issue 1,350,000,000 shares of Common Stock as the result of a vote of stockholders conducted on January 27, 2012 which effected an increase in the authorized shares of Common Stock from 800,000,000 shares to 1,350,000,000 shares. In addition, the Company is authorized to issue 10,000,000 shares of preferred stock with a $0.001 par value per share. As of December 31, 2013 and September 30, 2013, there were 807,850,028 and 786,526,955 shares of Common Stock issued and outstanding, respectively, and no shares of preferred stock outstanding.
Common Stock Transactions during the Three Months Ended December 31, 2013:
On December 16, 2013, Crede effected the cashless exercise of 10,695,187 Series A Warrants and 7,000,000 Series B Warrants, and the Company thereupon issued to Crede an aggregate of 18,823,073 shares of its Common Stock.
On December 20, 2013, 2,500,000 shares of the Company’s Common Stock were issued in connection with a settlement resulting from the termination of a consulting agreement. The fair value of the Common Stock was determined using the Company’s stock price on December 20, 2013. The total fair value of $337,500 was charged to operations.
NOTE F - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the related prices for the shares of Common Stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses in connection with the sale of Common Stock.
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Weighted
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Exercise
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Average
|
|
|
Average
|
|
|
Prices
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
$
|
0.0400
|
|
|
|
3,000,000
|
|
|
|
1.66
|
|
|
$
|
0.0400
|
|
|
|
3,000,000
|
|
|
$
|
0.0400
|
|
$
|
0.0441
|
|
|
|
510,784
|
|
|
|
3.54
|
|
|
$
|
0.0441
|
|
|
|
510,784
|
|
|
$
|
0.0441
|
|
$
|
0.0475
|
|
|
|
3,789,489
|
|
|
|
4.54
|
|
|
$
|
0.0475
|
|
|
|
3,789,489
|
|
|
$
|
0.0475
|
|
$
|
0.0553
|
|
|
|
226,081
|
|
|
|
4.02
|
|
|
$
|
0.0553
|
|
|
|
226,081
|
|
|
$
|
0.0553
|
|
$
|
0.0600
|
|
|
|
2,000,000
|
|
|
|
0.14
|
|
|
$
|
0.0600
|
|
|
|
2,000,000
|
|
|
$
|
0.0600
|
|
$
|
0.0710
|
|
|
|
1,000,000
|
|
|
|
1.07
|
|
|
$
|
0.0710
|
|
|
|
1,000,000
|
|
|
$
|
0.0710
|
|
$
|
0.0900
|
|
|
|
6,900,000
|
|
|
|
2.67
|
|
|
$
|
0.0900
|
|
|
|
6,900,000
|
|
|
$
|
0.0900
|
|
$
|
0.1790
|
|
|
|
100,000
|
|
|
|
1.85
|
|
|
$
|
0.1790
|
|
|
|
100,000
|
|
|
$
|
0.1790
|
|
$
|
0.2140
|
|
|
|
100,000
|
|
|
|
2.35
|
|
|
$
|
0.2140
|
|
|
|
100,000
|
|
|
$
|
0.2140
|
|
$
|
0.2431
|
|
|
|
22,411,764
|
|
|
|
4.55
|
|
|
$
|
0.2431
|
|
|
|
22,411,764
|
|
|
$
|
0.2431
|
|
$
|
0.5000
|
|
|
|
1,300,000
|
|
|
|
0.02
|
|
|
$
|
0.5000
|
|
|
|
1,300,000
|
|
|
$
|
0.5000
|
|
|
|
|
|
|
41,338,118
|
|
|
|
3.56
|
|
|
$
|
0.1762
|
|
|
|
41,338,118
|
|
|
$
|
0.1762
|
|
Transactions involving warrants are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted Average
Price Per Share
|
|
Balance at October 1, 2013
|
|
|
59,033,305
|
|
|
$
|
0.0196
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(17,695,187)
|
|
|
|
(0.2431
|
)
|
Cancelled or expired
|
|
|
—
|
|
|
|
—
|
|
Balance, December 31, 2013
|
|
|
41,338,118
|
|
|
$
|
0.1762
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE F - STOCK OPTIONS AND WARRANTS (continued)
Warrants
, continued
Transactions involving warrants are summarized as follows:
On December 16, 2013, Crede effected the cashless exercise of 10,695,187 Series A Warrants and 7,000,000 Series B Warrants, and the Company thereupon issued to Crede an aggregate of 18,823,073 shares of its Common Stock.
Employee Stock Options
In 2005, the Board of Directors and holders of a majority of the outstanding shares of Common Stock approved the 2005 Incentive Stock Plan, In 2007, 2008 and 2012, the Board of Directors and holders of a majority of the outstanding shares of Common Stock approved various increases in the number of shares of Common Stock that can be issued as stock awards and stock options thereunder to an aggregate of 350,000,000 shares and the number of shares of Common Stock that can be covered by awards made to any participant in any calendar year to 50,000,000 shares.
The 2005 Incentive Stock 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, 2013, a total of 12,675,000 shares have been issued and options to purchase 196,038,972 shares have been granted under the 2005 Incentive Stock Plan.
The following table summarizes the changes in options outstanding and the related prices for the shares of Common Stock issued to employees of the Company under the 2005 Incentive Stock Plan:
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
$
|
0.0500
|
|
|
|
24,000,000
|
|
|
|
1.35
|
|
|
$
|
0.0500
|
|
|
|
24,000,000
|
|
|
$
|
0.0500
|
|
$
|
0.0585
|
|
|
|
50,000,000
|
|
|
|
4.54
|
|
|
$
|
0.0585
|
|
|
|
50,000,000
|
|
|
$
|
0.0585
|
|
$
|
0.0600
|
|
|
|
30,000,000
|
|
|
|
1.51
|
|
|
$
|
0.0600
|
|
|
|
30,000,000
|
|
|
$
|
0.0600
|
|
$
|
0.0650
|
|
|
|
634,825
|
|
|
|
2.93
|
|
|
$
|
0.06500
|
|
|
|
634,825
|
|
|
$
|
0.0650
|
|
$
|
0.0680
|
|
|
|
4,770,000
|
|
|
|
2.92
|
|
|
$
|
0.06800
|
|
|
|
4,770,000
|
|
|
$
|
0.0680
|
|
$
|
0.0700
|
|
|
|
2,850,000
|
|
|
|
1.42
|
|
|
$
|
0.0700
|
|
|
|
2,275,000
|
|
|
$
|
0.0700
|
|
$
|
0.0866
|
|
|
|
7,377,000
|
|
|
|
4.96
|
|
|
$
|
0.0866
|
|
|
|
2,000,000
|
|
|
$
|
0.0866
|
|
$
|
0.0900
|
|
|
|
1,500,000
|
|
|
|
1.67
|
|
|
$
|
0.0900
|
|
|
|
1,500,000
|
|
|
$
|
0.0900
|
|
$
|
0.0970
|
|
|
|
56,777,780
|
|
|
|
4.96
|
|
|
$
|
0.097
|
|
|
|
3,777,780
|
|
|
$
|
0.0970
|
|
$
|
0.1100
|
|
|
|
5,400,000
|
|
|
|
4.46
|
|
|
$
|
0.1100
|
|
|
|
5,400,000
|
|
|
$
|
0.1100
|
|
$
|
0.1160
|
|
|
|
250,000
|
|
|
|
4.98
|
|
|
$
|
0.1160
|
|
|
|
|
|
|
$
|
—
|
|
$
|
0.1170
|
|
|
|
2,000,000
|
|
|
|
4.98
|
|
|
$
|
0.1170
|
|
|
|
|
|
|
$
|
|
|
$
|
0.1360
|
|
|
|
2,126,000
|
|
|
|
4.99
|
|
|
$
|
0.1360
|
|
|
|
2,126,000
|
|
|
$
|
0.1360
|
|
$
|
0.1799
|
|
|
|
2,099,367
|
|
|
|
3.92
|
|
|
$
|
0.1799
|
|
|
|
2,099,367
|
|
|
$
|
0.1799
|
|
$
|
0.1930
|
|
|
|
100,000
|
|
|
|
4.50
|
|
|
$
|
0.1930
|
|
|
|
|
|
|
$
|
|
|
$
|
0.2000
|
|
|
|
100,000
|
|
|
|
4.38
|
|
|
$
|
0.2000
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
189,984,972
|
|
|
|
3.69
|
|
|
$
|
0.0755
|
|
|
|
128,582,972
|
|
|
$
|
0.0652
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE F - STOCK OPTIONS AND WARRANTS (continued)
Employee Stock Options
, continued
Transactions involving stock options issued to employees are summarized as follows:
|
|
Number of
Shares
|
|
Weighted Average
Exercise
Price Per
Share
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at October 1, 2013
|
|
|
121,454,192
|
|
$
|
|
|
|
|
|
Granted
|
|
|
68,530,780
|
|
|
0.0977
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
189,984,972
|
|
$
|
|
|
|
|
|
Vested at December 31, 2013
|
|
|
128,582,972
|
|
|
|
|
$
|
0.0574
|
|
Non-vested at December 31, 2013
|
|
|
61,402,000
|
|
|
|
|
$
|
0.0257
|
|
Transactions involving stock options issued to employees are summarized as follows:
On October 14, 2013, the Company granted an aggregate of 7,377,000 options to purchase the Company’s Common Stock at an exercise price of $0.0886 per share for five years to employees. 5,377,000 of these options vest at 25% each anniversary for the next four years and 2,000,000 of these options vest immediately.
On October 17, 2013, the Company granted Dr. James A. Hayward, Chairman, CEO and President and Dr. Ming-Hwa Liang, Chief Technology Officer and Secretary of the Company options to purchase 50,000,000 and 3,000,000 shares of the Company’s Common Stock, respectively, at an exercise price of $0.0970 per share for five years with vesting at 25% each anniversary for the next four years. Also on October 17, 2013, the Company issued an aggregate of 3,777,780 options to non-employee board of director members under the 2005 Incentive Stock Plan at an exercise price of $0.0970 per share for five years with immediate vesting.
On November 28, 2013, the Company issued 250,000 options to purchase the Company’s Common Stock at an exercise price of $0.1160 per share for five years to an employee with vesting at 25% each anniversary for the next four years.
On December 2, 2013, the Company granted 2,000,000 options to purchase the Company’s Common Stock at an exercise price of $0.1170 per share for five years to an employee with vesting at 25% each anniversary for the next four years.
On December 10, 2013, the Company issued an aggregate of 2,126,000 options to purchase the Company’s Common Stock at an exercise price of $0.1360 per share for five years to employees, with immediate vesting.
The fair value of options granted during the three months ended December 31, 2013 was determined using the Black Scholes Option Pricing Model with the following weighted average assumptions: stock price $0.0979, exercise price $0.1212, dividend yield $-0-, volatility of 111.80% and risk free rate of 0.96%.
The Company recorded $765,546 and $417,866 as stock compensation expense for the three month periods ended December 31, 2013 and 2012, respectively, for the vesting portion of all employee options outstanding. As of December 31, 2013, unrecorded compensation cost related to non-vested awards was $4,084,655, which is expected to be recognized through 2017.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE G - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under an operating lease in Stony Brook, New York for its corporate headquarters. The lease is for a 30,000 square foot building. The term of the lease commenced on June 15, 2013 and expires on May 31, 2016, with the option to extend the lease for two additional three-year periods. The base rent during the initial lease term is $449,142 per annum. The Company also has operating leases for a laboratory in Huddersfield, England, which is currently inactive and Calverton, New York. The leases for both of these spaces are currently on month to month. Total rent expense for the three months ended December 31, 2013 and 2012 were $128,683 and $71,585, respectively.
Employment Agreement
The
Company has an employment agreement with the Chief Executive Officer as disclosed in the notes to consolidated financial
statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2013.
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.
Demodulation,
Inc. v. Applied DNA Sciences, Inc., et al.
(Civil Action No. 2:11-00296-WJM-MF, District of New Jersey):
On
May 18, 2011, the Company was served with a complaint in a lawsuit brought by Demodulation, Inc. against the Company, Corning
Incorporated, Alfred University, and Alfred Technology Resources, Inc. On July 8, 2011, the Company filed a motion
to dismiss the complaint. In response, on August 3, 2011, Demodulation filed an amended complaint. Demodulation
alleged that it was unable to bring its microwire technology to market due to the wrongful acts of defendants, who allegedly conspired
to steal Demodulation’s trade secrets and other intellectual property and to interfere in its business opportunities. Of
the 17 claims alleged in the amended complaint, five were asserted against the Company, including alleged misappropriation of
trade secrets, antitrust violations, civil RICO, and patent infringement. The Company believes these claims are without
merit.
On
January 27, 2012, the Company filed a motion to dismiss the amended complaint for failure to state a claim and on other grounds. On
December 12, 2012, the Court entered an order on the Company’s motion to dismiss. The Court granted in part and
denied in part the Company’s motion, dismissing four out of the five claims asserted against the Company, without prejudice,
leaving only the patent infringement claim. Subsequently, the parties stipulated to sever the patent infringement claim
against the Company from the claims against the other defendants. The Court entered an order severing the patent claim
on February 20, 2013, and terminated the main lawsuit against the Company. Demodulation may seek to re-file its patent
claim as a separate action, but to date has not done so. If Demodulation re-files its action, the Company intends to
vigorously defend the action. We are unable to express an opinion with respect to the likelihood of an unfavorable
outcome or to estimate the amount or range of potential loss if the outcome should be unfavorable, should Demodulation re-file
its action, or whether it will re-file it.
SmartWater, Ltd. v. Applied DNA Sciences, Inc.
(Civil Action No. 12-05731-JS-AKT, Eastern District of New York)
On June 6, 2012, a complaint for patent infringement was filed against the Company by SmartWater, Ltd. in the United States District Court for the District of Massachusetts. It alleged that the Company infringed one or more claims under two of SmartWater’s patents by selling or offering for sale, manufacturing and using certain of the Company’s products, by inducing others to infringe and by contributing to infringement by others. Prior to serving the complaint, on August 24, 2012, SmartWater voluntarily dismissed the complaint and refiled a similar complaint in the United States District Court for the Southern District of Florida, No. 12-611660-DMM. On August 30, 2012, SmartWater served the Company with the complaint. The refiled complaint seeks injunctive relief with respect to one of the patents as well as awards of damages and
attorneys’ fees with respect to the alleged infringement of both patents.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(unaudited)
NOTE
G - COMMITMENTS AND CONTINGENCIES, continued
The
Company filed a motion to dismiss and a motion to transfer the action to the United States District Court for the Eastern
District of New York. On November 19, 2012, the Court granted the Company’s motion to transfer. Following the transfer,
but prior to a decision on the Company’s motion to dismiss, on June 26, 2013, SmartWater moved for leave to file an
amended complaint asserting additional allegations in support of its claims. By memorandum and order dated September 27,
2013, the Court granted in part, and denied in part, SmartWater’s motion. The Court held that SmartWater had adequately
stated claims for direct infringement of both patents at issue, but had not adequately stated claims for contributory
infringement of the patents, or induced infringement with respect to one of the patents, and therefore dismissed them. On
October 10, 2013, the Company filed its (i) answer to the amended complaint, as modified by the Court’s September 27,
2013 order, and (ii) counterclaims. On October 31, 2013, the Company filed an amended answer and counterclaims. The Company
and SmartWater have filed motions for reconsideration of a portion of the Court’s order. These motions seek a
determination of whether SmartWater’s remaining claim for induced infringement of one of the patents should survive, or
be dismissed because the patent expired before the Company had notice of it. In addition, the parties are now engaged in
discovery. On January 10, 2014, the Company filed a second amended answer and counterclaims to which SmartWater
replied on January 24, 2014.
The Company believes the claims are without merit and intends to defend the action vigorously. We are unable to express our opinion with
respect to the likelihood of an unfavorable outcome or to estimate the amount or range of potential loss if the outcome should be unfavorable.
NOTE H - FAIR VALUE
The carrying value of cash, accounts receivable, accounts payable and accrued expenses approximate estimated fair values because of their short maturities.
The carrying value of the warrant liability is determined using the Binomial Lattice option pricing model as described in Note A. Certain
assumptions used in the calculation of the warrant liability represent level-3 unobservable inputs. The Company did not have any assets or
liabilities categorized as Level 1 or 2 as of December 31, 2013.
The following table summarizes the activity of Level 3 inputs measured on a recurring basis:
|
|
|
Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs (Level 3)
|
|
Three Months Ended December 31,
|
|
|
2013
|
|
|
|
2012
|
|
Balance at October 1,
|
|
$
|
2,643,449
|
|
|
$
|
—
|
|
Issuance of Series A and B Warrants
|
|
|
—
|
|
|
|
1,181,323
|
|
Adjustment resulting from change in value recognized in earnings (a)
|
|
|
2,634,758
|
|
|
|
6,332,599
|
|
Reclassification to equity upon exercise
|
|
|
(2,455,042
|
)
|
|
|
—
|
|
Balance at December 31,
|
|
$
|
2,823,165
|
|
|
$
|
7,513,922
|
|
(a)
Adjustment resulting from change in fair value
is the amount of total gains or losses for the period attributable to the change in unrealized gains or losses relating to liabilities held at the reporting date. The unrealized gain or loss is recorded in change in fair value of warrant liability in the accompanying condensed consolidated statements of operations.
NOTE
I - SUBSEQUENT EVENTS
On
February 11, 2014, 746,835 shares of the Company’s common stock were issued in connection with the cashless exercise of 1,000,000 warrants to acquire the Company’s
common stock.
On
February 6, 2014, the Company granted 2,500,000 options to purchase the Company’s common stock at an exercise price of $0.16
per share for five years to a consultant, with immediate vesting. This resulted in an expense of $271,417 for the three months
ended march 31, 2014.