ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
The following is a list of our directors, executive officers and significant employees.
Name
|
|
Age
|
|
Title
|
|
Board of Directors
|
James A. Hayward
|
|
60
|
|
Chief Executive Officer, President, and
Chairman of the Board
|
|
Director
|
John Bitzer, III
|
|
52
|
|
|
|
Director
|
Charles Ryan
|
|
49
|
|
|
|
Director
|
Yacov Shamash
|
|
63
|
|
|
|
Director
|
Sanford R. Simon
|
|
71
|
|
|
|
Director
|
Karol Gray
|
|
60
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
Judy Murrah
|
|
55
|
|
Chief Information Officer
|
|
|
Ming-Hwa Benjamin Liang
|
|
50
|
|
Secretary and Strategic Technology
Development Officer
|
|
|
Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. There are no family relationships between any director, executive officer, or person nominated or chosen by the registrant to become a director or executive officer.
On November 30, 2011 the Board approved the recommendation from the Compensation Committee, that each of the 5 outside directors shall annually receive, for as long as they are a member of the Board, a 5 year stock option, fully vested after 1 year, to purchase a number of shares of the Company’s common stock having a fair value of $60,000 as determined using Black-Scholes. Additionally, the Board approved the recommendation from the Compensation Committee and Dr. James Hayward to award additional stock options having a fair value of $40,000 as determined using Black-Scholes to certain non-employee directors. Biographical resumes of each executive officer and director are set forth below.
Chief Executive Officer, President, and Chairman of the Board – James A. Hayward
Dr. James A. Hayward has been our Chief Executive Officer since March 17, 2006 and our President and the Chairman of the Board of Directors since June 12, 2007. He was previously our acting Chief Executive Officer since October 5, 2005. He also served as Acting Chief Financial Officer from August 20, 2013 through October 13, 2013. Dr. Hayward received his Ph.D. in Molecular Biology from the State University of New York at Stony Brook in 1983 and an honorary Doctor of Science from the same institution in 2000. His experience with public companies began with the co-founding of one of England’s first biotechnology companies–Biocompatibles. Following this, Dr. Hayward was Head of Product Development for the Estee Lauder companies for five years. In 1990 he founded The Collaborative Group, a provider of products and services to the biotechnology, pharmaceutical and consumer-product industries based in Stony Brook, where he served as Chairman, President and Chief Executive Officer for 14 years. During this period, The Collaborative Group created several businesses, including The Collaborative BioAlliance, a contract developer and manufacturer of human gene products, that was sold to Dow Chemical in 2002, and Collaborative Labs, a service provider and manufacturer of ingredients for skincare and dermatology that was sold to Engelhard (now BASF) in 2004.
Our Board believes that Dr. Hayward’s current role as our Chief Executive Officer, the capital investments he has made to the Company throughout his tenure with us and his former senior executive positions in our industry make him an important contributor to our Board.
Director – John Bitzer, III
John Bitzer, III, joined the Board of Directors on August 10, 2011. Mr. Bitzer is President and Chief Executive Officer of ABARTA, Inc., a private, third-generation family holding-company with operations in the soft drink beverages, newspaper publishing, oil and gas exploration and development, and ethnic and frozen food industries (“ABARTA”). In 1985, Mr. Bitzer began his career in sales for the Cleveland Coca-Cola Bottling Company. He has been Publisher of Atlantic City Magazine in Atlantic City, N.J. In 1994 he founded the ABARTA Media Group and held the position of Group Publisher. In 1997 he was named President and Chief Operating Officer of ABARTA and has been President and Chief Executive Officer since 1999. He is also a director of the Institute for Entrepreneurial Excellence at the University of Pittsburgh. Mr. Bitzer has a degree from the University of Southern California and an MBA from the University of Michigan.
Our Board believes that Mr. Bitzer’s professional and management experience in investing in and building growing enterprises make him an important contributor to the Board.
Director – Charles Ryan
Dr. Charles Ryan joined the Board of Directors on August 2011. Dr. Ryan is the Sr. Vice President, and Chief Intellectual Property Counsel at Forest Laboratories, where he has been employed since 2003. Forest, with a market capitalization of nearly $10 billion, develops and markets pharmaceutical products in a variety of therapeutic categories including central nervous system, cardiovascular, anti-infective, respiratory, gastrointestinal, and pain management medicine. Dr. Ryan earned a doctorate in oral biology and pathology from Stony Brook University and a law degree from Western New England University.
Our Board believes that Mr. Ryan’s expertise as chief intellectual property counsel at a global public company make him an important contributor to the Board.
Director – Yacov Shamash
Dr. Yacov Shamash has been a member of the Board of Directors since March 17, 2006. Dr. Shamash is Vice President of Economic Development at the State University of New York at Stony Brook. Since 1992, he has been the Dean of Engineering and Applied Sciences and the Harriman School for Management and Policy at the University, and Founder of the New York State Center for Excellence in Wireless Technologies at the University. Dr. Shamash developed and directed the NSF Industry/University Cooperative Research Center for the Design of Analog/Digital Integrated Circuits from 1989 to 1992 and also served as Chairman of the Electrical and Computer Engineering Department at Washington State University from 1985 until 1992. Dr. Shamash also serves on the Board of Directors of Keytronic Corp., Netsmart Technologies, Inc., American Medical Alert Corp., and Softheon Corp.
As Vice President of Economic Development at the State University of New York at Stony Brook, Dr. Shamash daily encounters leaders of businesses large and small, regional and global in their reach and, as a member of our Board, has played an integral role in our business development by providing the highest-level introductions to customers, channels to market and to the media. Dr. Shamash also brings to our Board his valuable experience gained from serving as a director at other private and public companies.
Our Board believes that Dr. Shamash’s professional and management experience, service on other companies’ boards and education make him an important contributor to our Board.
Director – Sanford R. Simon
Dr. Sanford R. Simon has been a member of the Board of Directors since March 17, 2006. Dr. Simon has been a Professor of Biochemistry, Cell Biology and Pathology at Stony Brook since 1997. He joined the faculty at Stony Brook as an Assistant Professor in 1969 and was promoted to Associate Professor with tenure in 1975. Dr. Simon was a member of the Board of Directors of The Collaborative Group from 1995 to 2004. From 1967 to 1969 Dr. Simon was a Guest Investigator at Rockefeller University. Dr. Simon received a B.A. in Zoology and Chemistry from Columbia University in 1963, a Ph.D. in Biochemistry from Rockefeller University in 1967, and studied as a postdoctoral fellow with Nobel Prize winner Max Perutz in Cambridge, England. He maintains an active research laboratory studying aspects of cell invasion in cancer and inflammation and novel strategies of drug delivery; he also teaches undergraduate, graduate, medical, and dental students.
Dr. Simon is an expert at the use of large biomolecules in commercial media, and we have made use of his expertise in formulating DNA into commercial carriers for specific customers. As a member of our Board, Dr. Simon has advised us on patents, provided technical advice, and introduced us to corporate partners and customers.
Our Board believes that Dr. Simon’s professional experience, expertise, and education make him an important contributor to our Board.
Chief Financial Officer – Karol Gray
Ms. Gray has been Chief Financial Officer of the Company since October 14, 2013. Previously she served on the Company’s Board of Directors from August 10, 2011 through August 20, 2013, and was chair of the Audit Committee and a member of the Compensation Committee.
Over the last two years, she held the position of Vice Chancellor of Finance and Administration at UNC Chapel Hill. In addition she was the Executive Vice President/Treasurer of the Chapel Hill Foundation Real Estate Holdings, Inc., Treasurer of The University of North Carolina at Chapel Hill Investment Fund, Inc. (CHIF), Treasurer of The University of North Carolina at Chapel Hill Foundation, Inc., and Secretary/Treasurer of UNC Management Company, and a board member of the UNC Health Care System.
Prior to her position at UNC Chapel Hill, Ms. Gray was Vice President for Finance & Administration and the Chief Financial Officer at Stony Brook University. She was active on several committees, including the Brookhaven National Laboratory Audit Committee, the Presidential Budget Working Group, and the Investment Subcommittee of the Research Foundation of the State University of New York, and a member of the Executive Committee of the State University of New York Business and Officers Association.
Ms. Gray is a graduate of Hofstra University. Ms. Gray has 35 years of financial, organizational and management experience.
Chief Information Officer – Judy Murrah
Ms.
Judy Murrah has been Chief Information Officer of the Company since June 1, 2013. Ms. Murrah is responsible for information
technology strategy and implementation. Murrah comes to the Company from Motorola Solutions, which had acquired her
former firm, Symbol Technologies. She was Senior Director of Information Technology, overseeing global IT program management
office, financial and supplier operations and quality assurance. At Symbol, Ms. Murrah held leadership positions
in product line management, global account sales, corporate and marketing communications and IT. Ms. Murrah holds
a Master of Business Administration (MBA) from Harvard Business School, and a Bachelor of Science (BS) in Industrial Engineering
from the University of Rhode Island. She is an author on eleven U.S. patents and one additional pending.
Ms. Murrah is co-founder and President of non-profit ConnectToTech, a recognized leader in engaging students
in science, technology, engineering and math disciplines. Ms. Murrah was named to 2005 and 2006
Top 50 Women of Long Island and received the inaugural 2001 Diamond Award for Long Island Women Leaders in Technology.
Secretary and Strategic Technology Development Officer – Ming-Hwa Benjamin Liang
Ming-Hwa Benjamin Liang has been our Secretary and Strategic Technology Development Officer since October 2005. Between May 1999 and September 2005, Mr. Liang had been the director of research and development at Biowell Technology Inc. Mr. Liang received a B.S. in Bio-Agriculture from Colorado State University in 1989, a M.S. in Horticulture from the University of Missouri at Columbia in 1991, his Ph.D. in Plant Science from the University of Missouri at Columbia in 1997 and his LL.M. in Intellectual Property Law from Shih Hsin University, Taiwan in 2004.
Board Leadership Structure
Our Board of Directors does not have a policy on whether the same person should serve as both the Chief Executive Officer and Chairman of the Board or, if the roles are separate, whether the Chairman should be selected from the non-employee directors or should be an employee. The Board of Directors believes that Dr. Hayward’s dual role as both Chairman of the Board and Chief Executive Officer serves the best interests of both the company and its stockholders. His combined role enables decisive leadership, ensures clear accountability, and enhances the Company’s ability to communicate its message and strategy clearly and consistently to the company’s stockholders, employees, customers and suppliers. Dr. Hayward possesses detailed and in-depth knowledge of the issues, opportunities and challenges facing the company and its businesses and is thus best positioned to develop agendas that ensure that the time and attention of the Board of Directors are focused on the most critical matters. This structure also enables our Chief Executive Officer to act as a bridge between management and the Board of Directors, helping both to act with a common purpose.
The Board of Directors appreciates that the advantages gained by having a single Chairman and Chief Executive Officer must be viewed in light of potential independence concerns. The Board considers, however, that we have adequate safeguards in place to address those concerns, including, for example, our Board of Directors consisting of a supermajority of independent directors. In addition, our audit, compensation and nominating committees, which oversee critical matters such as the integrity of our financial statements, the compensation of executive management, the selection and evaluation of directors, and the development and implementation of corporate governance policies, each consist entirely of independent directors.
Our risk management program is overseen by our Chief Executive Officer. Material risks are identified and prioritized by management, and each prioritized risk is referred to a Board Committee or the full Board of Directors for oversight. For example, strategic risks are referred to the full Board while financial risks are referred to the Audit Committee. The Board of Directors regularly reviews information regarding our liquidity and operations, as well as the risks associated with each. Also, the Compensation Committee periodically reviews the most important risks to our business to ensure that compensation programs do not encourage excessive risk-taking and promote our goals and objectives.
Board of Directors Structure and Committee Composition
In June 2008, our Board of Directors established a standing compensation committee and in September 2011, our Board of Directors established an audit committee and a nominating committee. Each of the committees operates under a written charter adopted by the Board of Directors. All of the committee charters are available on our web site at
http://www.adnas.com/investors
or by writing to Applied DNA Sciences, Inc., 50 Health Sciences Drive, Stony Brook, New York 11790, c/o Investor Relations.
During fiscal 2013, the Board of Directors held seven formal meetings and four unanimous written consents. Each director attended at least 75% of all meetings of the Board of Directors and applicable committee meetings
The membership of each of the audit committee, the compensation committee, and the nominating committee is composed entirely of independent directors. In addition, the members of the audit committee meet the heightened standards of independence for audit committee members required by SEC rules and NASDAQ rules. The committee membership and the responsibilities of each of the committees are described below.
|
|
|
|
|
|
|
Name
|
|
Audit
|
|
Compensation
|
|
Nominating
|
James A. Hayward
|
|
—
|
|
—
|
|
—
|
John Bitzer, III (I)
|
|
|
|
|
|
|
Charles Ryan (I)
|
|
|
|
|
|
—
|
Sanford R. Simon (I)
|
|
—
|
|
—
|
|
|
Yacov Shamash (I)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Committee
Messrs. Bitzer (Chairperson), Ryan and Shamash currently serve on the audit committee. On August 20, 2013 in connection with her appointment as Chief Financial Officer, effective October 14, 2013 Karol Gray resigned from the audit committee on August 20, 2013, of which she was the chair and John Bitzer assumed the chair position. The Board of Directors has determined that each member of the audit committee is independent within the meaning of the director independence standards of the company and NASDAQ as well as the heightened director independence standards of the SEC for audit committee members, including Rule 10A-3(b)(1) under the Exchange Act. The Board of Directors has also determined that each of the members of the audit committee is financially sophisticated and is able to read and understand consolidated financial statements and that Mr. Bitzer is an “audit committee financial expert” as defined in the Exchange Act.
The composition and responsibilities of the audit committee and the attributes of its members, as reflected in the charter, are intended to be in accordance with applicable requirements for corporate audit committees. The audit committee charter will be reviewed, and amended if necessary, on an annual basis.
The audit committee assists the Board of Directors in fulfilling its oversight responsibility relating to our financial statements and the disclosure and financial reporting process, our system of internal controls, our internal audit function, the qualifications, independence and performance of our independent registered public accounting firm, compliance with our code of ethics and legal and regulatory requirements. The audit committee has the sole authority to appoint, retain, terminate, compensate and oversee the work of the independent registered public accounting firm, as well as to pre-approve all audit and non-audit services to be provided by the independent registered public accounting firm.
Compensation Committee
Our compensation committee is composed of John Bitzer, III, Yacov Shamash (Chairperson) and Charles Ryan. Ms. Gray resigned as a member of the Compensation Committee on August 20, 2013 in connection with her appointment as Chief Financial Officer effective October 14, 2013. The compensation committee reviews and approves salaries and bonuses for all officers, administers options outstanding under our stock incentive plan, provides advice and recommendations to the Board regarding directors’ compensation and carries out the responsibilities required by SEC rules. The compensation committee believes that its processes and oversight should be directed toward attracting, retaining and motivating employees and non-employee directors to promote and advance the interests and strategic goals of the Company. As requested by the compensation committee, the Chief Executive Officer will provide information and may participate in discussion regarding compensation for other executive officers. The compensation committee does not utilize outside compensation consultants but considers other general industry information and trends if available.
Nominating Committee
Messrs. Shamash (Chairperson), Bitzer and Simon currently serve on the nominating committee. The Board of Directors has determined that each member of the nominating committee is independent within the meaning of the director independence standards of the company, NASDAQ and the SEC.
The nominating committee is responsible for, among other things: reviewing Board composition, procedures and committees, and making recommendations on these matters to the Board of Directors; reviewing, soliciting and making recommendations to the Board of Directors and stockholders with respect to candidates for election to the Board.
Process for Identifying and Evaluating Nominees for the Board of Directors
Director Qualifications
. The nominating committee has not formally established any specific, minimum qualifications that must be met by each candidate for the Board of Directors or specific qualities or skills that are necessary for one or more of the members of the Board of Directors to possess.
Identifying Nominees
. The nominating committee has two primary methods for identifying director candidates (other than those proposed by our stockholders, as discussed below). First, on a periodic basis, the nominating committee will solicit ideas for possible candidates from a number of sources, including members of the Board of Directors, our executive officers and individuals personally known to the members of the Board of Directors. Second, the nominating committee is authorized to use its authority under its charter to retain at the company’s expense one or more search firms to identify candidates (and to approve such firms’ fees and other retention terms).
Stockholder Candidates
. The nominating committee will consider candidates for nomination as a director submitted by stockholders. Although the nominating committee does not have a separate policy that addresses the consideration of director candidates recommended by stockholders, the Board of Directors does not believe that such a separate policy is necessary because our bylaws permit stockholders to nominate candidates and one of the duties set forth in the nominating committee charter is to consider director candidates submitted by stockholders in accordance with our bylaws. The nominating committee will evaluate individuals recommended by stockholders for nomination as directors according to the criteria discussed above and in accordance with our bylaws and the procedures described under “Stockholder Proposals and Nominations” below.
Review of Director Nominees
. The nominating committee will evaluate any candidates recommended by stockholders against the same criteria and pursuant to the same policies and procedures applicable to the evaluation of candidates proposed by our directors, executive officers, third-party search firms or other sources. In evaluating proposed director candidates, the nominating committee may consider, in addition to any minimum qualifications and other criteria for Board of Directors membership approved by the Board of Directors from time to time, all facts and circumstances that it deems appropriate or advisable, including, among other things, the proposed director candidate’s understanding of the company’s business and industry on a technical level, his or her judgment and skills, his or her depth and breadth of professional experience or other background characteristics, his or her independence, his or her willingness to devote the time and effort necessary to be an effective board member, and the needs of the Board of Directors. We do not have a formal policy with regard to the consideration of diversity in identifying director nominees. However, the Board of Directors believes that it is essential that its members represent diverse viewpoints, with a broad array of experiences, professions, skills, geographic representation and backgrounds that, when considered as a group, provide a sufficient mix of perspectives to allow the Board of Directors to best fulfill its responsibilities to the long-term interests of our stockholders. The nominating committee considers at least annually, and recommends to the Board of Directors suggested changes to, if any, the size, composition, organization and governance of the Board of Directors and its committees.
Stockholder Proposals and Nominations
. In order for a stockholder to nominate a person for election as a director at the 2014 annual meeting of stockholders, you must provide written notice to Applied DNA Sciences, Inc., 50 Health Sciences Drive, Stony Brook, New York 11790, c/o Corporate Secretary. The Corporate Secretary must receive this notice within the time period specified in the proxy statement for the 2013 annual meeting of stockholders. The notice of a proposed director nomination must provide information and documentation as required in our bylaws which, in general, require that the notice of a director nomination include the information about the nominee that would be required to be disclosed in the solicitation of proxies for the election of a director under federal securities laws; the nominee’s written consent to be named in the proxy statement as a nominee and to serve as a director if elected; a description of any transaction or arrangement during the last three years between the stockholder making the nomination and the nominee in which the nominee had a direct or indirect material interest; and a completed and signed questionnaire, representation and agreement. A copy of the bylaw requirements will be provided upon request to the Corporate Secretary at the address above.
Stockholder Communications with the Board
Stockholders and other interested parties may make their concerns known confidentially to the Board of Directors or the independent directors by submitting a communication in an envelope addressed to the “Board of Directors,” a specifically named independent director or the “Independent Directors” as a group, in care of the Secretary. All such communications will be conveyed, as applicable, to the full Board of Directors, the specified independent director or the independent directors as a group.
Code of Ethics
Our Board of Directors adopted a “code of ethics” as defined by regulations promulgated under the Securities Act and the Exchange Act that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of ethics is designed to codify the ethical standards that we believe are reasonably designed to deter wrong-doing.
We have established procedures to ensure that suspected violations of the code may be reported anonymously. A current copy of our code of ethics is available on our website at
http://www.adnas.com/investors
. A copy may also be obtained, free of charge, from us upon a request directed to Applied DNA Sciences, Inc., 50 Health Sciences Drive, Stony Brook, New York 11790, c/o Investor Relations. We intend to disclose any amendments to or waivers of a provision of the code of ethics granted to directors and officers by posting such information on our website available at www.adnas.com and/or in our public filings with the SEC.
Compliance with Section 16(A) of the Exchange Act
Since our common stock is registered under Section 15(d) of the Exchange Act, we are not required to file reports of executive officers and directors and persons who own more than 10% of a registered class of the Company’s equity securities pursuant to Section 16(a) of the Exchange Act.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE A – LIQUIDITY AND MANAGEMENT’S PLAN
The Company incurred a net loss of $17,686,472 and generated negative operating cash flow of $7,870,353 for the fiscal year ended September 30, 2013. However, the Company has attained positive working capital of $6,091,555 as of September 30, 2013.
As discussed in Note H,
during the year ended September 30, 2013, the Company entered into two securities purchase agreements on November 28, 2012 and July 19, 2013, respectively, with an institutional investor (“Crede”) to sell an aggregate of $15.0 million ($7.5 million per agreement) of our securities.
The total net proceeds received under these two transactions were $14.6 million ($15 million gross proceeds, less investment fees of $365,000).
Management believes that the Company’s positive cash balance and working capital as of September 30, 2013 along with its current customer base, projected cash flow and the minimum projected revenues for the next fiscal year will allow the Company to continue to improve its working capital and 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 the next fiscal year, the Company may be required to seek additional capital. 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. In accordance with its financing agreements with Crede (described below), the Company has agreed not to issue additional Common Stock or securities convertible into Common Stock at a price below the per share price issued to Crede under the Second Purchase Agreement, $0.187, or the market price of the Common Stock on the day before the registration statement was declared effective ($0.167), for a period of 180 days from the effective date of the registration statement, which was declared effective on July 31, 2013. Further, if the Company issues additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of the Company’s common stock.
NOTE B — SUMMARY OF ACCOUNTING POLICIES
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 generated limited sales revenues from services and products; it has incurred expenses and has sustained losses. Consequently, its operations are subject to all risks inherent in the establishment of an early stage company. For the period from inception through September 30, 2013, the Company has accumulated losses of $186,693,611.
The 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. Significant inter-company transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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 allowances for doubtful accounts. Management reviews its estimates on a regular basis and the effects of any material revisions are reflected in the consolidated financial statements in the period they are deemed necessary. Accordingly, actual results could differ from those estimates.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE B — SUMMARY OF ACCOUNTING POLICIES, continued
Reclassifications
Certain reclassifications have been made in prior year’s financial statements to conform with the current year’s financial statements’ presentation.
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 September 30, 2013 and 2012, the Company recorded deferred revenue of $148,503 and $0, respectively.
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 $100,000 from this contract
during the year ended September 30, 2013.
Cash Equivalents
For the purpose of the accompanying 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 September 30, 2013 and 2012, the Company has an allowance for doubtful accounts of $62,415 and $0, respectively. The Company writes-off receivables that are deemed uncollectible. The Company wrote-off $15,000 and $0 of accounts receivable that was not previously reserved for during the year ended September 30, 2013 and 2012, respectively.
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 years ended September 30, 2013 and 2012, the Company incurred losses from operations. Based upon these results and the trends in the Company’s performance projected for 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 consolidated financial statements.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE B — SUMMARY OF ACCOUNTING POLICIES, continued
Income Taxes
, continued
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 September
30, 2013 and 2012.
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 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 terms. Property plant and equipment consist of:
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
Computer equipment
|
|
$
|
43,555
|
|
|
$
|
33,464
|
|
Lab equipment
|
|
|
657,735
|
|
|
|
296,904
|
|
Furniture
|
|
|
164,997
|
|
|
|
132,435
|
|
Leasehold improvements
|
|
|
239,337
|
|
|
|
-
|
|
Total
|
|
|
1,105,624
|
|
|
|
462,803
|
|
Accumulated depreciation
|
|
|
409,629
|
|
|
|
251,958
|
|
Property and equipment, net
|
|
$
|
695,995
|
|
|
$
|
210,845
|
|
Depreciation expense for the years ended September 30, 2013 and 2012 were $157,671 and $41,096, 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 intangible 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. For the years ended September 30, 2013 and 2012, the Company recognized impairment charges of $114,730 and $0, respectively related to certain intellectual property.
Segment Information
The Company follows the provisions of ASC 280, Segment Reporting (“ASC 280-10”). 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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE B — SUMMARY OF ACCOUNTING POLICIES, continued
Net Loss per Share
, continued
For the years ended September 30, 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 839,583,895 and 692,328,470 for the years ended September 30, 2013 and 2012, respectively.
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 years ended September 30, 2013 and 2012 was $1,926,129 and $1,953,844, respectively.
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.
No customers represented greater than 10% of the Company’s total revenues for the year ended September 30, 2013. The Company’s revenues earned from sale of products and services for the year ended September 30, 2012 included an aggregate of 54% from two customers of the Company’s total revenues. Three and two customers accounted 43% and 54% of the Company’s total accounts receivable at September 30, 2013 and 2012, respectively.
Research and Development
The Company accounts for research and development costs in accordance with the ASC 730, 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 $692,480 and $432,669 for the years ended September 30, 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 $196,762 and $97,877 as advertising costs for the years ended September 30, 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 CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE B — 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 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 September 30, 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 valuation 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 L.
Recently Adopted Accounting Principles
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 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 consolidated financial statements, management concluded that no additional subsequent events required disclosure in these consolidated financial statements.
NOTE C - INTANGIBLE ASSETS
On May 10, 2013, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with RedWeb Technologies Limited (“RedWeb”), a corporation incorporated and registered under the laws of England & Wales, to purchase certain assets of RedWeb (“Purchased Assets”) relating to its forensic tagging security system for a purchase price of £400,000 ($624,080). The Company completed the acquisition of the Purchased Assets on the same day. The Purchased Assets include RedWeb’s Sentry 500 Intruder Spray System, RedWeb’s Advanced Molecular Taggent Technology and all products relating thereto, certain intellectual property and supplies relating to the foregoing. £40,000 ($62,408) of the purchase price shall be held in escrow for up to one year to be applied against the indemnification obligations of RedWeb pursuant to the Asset Purchase Agreement. This transaction was accounted for as an asset acquisition in accordance with ASC 805. The Company assigned $584,080 of the purchase price to intellectual property and the remaining $40,000 was for supplies, which were expensed during the year ended September 30, 2013.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE C - INTANGIBLE ASSETS, continued
The Company recorded impairment expense of $114,730 during the year ended September 30, 2013 related to certain intellectual property that was part of the purchased assets from RedWeb. The impairment related to two pending patents that were no longer valid as of September 30, 2013.
The identifiable intangible assets acquired and their carrying values at September 30, 2013 and 2012 are as follows:
|
|
2013
|
|
|
2012
|
|
Trade secrets and developed technologies (Weighted average life of 7 years)
|
|
$
|
-
|
|
|
$
|
3,775,889
|
|
Patents (Weighted average life of 5 years)
|
|
|
-
|
|
|
|
34,257
|
|
Intellectual property (Weighted average life of 5 years)
|
|
|
584,080
|
|
|
|
-
|
|
Total identifiable intangible assets-Gross carrying value:
|
|
|
584,080
|
|
|
|
3,810,146
|
|
Less:
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(48,674
|
)
|
|
|
(3,810,146
|
)
|
Impairment charges
|
|
|
(114,730
|
)
|
|
|
-
|
|
Intangible assets, net
|
|
$
|
420,676
|
|
|
$
|
-
|
|
Total amortization expense charged to operations for the years ended September 30, 2013 and 2012 were $163,404 (includes $114,730 of impairment expense) and $272,844, respectively.
The following table presents the estimated amortization expense of the intangible assets for each of the five succeeding years as of September 30, 2013:
|
|
Amount
|
|
|
|
|
|
|
2014
|
|
$
|
90,145
|
|
|
|
|
|
|
2015
|
|
|
90,145
|
|
|
|
|
|
|
2016
|
|
|
90,145
|
|
|
|
|
|
|
2017
|
|
|
90,145
|
|
|
|
|
|
|
2018
|
|
|
60,096
|
|
|
|
|
|
|
Total
|
|
$
|
420,676
|
|
NOTE D– ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30, 2013 and 2012 are as follows:
|
|
2013
|
|
|
2012
|
|
Accounts payable
|
|
$
|
641,302
|
|
|
$
|
473,060
|
|
Accrued consulting fees
|
|
|
102,500
|
|
|
|
102,500
|
|
Accrued salaries payable
|
|
|
220,175
|
|
|
|
16,449
|
|
Other accrued expenses
|
|
|
3,000
|
|
|
|
-
|
|
Total
|
|
$
|
966,977
|
|
|
$
|
592,009
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE E – PRIVATE PLACEMENT OF CONVERTIBLE NOTES
During the years ended September 30, 2011 and 2010 the Company issued multiple senior secured convertible promissory notes, all of which had been converted as of September 30, 2012. The activity that occurred during the year ended September 30, 2012 is summarized below.
10% Secured Convertible Promissory Note dated June 4, 2010
On June 4, 2010, the Company issued a $675,000 related party convertible promissory note due January 31, 2012 with interest at 10% per annum due upon maturity. In January 2012, the Company issued an aggregate of 6,750,248 shares of Common Stock in settlement of the convertible notes and related accrued interest.
10% Senior Secured Convertible Promissory Notes dated July 15, 2010
On July 15, 2010, the Company issued an aggregate of $2,000,000 senior secured convertible promissory notes due July 15, 2011 with interest at 10% per annum due upon maturity to “accredited investors,” as defined in regulations promulgated under the Securities Act of 1933, as amended (“Securities Act”).
On January 7, 2011, upon the completion of a Subsequent Financing, the above described conversion rate changed from $0.04405 to $0.037104 with an extended due date from July 15, 2011 to January 7, 2012 on $1,550,000 of the $2,000,000 issued senior convertible promissory notes. All other terms remained the same. Although the conversion rate of the remaining $450,000 senior secured convertible promissory notes remained the same, the due date was extended also to January 7, 2012. In conjunction with the conversion rate and term modifications of the $1,550,000 senior secured convertible promissory notes, the Company wrote off the remaining unamortized debt discount of $331,332 to operations.
Amortization of $26,091 was recorded for the year ended September 30, 2012.
In January 2012, the Company issued an aggregate of 11,729,821 shares of Common Stock in settlement of the $450,000 convertible notes and related accrued interest. As described further below, the Company issued 1,497,826 and 44,778,815 shares on October 26, 2011 and January 7, 2012, respectively in settlement of the remaining $1,550,000 convertible notes and related accrued interest.
10% Senior Secured Convertible Promissory Notes dated November 19, 2010
On November 19, 2010, the Company issued an aggregate of $350,000 in principal amount of senior secured convertible notes bearing interest at a rate of 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act.
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($76,494) to debt discount which will be amortized to interest expense over the term of the notes. Amortization of $10,479 was recorded for the year ended September 30, 2012.
In November 2011, the Company issued an aggregate of 11,693,102 shares of Common Stock in settlement of the convertible notes and related accrued interest.
10% Senior Secured Convertible Promissory Note dated November 30, 2010
On November 30, 2010, the Company issued a $750,000 principal amount senior secured convertible note bearing interest at a rate of 10% per annum to an “accredited investor,” as defined in regulations promulgated under the Securities Act.
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($270,078) to debt discount which will be amortized to interest expense over the term of the note. Amortization of $45,136 was recorded for the year ended September 30, 2012.
On November 30, 2011, the Company issued an aggregate of 26,716,321 shares of Common Stock in settlement of the convertible note and related accrued interest.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE E – PRIVATE PLACEMENT OF CONVERTIBLE NOTES, continued
10% Senior Secured Convertible Promissory Note dated January 7, 2011.
On January 7, 2011, the Company issued a $750,000 principal amount senior secured convertible note bearing interest at a rate of 10% per annum to an “accredited investor,” as defined in regulations promulgated under the Securities Act.
Amortization of $65,159 was recorded for the year ended September 30, 2012.
In January 2012, the Company issued an aggregate of 14,921,324 shares of Common Stock in settlement of the convertible note and related accrued interest.
10% Senior Secured Convertible Promissory Notes issued on July 15, 2010, modified on January 7, 2011
On January 7, 2011, the Company modified previously issued senior secured promissory notes initially dated July 15, 2010 totaling $1,550,000 in principal amount bearing interest at a rate of 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($1,499,536) to debt discount which will be amortized to interest expense over the term of the notes. Amortization of $392,923 was recorded for the year ended September 30, 2012.
On October 26, 2011, the Company issued 1,497,826 shares of Common Stock in settlement of $50,000 of convertible notes and related accrued interest.
In January 2012, the Company issued an aggregate of 44,778,815 shares of Common Stock in settlement of the remaining $1,447,000 convertible notes and related accrued interest.
4% Senior Secured Convertible Promissory Note issued on July 11, 2011
On July 11, 2011, the Company issued a $250,000 related party convertible promissory note due July 11, 2012 with interest at 4% per annum due upon maturity.
On July 11, 2012, the Company issued 4,444,444 shares of Common Stock in settlement of $250,000 of convertible notes and related accrued interest.
NOTE F – WARRANT LIABILITY
As more fully described in Note H below, on November 28, 2012 the Company entered into a securities purchase agreement (“Initial Purchase Agreement”) with Crede CG II, Ltd and on July 19, 2013, the Company entered into an additional securities purchase agreement (“Second Purchase Agreement”) with Crede CG III, Ltd. (collectively referred to as “Crede” and “Purchase Agreements”).
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE F – WARRANT LIABILITY, continued
In connection with the Purchase Agreements, the Company issued Series A, B and C Warrants allowing Crede to purchase the shares of Common Stock detailed in the table below:
Securities Issued
|
|
Initial Purchase Agreement
|
|
|
Second Purchase Agreement
|
|
|
|
Shares issued
|
|
|
Price per share
|
|
|
Shares issued
|
|
|
Price per share
|
|
Series A Warrants
|
|
|
10,752,688
|
|
|
$
|
0.2232
|
|
|
|
10,695,187
|
|
|
$
|
0.2431
|
|
Series B Warrants
|
|
|
29,569,862
|
|
|
$
|
0.2232
|
|
|
|
29,411,764
|
|
|
$
|
0.2431
|
|
Series C Warrants
|
|
|
26,881,720
|
|
|
$
|
0.2232
|
|
|
|
26,737,967
|
|
|
$
|
0.2431
|
|
The Company determined that the Series A and B Warrants described above should be classified as a liability due to transactions which may cause an adjustment to the conversion rate (reset provisions) contained in the warrant agreements and re-measured at each reporting date at their fair value with the changes reported in earnings (loss). The Series C Warrants associated with the Initial Purchase Agreement were repurchased by the Company for $50,000 on January 22, 2013 and the Series C Warrants from the Second Purchase Agreement were repurchased on August 14, 2013 for $10,000. Liability classification of the Series A and B Warrants will end upon expiration of reset provisions, at which time the Warrants will be reclassified to equity based on their then fair value.
Initial Purchase Agreement:
The Company determined the allocated fair value of the Warrants to be $1,181,324 on November 28, 2012, the issuance date using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.20 per share; dividend yield 0%; expected terms 5 years; risk free interest rate: 0.64%; expected volatility of: 146.32%; and the expected price at which holders are likely to exercise their Warrants of $0.2232 per share.
On April 25, 2013, Crede effected the cashless exercise of the Series A and Series B Warrants. At April 25, 2013 (date of exercise), the Company determined the fair value of the Warrants to be $7,326,553 using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.221 per share; dividend yield 0%; expected term: 4.54 years; risk free interest rate: 0.71%; expected volatility of: 125.97%; and an exercise price of $0.2232 per share. Upon exercise, the fair value of the Series A and Series B Warrants were reclassified to equity.
Second Purchase Agreement:
The Company determined the allocated fair value of the Warrants to be $1,280,532 on July 19, 2013, the issuance date using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.19 per share; dividend yield 0%; expected terms 5 years; risk free interest rate: 1.31%; expected volatility of: 130.09%; and the expected price at which holders are likely to exercise their Warrants of $0.2431 per share.
As of September 30, 2013 the fair value of the Series A and Series B Warrants was $2,643,449. The fair value was determined using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.09 per share; dividend yield 0%; expected terms 4.80 years; risk free interest rate: 1.39%; expected volatility of: 121.71%; and the expected price at which holders are likely to exercise their Warrants of $0.2431 per share.
NOTE G - RELATED PARTY TRANSACTIONS
During the year ended September 30, 2012, the Company issued 22,924,513 shares of Common Stock in exchange for settlement of an aggregate of $925,000 related party convertible promissory notes and accrued interest.
On June 21, 2012, Abarta Partners I, a partnership administered by Mr. Bitzer, one of the Company’s directors, for which his revocable
trust is a partner, purchased 35,576,568 shares of our Common Stock at a purchase price of $0.04336 per share for gross proceeds of $1,542,600 in a private placement transaction.
The Company acquired rights to certain software and intellectual property pursuant to an agreement it entered into with DivineRune Inc., a secure cloud-computing specialist, on January 25, 2012. DivineRune was issued a 3 year warrant to purchase one million shares of the Company’s common stock at an exercise price of $0.071 per share vesting in full on the first anniversary of the date of grant as compensation for a license to DivineRune’s patent portfolio. The Company will also share revenues on any future sales of products generated as a result of this agreement. The Company expects that the partnership will enhance and extend its core anti-counterfeiting, anti-diversion, and security systems into the digital track-and-trace sphere. James A. Hayward, the Company’s President, Chairman and Chief Executive Officer, and Yacov Shamash, a member of the Company’s Board of Directors, were among the early investors in DivineRune.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE H - CAPITAL STOCK
The Company is authorized to issue 1,350,000,000 shares of Common Stock, with a $0.001 par value per share, 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 September 30, 2013 and 2012, there were 786,526,955 and 646,182,550 shares of Common Stock issued and outstanding, respectively.
Preferred and Common Stock Transactions during the Year Ended September 30, 2013:
As part of the Purchase Agreements with Crede on November 29, 2012 and July 19, 2013, the Company sold an aggregate of $15,000,000 ($7,500,000 per agreement) of its securities. The total net proceeds received under these two financings were $14,635,000 ($15,000,000 gross proceeds, less investment fees of $365,000).
The table below summarizes the securities issued as part of these Purchase Agreements.
Securities Issued
|
|
Initial Purchase Agreement
|
|
|
Second Purchase Agreement
|
|
|
|
Shares issued
|
|
|
Price per share
|
|
|
Shares issued
|
|
|
Price per share
|
|
Common Stock
|
|
|
10,752,688
|
|
|
$
|
0.1860
|
|
|
|
10,695,187
|
|
|
$
|
0.1870
|
|
Series A Warrants
|
|
|
10,752,688
|
|
|
$
|
0.2232
|
|
|
|
10,695,187
|
|
|
$
|
0.2431
|
|
Series B Warrants
|
|
|
29,569,862
|
|
|
$
|
0.2232
|
|
|
|
29,411,764
|
|
|
$
|
0.2431
|
|
Series C Warrants
|
|
|
26,881,720
|
|
|
$
|
0.2232
|
|
|
|
26,737,967
|
|
|
$
|
0.2431
|
|
Series A Preferred Stock
|
|
|
5,500
|
|
|
$
|
1,000
|
|
|
|
-
|
|
|
$
|
-
|
|
Series B Preferred Stock
|
|
|
-
|
|
|
$
|
-
|
|
|
|
5,500
|
|
|
$
|
1,000
|
|
The Series A and Series B Preferred contained weighted average anti-dilution protection. The Series A and Series B Preferred did not accrue dividends except to the extent dividends were paid on the Common Stock. The Company’s Common Stock was junior in rank to the Series A and Series B Preferred with respect to preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company. The Series A and Series B Preferred generally had no voting rights except as required by law. The Series A and Series B Preferred were converted into Common Stock as set forth below.
Crede may exercise Series A and Series B Warrants by paying in cash or on a cashless basis by exchanging such Warrants for Common Stock using the Black-Scholes value. In the event that the Common Stock trades at a price 25% or more above the exercise price of the Series A and Series B Warrants for a period of 20 consecutive days (with average daily dollar volume of Common Stock on the OTC Bulletin Board at least equal to $300,000), the Company may obligate Crede to exercise such Warrants for cash.
Pursuant to registration rights agreements between the Company and Crede, the Company filed registration statements within 30 days of the Initial Closing of both purchase agreements. The registration statements covered the resale of all shares of Common Stock issuable pursuant to the Purchase Agreements, including the shares of Common Stock underlying the Series A and Series B Preferred and Series A, B and C Warrants. The Company has agreed to prepare and file amendments and supplements to the registration statements to the extent necessary to keep the registration statements effective for the period of time required under the Purchase Agreements.
The Series A and Series B Preferred and the Series A, B and C Warrants each contain a 9.9% “blocker” so that in no event shall the Series A and Series B Preferred or any of the Series A, B and C Warrants be convertible or exercisable (including through the cashless exercise exchange provision) into or for Common Stock to the extent that such conversion or exercise would result in Crede having “beneficial ownership” (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) of more than 9.9% of the Common Stock. Crede would, however, have the right from time to time to convert, exercise or exchange for shares of Common Stock, which over time would aggregate to greater than 9.9% beneficial ownership if all such shares of Common Stock so acquired had been held at one time by Crede.
Crede has the right to participate in other equity or equity-linked financings completed by the Company for a period of 180 days from the date the registration statement went effective on July 30, 2013.
In addition, the Company has agreed not to issue additional Common Stock or securities convertible into Common Stock at a price below the per share price issued to Crede under the Second Purchase Agreement, $0.187, or the market price of the Common Stock on the day before the registration statement was declared effective ($0.167), for a period of 180 days from the effective date of the registration statement, except for issuances (i) pursuant to acquisitions, joint ventures, license arrangements, leasing arrangements and other similar arrangements, (ii) to employees, consultants, directors and officers approved by the Board or pursuant to a plan approved by the Board, (iii) pursuant to one or more contracts entered into by the Company with third parties which would result in revenues to the Company during a three-month period equal to an annual run rate of $15 Million in revenues and (iv) pursuant to a contract entered into by the Company with a third party which would reasonably be expected to result in more than $3 Million in annual receivables.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE H - CAPITAL STOCK, continued
Until one year after the Second Closing, which occurred on July 31, 2013, the Company is prohibited from entering into any transaction to (i) sell any convertible securities at a conversion rate or other price that is generally based on and/or varies with the trading prices of the Company’s Common Stock at any time after the initial issuance of such convertible securities or (ii) sell securities at a future determined price, including, without limitation, an “equity line of credit” or an “at the market offering.”
On January 8, 2013, Crede exercised its option and converted the Series A Preferred into 25,462,963 shares or the Company’s Common Stock at a conversion price of $0.216 per share and on April 25, 2013, Crede effected the cashless exercise of the Series A and Series B Warrants related to the Initial Purchase Agreement. Also, on August 14, 2013, the Company exercised its option and converted the Series B Preferred into 42,307,692 shares of the Company’s Common Stock at a conversion price of $0.13 per share. On January 22, 2013, the Company exercised its option to repurchase the Series C warrants related to the Initial Purchase Agreement and on August 14, 2013, the Company exercised its option to repurchase the Series C Warrants related to the Second Purchase Agreement for $50,000 and $10,000, respectively.
NOTE I - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s 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 the Company’s 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
|
|
|
|
1.92
|
|
|
$
|
0.0400
|
|
|
|
3,000,000
|
|
|
$
|
0.0400
|
|
$
|
0.0441
|
|
|
|
510,784
|
|
|
|
3.79
|
|
|
$
|
0.0441
|
|
|
|
510,784
|
|
|
$
|
0.0441
|
|
$
|
0.0475
|
|
|
|
3,789,489
|
|
|
|
4.79
|
|
|
$
|
0.0475
|
|
|
|
3,789,489
|
|
|
$
|
0.0475
|
|
$
|
0.0553
|
|
|
|
226,081
|
|
|
|
4.27
|
|
|
$
|
0.0553
|
|
|
|
226,081
|
|
|
$
|
0.0553
|
|
$
|
0.0600
|
|
|
|
2,000,000
|
|
|
|
0.39
|
|
|
$
|
0.0600
|
|
|
|
2,000,000
|
|
|
$
|
0.0600
|
|
$
|
0.0710
|
|
|
|
1,000,000
|
|
|
|
1.32
|
|
|
$
|
0.0710
|
|
|
|
1,000,000
|
|
|
$
|
0.0710
|
|
$
|
0.0900
|
|
|
|
6,900,000
|
|
|
|
2.92
|
|
|
$
|
0.0900
|
|
|
|
6,900,000
|
|
|
$
|
0.0900
|
|
$
|
0.1790
|
|
|
|
100,000
|
|
|
|
2.10
|
|
|
$
|
0.1790
|
|
|
|
100,000
|
|
|
$
|
0.1790
|
|
$
|
0.2140
|
|
|
|
100,000
|
|
|
|
2.60
|
|
|
$
|
0.2140
|
|
|
|
-
|
|
|
$
|
-
|
|
$
|
0.2431
|
|
|
|
40,106,951
|
|
|
|
4.80
|
|
|
$
|
0.2431
|
|
|
|
40,106,951
|
|
|
$
|
0.2431
|
|
$
|
0.5000
|
|
|
|
1,300,000
|
|
|
|
0.12
|
|
|
$
|
0.5000
|
|
|
|
1,300,000
|
|
|
$
|
0.5000
|
|
|
|
|
|
|
59,033,305
|
|
|
|
4.10
|
|
|
$
|
0.1976
|
|
|
|
58,933,305
|
|
|
$
|
0.1963
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE I - STOCK OPTIONS AND WARRANTS, continued
Warrants,
continued
Transactions involving warrants are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted Average
Price Per Share
|
|
Balance, September 30, 2011
|
|
|
58,205,280
|
|
|
$
|
0.140
|
|
Granted
|
|
|
1,075,000
|
|
|
|
0.071
|
|
Exercised
|
|
|
(5,039,633
|
)
|
|
|
(0.045
|
|
Cancelled or expired
|
|
|
(8,400,000
|
)
|
|
|
(0.161
|
)
|
Balance at September 30, 2012
|
|
|
45,840,647
|
|
|
$
|
0.145
|
|
Granted
|
|
|
134,249,218
|
|
|
|
0.233
|
|
Exercised
|
|
|
(60,236,873
|
)
|
|
|
(0.170
|
)
|
Cancelled or expired
|
|
|
(60,819,687
|
)
|
|
|
(0.265
|
)
|
Balance, September 30, 2013
|
|
|
59,033,305
|
|
|
|
0.196
|
|
On October 31, 2011, warrants totaling 75,000 were issued in connection with services. The warrants are exercisable for three years from the date of issuance at an exercise price of $0.07 per share with vesting immediately. The fair value of the warrants of $1,363 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 157.69% and risk free rate from 0.41% and were charged to operations during the year ended September 30, 2012.
On January 25, 2012, warrants totaling 1,000,000 were issued in connection with services. The warrants are exercisable for three years from the date of issuance at an exercise price of $0.071 per share and will vest in full on the first anniversary of the date of grant. The fair value of the warrants of $56,875 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 147.53% and risk free rate from 0.81% and were charged to operations during the year ended September 30, 2012.
In September 2012, the Company issued an aggregate of 5,012,160 shares of Common Stock in settlement of 5,039,633 warrants exercised on a cashless basis.
On November 7, 2012, 100,000 warrants were issued in connection with services. The warrants are exercisable on or after May 7, 2013 for three years at an exercise price of $0.179 per share. The fair value of the warrants of $13,238 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 129.56% and risk free rate from 0.36% and were charged to current period operations.
On November 29, 2012, in connection the Initial Purchase Agreement, as described in Note H above, the Company issued an aggregate of 67,204,300 warrants to purchase the Company’s common stock exercisable for one to five years after defined date or events, at an exercise price of $0.2232 per share.
In March 2013, the Company issued an aggregate of 1,500,000 shares of its common stock in connection with the exercise of warrants at an exercise price of $0.10 per share with net proceeds of $150,000.
In April 2013, the Company issued 11,285,376 shares of its common stock in connection with the cashless exercise of 15,438,337 warrants to acquire the Company’s stock at a weighted average exercise price of $0.063 per share.
In May 2013, the Company issued 2,418,971 shares of its common stock in connection with the cashless exercise of 2,975,956 warrants to acquire the Company’s stock at a weighted average exercise price of $0.042 per share.
On May 7, 2013, 100,000 warrants were issued in connection with services. The warrants are exercisable on or after November 7, 2013 for three years at an exercise price of $0.214 per share. The fair value of the warrants of $15,018 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 119.72% and risk free rate from 0.35% and were charged to current period operations.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE I - STOCK OPTIONS AND WARRANTS, continued
Warrants, continued
As described in Note H above, on January 22, 2013, the Company exercised its option to repurchase 26,881,720 Series C Warrants issued to Crede under the Initial Purchase Agreement for $50,000. On April 25, 2013, under the Initial Purchase Agreement, Crede effected the cashless exercise of 10,752,688 Series A Warrants and 29,569,892 Series B Warrants, and the Company thereupon issued to Crede an aggregate of 31,257,045 shares of its Common Stock.
On July 19, 2013, in connection the Second Purchase Agreement, as described in Note H above, the Company issued an aggregate of 66,844,918 warrants to purchase the Company’s common stock exercisable for one to five years after defined date or events, at an exercise price of $0.2431 per share.
On August 14, 2013, the Company exercised its option to repurchase 26,737,967 Series C Warrants issued to Crede under the Second Purchase Agreement for $10,000, as described in Note H above.
Employee 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. 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 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 our success with an award of options to purchase shares of Common Stock. As of September 30, 2013, a total of 10,175,000 shares have been issued and options to purchase 125,208,825 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 the Company’s 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
|
|
|
|
1.65
|
|
|
$
|
0.0500
|
|
|
|
24,000,000
|
|
|
$
|
0.0500
|
|
$
|
0.0585
|
|
|
50,000,000
|
|
|
|
4.79
|
|
|
$
|
0.0585
|
|
|
|
50,000,000
|
|
|
$
|
0.0585
|
|
$
|
0.0600
|
|
|
30,000,000
|
|
|
|
1.76
|
|
|
$
|
0.0600
|
|
|
|
30,000,000
|
|
|
$
|
0.0600
|
|
$
|
0.0650
|
|
|
634,825
|
|
|
|
3.18
|
|
|
$
|
0.0650
|
|
|
|
634,825
|
|
|
$
|
0.0650
|
|
$
|
0.0680
|
|
|
4,770,000
|
|
|
|
3.17
|
|
|
$
|
0.0680
|
|
|
|
4,770,000
|
|
|
$
|
0.0680
|
|
$
|
0.0700
|
|
|
2,850,000
|
|
|
|
1.67
|
|
|
$
|
0.0700
|
|
|
|
1,900,000
|
|
|
$
|
0.0700
|
|
$
|
0.0900
|
|
|
1,500,000
|
|
|
|
2.92
|
|
|
$
|
0.0900
|
|
|
|
1,500,000
|
|
|
$
|
0.0900
|
|
$
|
0.1100
|
|
|
5,400,000
|
|
|
|
4.71
|
|
|
$
|
0.1100
|
|
|
|
5,400,000
|
|
|
$
|
0.1100
|
|
$
|
0.1799
|
|
|
2,099,367
|
|
|
|
4.17
|
|
|
$
|
0.1799
|
|
|
|
-
|
|
|
$
|
-
|
|
$
|
0.1930
|
|
|
100,000
|
|
|
|
4.75
|
|
|
$
|
0.1930
|
|
|
|
-
|
|
|
$
|
-
|
|
$
|
0.2000
|
|
|
100,000
|
|
|
|
4.63
|
|
|
$
|
0.2000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
121,454,192
|
|
|
|
3.23
|
|
|
$
|
0.063
|
|
|
|
118,204,825
|
|
|
$
|
0.0605
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE I - 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, 2011
|
|
|
120,650,000
|
|
|
$
|
0.060
|
|
|
|
|
|
Granted
|
|
|
6,558,825
|
|
|
|
0.067
|
|
|
|
|
|
Exercised
|
|
|
(500,000
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
Cancelled or expired
|
|
|
(1,500,000
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
125,208,825
|
|
|
$
|
0.060
|
|
|
|
|
|
Granted
|
|
|
2,299,367
|
|
|
|
0.181
|
|
|
|
|
|
Exercised
|
|
|
(5,979,000
|
)
|
|
|
(0.042
|
)
|
|
|
|
|
Cancelled or expired
|
|
|
(75,000
|
)
|
|
|
(0.060
|
)
|
|
|
|
|
Outstanding at September 30, 2013
|
|
|
121,454,192
|
|
|
$
|
0.063
|
|
|
|
|
|
Vested at September 30, 2013
|
|
|
118,204,825
|
|
|
|
|
|
|
$
|
0.136
|
|
Non-vested at September 30, 2013
|
|
|
3,429,367
|
|
|
|
|
|
|
$
|
0.055
|
|
On November 30, 2011, the Company granted an aggregate of 5,724,000 options to purchase the Company’s Common Stock at an exercise price of $0.068 per share for five years to directors with immediate vesting. The fair value of options was determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 156.65% and risk free rate of 0.96%.
On December 6, 2011, the Company granted an aggregate of 634,825 options to purchase the Company’s Common Stock at an exercise price of $0.065 per share for five years to two directors with immediate vesting. The fair value of options was determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 156.29% and risk free rate of 0.94%.
On February 8, 2012, the Company granted 100,000 options to purchase the Company’s Common Stock at an exercise price of $0.07 per share for five years to an employee with vesting at 25% each anniversary for the next four years. The fair value of options was determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 152.56% and risk free rate of 0.82%.
On March 16, 2012, the Company granted 100,000 options to purchase the Company’s Common Stock at an exercise price of $0.06 per share for five years to an employee with vesting at 25% each anniversary for the next four years. The fair value of options was determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 149.81% and risk free rate of 1.13%.
On September 24, 2012, the Company issued 349,114 shares of Common Stock in settlement of 500,000 options exercised on a cashless basis and the remaining 1,500,000 options expired.
On November 30, 2012, the Company granted an aggregate of 2,099,367 options to non-employee board of director members (except Mr. Catenacci) under the 2005 Incentive Stock Plan. The options are exercisable at $0.1799 per share for five years, vesting one year from the date of issuance. The fair value of options was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 146.33% and risk free rate of 0.82%.
On May 12, 2013, the Company granted an aggregate of 100,000 options to an employee under the 2005 Incentive Stock Plan. The options are exercisable at $0.20 per share for five years, vesting at 25% each anniversary for the next four years. The fair value of the options was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 117.57% and risk free rate of 0.60%.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE I - STOCK OPTIONS AND WARRANTS, continued
Employee Stock Options, continued
On May 15, 2013 the Company extended the term of 5,400,000 options that were set to expire to June 16, 2018. The Company recorded $408,605 of stock compensation expense for the year ended September 30, 2013 in connection with this modification as the incremental difference between fair value of the stock options immediately before and after modification.
On July 2, 2013 the Company granted an aggregate of 100,000 options to an employee under the 2005 Incentive Stock Plan. The options are exercisable at $0.193 per share for five years, vesting at 25% each anniversary for the next four years. The fair value of the options was determined using the Black
Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 114% and risk free interest rate of 1.01%.
During
the year ended September 30, 2013, the Company issued 4,639,483 shares of its Common Stock in connection with the cashless
exercise of 5,954,000 options to acquire the Company’s stock at a weighted average of $.053 per
share. The Company also issued 25,000 shares of its Common Stock in connection with the exercise of 25,000 options at $0.06
per share.
In accordance with his resignation agreement dated August 20, 2013, Mr. Jensen, the former Chief Financial Officer of the Company shall have one year from his resignation date to exercise his 20,500,000 vested options. There was no expense associated with this modification.
See Note M for details of issuances subsequent to the twelve months ended September 30, 2013.
The Company recorded $1,926,129 (including the stock option modification) and $1,953,844 as
stock compensation expense for the years ended September 30, 2013 and 2012, respectively
for the vesting portion of all employee options outstanding. As of September 30, 2013, unrecorded compensation cost related to non-vested awards was $107,462, which is expected to be recognized through 2018.
NOTE
J - INCOME TAXES
The
Company utilizes ASC 740 “Income Taxes”, which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the consolidated financial statement or tax returns.
Under this method, deferred tax liabilities and assets are determined based on the difference between consolidated financial statements
and tax bases 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 purpose include,
but are not limited to, accounting for intangibles, warrants, equity based compensation and depreciation and amortization.
As
of September 30, 2013, the Company had available for U.S federal income tax purposes net operating loss carryovers of approximately
$46,300,000, which expire beginning the fiscal tax year of 2022. The net operating loss carryovers may be subject to limitations
under Internal Revenue Code due to significant changes in the Company’s ownership. The Company has provided a full valuation
allowance against the full amount of the net operating loss benefit, since, in the opinion of management, based upon the earnings
history of the Company it is more likely than not that the benefits will not be realized.
The
income tax provision (benefit) for the years ended September 30, 2013 and 2012 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Federal:
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
2,955,000
|
|
|
|
1,422,000
|
|
|
|
|
2,955,000
|
|
|
|
1,422,000
|
|
State
and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
407,000
|
|
|
|
196,000
|
|
|
|
|
407,000
|
|
|
|
196,000
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance
|
|
|
(3,362,000
|
)
|
|
|
(1,618,000
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
The
provision for income taxes differ from the amount of income tax determined by applying the applicable U.S statutory rate to losses
before income tax expense for the years ended September 30, 2013 and 2012 as follows:
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
|
(34.00
|
%)
|
|
|
(34.00
|
%)
|
Statutory
state and local income tax rate (7.1%), net of federal benefit
|
|
|
(4.69
|
%)
|
|
|
(4.69
|
%)
|
Stock
based compensation
|
|
|
3.27
|
%
|
|
|
10.74
|
%
|
Depreciation
and amortization
|
|
|
(0.12
|
%)
|
|
|
(0.28
|
%)
|
Amortization
of debt discount
|
|
|
0.00
|
%
|
|
|
2.92
|
%
|
Change
in valuation allowance
|
|
|
35.54
|
%
|
|
|
25.31
|
%
|
Effective
tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE
J - INCOME TAXES, continued
Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax asset and liabilities result principally from the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
Stock based compensation
|
|
$
|
578,000
|
|
|
$
|
768,000
|
|
Depreciation and amortization
|
|
|
(21,000
|
)
|
|
|
(20,000
|
)
|
Amortization of debt discount
|
|
|
-
|
|
|
|
209,000
|
|
Net operating loss carry forward
|
|
|
17,913,000
|
|
|
|
14,551,000
|
|
Less: valuation allowance
|
|
|
(18,470,000
|
)
|
|
|
(15,508,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The provisions of ASC 740 require companies to recognize in their financial statements the impact of a tax position if that position is more likely than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
Management does not believe that the Company has any material uncertain tax positions requiring recognition or measurement in accordance with the provisions of ASC 740. Accordingly, the adoption of these provisions of ASC 740 did not have a material effect on the Company’s consolidated financial statements. The Company’s policy is to record interest and penalties on uncertain tax positions, if any, as income tax expense.
All tax years for the Company remain subject to future examinations by the applicable taxing authorities.
NOTE K- COMMITMENTS AND CONTINGENCIES
Operating leases
On June 14, 2013, the Company entered into an operating lease agreement for its new corporate headquarters located in Stony Brook, New York. 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. This new location replaces a lesser amount of space leased by the Company in an adjacent building, which was for corporate use. 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 month to month. Total lease rental expenses for years ended September 30, 2013 and 2012 were $352,867 and $244,192, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE K- COMMITMENTS AND CONTINGENCIES, continued
Operating leases
, continued
Future minimum rental payments (excluding real estate tax and maintenance costs) as of September 30, 2013 are as follows:
2014
|
|
$
|
450,617
|
|
|
|
|
|
|
2015
|
|
|
449,142
|
|
|
|
|
|
|
2016
|
|
|
299,428
|
|
Total
|
|
$
|
1,199,187
|
|
Employment and Consulting Agreements
Employment agreements
On July 11, 2011, the Company’s Board of Directors approved the terms of employment for each of James A. Hayward, the Company’s Chief Executive Officer (“CEO”), and Kurt H. Jensen, the Company’s former Chief Financial Officer.
In connection with his employment agreement, Dr. Hayward was granted options to purchase 40 million shares of the Company’s Common Stock at an exercise price per share equal to the average of the bid and asked prices of the Company’s Common Stock on the Over The Counter Market Group (the “OTCQB”) Bulletin Board on the date of grant ($0.0585). The option will vest as follows: 25% on the grant date, and 37.5% on each of the next two anniversaries of the grant date, subject to Dr. Hayward’s continuous employment. If Company’s revenues for any fiscal quarter increase by more than $1 million over the prior fiscal quarter, then the vesting date for the next 37.5% tranche will be accelerated. Exercisability of options for the 40 million shares was conditioned upon stockholder approval of an amendment of the Company’s 2005 Incentive Stock Plan made by the Board of Directors increasing the aggregate and individual limits on the shares of Company Common Stock issuable under the Plan. The Company also granted 15 million shares of the Company’s Common Stock to Dr. Hayward.
In connection with his employment agreement, Mr. Jensen was granted options to purchase 10 million shares of the Company’s Common Stock at an exercise price per share equal to the average of the bid and asked prices of the Company’s Common Stock on the Over The Counter Market Group (the “OTCQB”) on the date of grant of grant of ($0.0585). The option will vest as follows: 25% on the grant date, and 37.5% on each of the next two anniversaries of the grant date, subject to Mr. Jensen’s continuous employment. If Company’s revenues for any fiscal quarter increase by more than $1 million over the prior fiscal quarter, then the vesting date for the next 37.5% tranche will be accelerated. On August 20, 2013, Mr. Jensen resigned as Chief Financial Officer of the Company. According to his separation agreement, Mr. Jensen will receive payment of his base salary through December 31, 2013 and he shall have one year from his resignation date to exercise his 20,500,000 vested options. As of September 30, 2013 approximately $79,000 was accrued related to Mr. Jensen’s resignation agreement.
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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE K- COMMITMENTS AND CONTINGENCIES, continued
Litigation
, continued
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.
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.
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 L - 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 model option pricing model as described in Note B. Certain assumptions used in the calculation of the warrants liability represent level-3 unobservable inputs. The Company did not have any assets or liabilities categorized as Level 1 or 2 as of September 30, 2013.
APPLIED DNA SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
NOTE L - FAIR VALUE, continued
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)
|
|
Year Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
Balance at October 1,
|
|
$
|
—
|
|
|
$
|
—
|
|
Issuance of Series A and B Warrants
|
|
|
2,461,856
|
|
|
|
—
|
|
Adjustment resulting from change in value recognized in earnings (a)
|
|
|
7,508,146
|
|
|
|
—
|
|
Reclassification to equity upon exercise
|
|
|
(7,326,553
|
)
|
|
|
—
|
|
Balance at September 30,
|
|
$
|
2,643,449
|
|
|
$
|
—
|
|
(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 M – SUBSEQUENT EVENTS
In accordance with FASB ASC 855, “Subsequent Events,” the Company has evaluated subsequent events through the date of filing.
On October 14, 2013, Karol Gray commenced employment with the Company as the Chief Financial Officer. Pursuant to an offer letter, Ms. Gray will be an at-will employee and will be paid an annual starting salary of $336,000. In addition, after six months employment, she will be granted a five year option pursuant to the Company’s 2005 Incentive Stock Plan to purchase up to 2,000,000 shares of the Company’s Common Stock at the fair market value on the date of grant, vesting in four equal annual increments beginning on the first anniversary of the date of grant.
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 was
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 changes
to operations.
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.
Subsequent Option Grants
On October 14, 2013, the Company granted an aggregate of 7,928,000 options to purchase the Company’s Common Stock at an exercise price of $0.0886 per share for five years to employees, 5,928,000 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 Mr. 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 $0.097 per share for five years to employees with vesting at 25% each anniversary for the
next four years. Also on October 17, 2013, the Company granted an aggregate of 3,777,780 options to purchase the Company’s
Common Stock at an exercise price of $0.0886 per share for five years to nonemployee directors with immediate vesting.
On November 28, 2013, the Company granted 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 the Chief Information Officer with vesting at 25% each anniversary for the next four years.
On
December 10, 2013, the Company granted 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.
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 month period
ended March 31, 2014.