See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2016
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES
General
The accompanying condensed consolidated financial
statements as of March 31, 2016 and for the three and six month periods ended March 31, 2016 and 2015 are unaudited. These unaudited
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Rule
S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they
do not include all the information and footnotes required by generally accepted accounting principles for complete condensed consolidated
financial statements.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three and six month periods ended March 31, 2016 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2016. The unaudited condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements as of and for the fiscal year ended September 30, 2015 and footnotes thereto
included in the Annual Report on Form 10-K of Applied DNA Sciences, Inc. (the “Company”) filed with the SEC on December
14, 2015.
The condensed consolidated balance sheet as
of September 30, 2015 contained herein has been derived from the audited consolidated financial statements as of September 30,
2015, but does not include all disclosures required by GAAP.
Business and Basis of Presentation
The Company is a Delaware corporation, which
was initially organized in 1983 under the laws of the State of Florida as Datalink Systems, Inc. In 1998, the Company reincorporated
in the State of Nevada, and in 2002, the Company changed its name to its current name, Applied DNA Sciences, Inc. In December
2008, the Company reincorporated from Nevada to the State of Delaware. The Company is principally devoted to developing and marketing
DNA-embedded biotechnology security solutions in the United States and Europe. To date, the Company has produced limited
recurring revenues from its services and products; it has incurred expenses and has sustained losses. Consequently, its operations
are subject to all the risks inherent in the establishment and development of a biotechnology company.
The unaudited condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, APDN (B.V.I.) Inc. and Applied DNA Sciences Europe
Limited, which currently have no operations or activity. Significant inter-company transactions and balances have been eliminated
in consolidation.
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 March 31,
2016 and September 30, 2015, the Company recorded deferred revenue of $50,162 and $282,050, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES
(continued)
Revenue Recognition
, continued
Revenue arrangements with multiple components
are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone
value to the customer. Consideration received is allocated among the separate units of accounting based on their respective selling
prices. The selling price for each unit is based on vendor-specific objective evidence, or VSOE, if available, third party evidence
if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available. The applicable
revenue recognition criteria are then applied to each of the units.
Revenue for government
contract awards, which supports the Company’s development efforts on specific projects, is recognized as milestones are achieved
as per each contract. The Company recognized revenue of $278,698 and $783,047 from these contract awards during the three and six
month periods ended March 31, 2016, respectively
and $811,676 and $1,261,323 for the three
and six month periods ended March 31, 2015, respectively.
The Company recognizes the revenue under its
cotton customer contracts when the product has been shipped, as there is no right of return under these arrangements. The Company
has evaluated the other indicators of gross and net revenue recognition, including whether or not the Company is the primary obligor
and if it has general inventory risk. The Company does not have any general inventory risk and is not the primary obligor as it
relates to the marketing portion of the cotton tagging fee. With respect to the Company’s mutual license agreement with Himatsingka
America Inc. (formerly known as Divatex Home Fashion, Inc.) (“Himatsingka”), the Company has carefully evaluated all
of the key gross and net revenue recognition indicators and has concluded that the circumstances as they relate to Himatsingka’s
portion of the tagging fee are more consistent with those key indicators that support net revenue reporting. In addition, the nature
of some of the Company’s cotton contracts includes extended payment terms that will result in a longer collection period
and slower cash inflows. As a result, $1,500,000 of revenue recognized during the fiscal year ended September 30, 2015 under the
Company’s memorandum of understanding with Louis Dreyfus Commodities was included in long-term accounts receivable as of
September 30, 2015. Effective, January 31, 2016, this amount has been reclassified to short term accounts receivable. As of March
31, 2016 and September 30, 2015 there was $4,263,400 and $2,893,400 included in short term accounts receivable, respectively. The
cotton ginning season in the United States takes place between September and December each year, therefore, revenues from these
customer contracts may be seasonal.
Use of Estimates
In preparing financial statements in conformity
with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Net Loss Per Share
The Company presents loss per share utilizing
a dual presentation of basic and diluted loss per share. Basic loss per share includes no dilution and has been calculated based
upon the weighted average number of common shares outstanding during the period. Dilutive common stock equivalents consist of shares
issuable upon the exercise of the Company’s stock options and warrants.
For the three and six month periods ended March
31, 2016 and 2015, common stock equivalent shares are excluded from the computation of the diluted loss per share as their effect
would be anti-dilutive.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2016
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES
(continued)
Net Loss Per Share
, continued
Securities that could potentially dilute basic
net income per share in the future that were not included in the computation of diluted net loss per share because including those
securities would have been anti-dilutive for the six month periods ended March 31, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
7,324,727
|
|
|
|
4,453,835
|
|
Employee options
|
|
|
3,886,406
|
|
|
|
3,808,894
|
|
|
|
|
11,211,133
|
|
|
|
8,262,729
|
|
Stock-Based Compensation
The Company accounts for stock-based compensation
for employees and directors in accordance with ASC 718, Compensation (“ASC 718”). ASC 718 requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their
fair values. Under the provisions of ASC 718, stock-based compensation costs are measured at the grant date, based on the fair
value of the award, and are recognized as expense over the employee’s requisite service period (generally the vesting period
of the equity grant). The fair value of the Company’s common stock options are estimated using the Black Scholes option-pricing
model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company
expenses stock-based compensation by using the straight-line method. In accordance with ASC 718, excess tax benefits realized from
the exercise of stock-based awards are classified as 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.
The Company accounts for stock-based compensation
awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or
the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines
enumerated in ASC 505-50.
Concentrations
Financial instruments and related items, which
potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables.
The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may
be in excess of the FDIC insurance limit.
The Company’s revenues earned from sale
of products and services for the three month period ended March 31, 2016 included an aggregate of 76% from two customers. These
two customers accounted for approximately 13% of the Company’s total accounts receivable at March 31, 2016.
The Company’s revenues earned from sale
of products and services for the six month period ended March 31, 2016 included an aggregate of 61%, from two customers. These
two customers accounted for approximately 11% of the Company’s total accounts receivable at March 31, 2016.
The Company’s revenues earned from sale
of products and services for the three and six month periods ended March 31, 2015 included an aggregate of 75% and 55%, respectively,
from one customer. This one customer accounted for approximately 73% of the Company’s total accounts receivable at March
31, 2015.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2016
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES
(continued)
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update ("ASU") 2016-09, "Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting." The objective of this update is to simplify several aspects of the accounting for employee share-based
payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods
within those fiscal years. Early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact
it may have on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic
842)." The objective of this update is to increase transparency and comparability among organizations by recognizing lease
assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective
for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied
utilizing a modified retrospective approach. The Company is currently evaluating the new guidance to determine the impact it may
have on its condensed consolidated financial statements.
In November 2015, the FASB issued ASU
2015-17, "Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"). This update requires
an entity to classify deferred tax liabilities and assets as noncurrent within a classified statement of financial position. ASU
2015-17 is effective for annual and interim reporting periods beginning after December 15, 2016. This update may be applied
either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early application
is permitted as of the beginning of the interim or annual reporting period. The Company expects the impact of the adoption
of this pronouncement on its condensed consolidated balance sheet to be a reclassification only, and does not expect the pronouncement
to have a significant impact.
In September 2015, the FASB issued ASU 2015-16, Business
Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). The FASB
issued ASU 2015-16 to simplify US GAAP to require that the acquirer record, in the same period’s financial statements,
the effect of changes to provisional, measurement period amounts calculated as if the accounting had been completed at the acquisition
date and disclose the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous
reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance was
effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company
does not believe that this pronouncement will have a material impact on its condensed consolidated financial statements.
In August 2014,
FASB
issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU
2014-15”). ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is substantial
doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting
period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s
ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in ASU
2014-15 are effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter.
Early adoption is permitted. The Company will adopt the methodologies prescribed by ASU 2014-15 by the date required, and does
not anticipate that the adoption of ASU 2014-15 will have a material effect on its condensed consolidated financial position or
results of operations.
In June 2014, the FASB issued ASU 2014-12,
“Accounting for share-based payments when the terms of an award provide that a performance target could be achieved after
the requisite service period” (“ASU 2014-12”) which requires performance-based awards with a performance target
that affects vesting and that could be achieved after an employee completes the requisite service period to be accounted for as
a performance condition. If performance targets are clearly defined and it is probable that the performance condition will be achieved,
stock-based expense should be recognized over the remaining requisite service period. This guidance is effective for fiscal years
(and interim reporting periods within those years) beginning after December 15, 2015. Early adoption is permitted. The Company
is in the process of evaluating the provisions of the ASU and assessing the potential effect on the Company’s condensed consolidated
financial position or results of operations.
In May 2014, the FASB issued ASU 2014-09, “Revenue
from Contracts with Customers” (“ASU 2014-09”) which provides updated, comprehensive revenue recognition guidance
for contracts with customers, including a new principles-based five step framework that eliminates much of the industry-specific
guidance in current accounting literature. Under ASU 2014-09, revenue recognition is based on a core principle that companies recognize
revenue in an amount consistent with the consideration they expect to be entitled to in exchange for the transfer of goods or services.
The standards update also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of recognized revenue.
This guidance will be effective for fiscal years (and interim reporting periods within those years) beginning after December 15,
2017. The Company is in the process of evaluating the provisions of the ASU and assessing the potential effect on the Company’s
condensed consolidated financial position or results of operations.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2016
(unaudited)
NOTE B – LIQUIDITY AND MANAGEMENT’S
PLAN
The Company has recurring net losses, which
have resulted in an accumulated deficit of $218,035,302 as of March 31, 2016. The Company incurred a net loss of $6,393,893 and
generated negative operating cash flow of $5,223,699 for the six month period ended March 31, 2016. However, the Company also had
working capital of $12,255,112 as of March 31, 2016. At March 31, 2016, the Company had cash and cash equivalents of $9,785,827.
The Company’s current capital resources include cash and cash equivalents, accounts receivable and prepaid expenses and other
current assets. Historically, the Company has financed its operations principally from the sale of equity securities.
The Company expects to finance operations and
capital expenditures primarily through cash received from the November 2015 public offering and concurrent private placement as
well as collection of its current accounts receivables. The Company estimates that its cash and cash equivalents and the collection
of its current accounts receivables are sufficient to fund operations for the next twelve months.
The Company may require additional funds to
complete the continued development of its products, product manufacturing, and to fund expected additional losses from operations,
until revenues are sufficient to cover the Company’s operating expenses.
As a result of the Company's inability to file
with the SEC certain audited historical financial statements relating to the assets of Vandalia Research, Inc. acquired in September
2015 by the date on which they were required to be filed, the Company is currently ineligible to use Form S-3, a streamlined registration
form, to offer or sell securities until at least December 1, 2016, assuming the Company is able to file these audited historical
financial statements. Moreover, until the Company has filed the audited historical financial statements, it would be unable to
use Form S-1 or other SEC forms to register securities as required for a public offering and would be unable to conduct offerings
in private placements under Rule 505 or 506 of Regulation D to any purchasers who are not accredited investors. Therefore, until
such time as the Company is able to conduct a public offering, if it determines it to be necessary or advisable to raise additional
capital, the Company would need to issue securities in private placements to the extent permissible by law or seek other forms
of financing. These alternatives generally entail greater total costs to the Company than a public offering of securities and may
result in increased dilution to stockholders.
NOTE C – ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES
Accounts payable and accrued liabilities at
March 31, 2016 and September 30, 2015 are as follows:
|
|
March 31, 2016
|
|
|
September 30,
2015
|
|
Accounts payable
|
|
$
|
1,909,128
|
|
|
$
|
1,237,973
|
|
Accrued salaries payable
|
|
|
685,412
|
|
|
|
1,002,743
|
|
Other accrued expenses
|
|
|
39,234
|
|
|
|
144,290
|
|
Total
|
|
$
|
2,633,774
|
|
|
$
|
2,385,006
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2016
(unaudited)
NOTE D - CAPITAL STOCK
On November 23, 2015, the Company entered into
a securities purchase agreement with certain institutional investors providing for the purchase and sale of 2,500,000 shares of
common stock at a price of $3.49 per share in a registered direct public offering. In a concurrent private placement, the Company
sold warrants to purchase 1,250,000 shares of its common stock at a price of $0.01 per warrant, with an exercise price of $4.30
per share. The warrants will be exercisable beginning six months following the closing date of the private placement, November
25, 2015, and will expire five years from the date on which they become exercisable. The warrants provide each warrant holder the
right, at the warrant holder's election, to exercise by means of a cashless exercise feature. The gross proceeds to the Company
from this registered direct offering and concurrent private placement were $8.75 million and net proceeds after deducting the placement
agent fees and offering expenses were approximately $7.9 million.
In connection with the closing of the registered
direct public offering and the concurrent private placement, as partial compensation, on November 25, 2015, the Company granted
warrants to purchase 50,000 shares of common stock to its placement agent. These warrants have an exercise price of $4.01 (115%
of the public offering price), subject to adjustment as set forth therein, will be exercisable beginning six months following the
closing date of the private placement and expire at 5:00 PM (Eastern Standard Time) on November 25, 2020. These warrants provide
the placement agent the right, at the placement agent’s election, to exercise by means of a cashless exercise feature.
NOTE E - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes
in warrants outstanding and the related prices for the shares of common stock issued to non-employees of the Company. These warrants
were granted in lieu of cash for services performed or financing expenses in connection with the sale of common stock.
Transactions involving warrants are summarized
as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Balance at October 1, 2015
|
|
|
6,027,654
|
|
|
$
|
3.54
|
|
Granted
|
|
|
1,300,000
|
|
|
|
4.29
|
|
Exercised
|
|
|
(1,260
|
)
|
|
|
(3.50
|
)
|
Cancelled or expired
|
|
|
(1,667
|
)
|
|
|
(10.74
|
)
|
Balance at March 31, 2016
|
|
$
|
7,324,727
|
|
|
$
|
3.67
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2016
(unaudited)
NOTE E - STOCK OPTIONS AND WARRANTS (continued)
Stock Options
In 2005, the Board of Directors and the holders
of a majority of the outstanding shares of common stock approved the 2005 Incentive Stock Plan (the “Incentive Plan”).
In 2007, 2008, 2012 and 2015, the Board of Directors and holders of a majority of the outstanding shares of common stock approved
various increases in the number of shares of common stock that can be issued as stock awards and stock options thereunder to an
aggregate of 8,833,333 shares and the number of shares of common stock that can be covered by awards made to any participant in
any calendar year to 833,334 shares. The Incentive Plan’s expiration date is January 25, 2025.
The Incentive
Plan is designed to retain directors, executives, and selected employees and consultants by rewarding them for making contributions
to the Company's success with an award of options to purchase shares of common stock and an award of shares of common stock. As
of
March 31, 2016
a total of 272,752 shares have been issued and options to purchase 4,675,947
shares have been granted under the Incentive Plan.
Transactions involving stock options issued
to employees and consultants are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at October 1, 2015
|
|
|
3,458,905
|
|
|
$
|
4.74
|
|
|
|
|
|
Granted
|
|
|
540,273
|
|
|
|
3.03
|
|
|
|
|
|
Exercised
|
|
|
(75,000
|
)
|
|
|
(2.86
|
)
|
|
|
|
|
Cancelled or expired
|
|
|
(37,772
|
)
|
|
|
(4.06
|
)
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
3,886,406
|
|
|
$
|
4.26
|
|
|
|
|
|
Vested at March 31, 2016
|
|
|
2,819,458
|
|
|
$
|
4.23
|
|
|
$
|
1,195,153
|
|
Non-vested at March 31, 2016
|
|
|
1,066,948
|
|
|
|
|
|
|
$
|
481,956
|
|
During the three and six month periods ended March 31, 2016, the
Company issued an aggregate of 8,750 and 540,273 options to employees, non-employee board of director members and members of the
strategic advisory board, respectively. Included in these grants were 160,000 options granted to executives during the six month
period ended March 31, 2016.
The fair value of options granted to employees
and consultants during the three and six month periods ended March 31, 2016 was determined using the Black Scholes Option
Pricing Model with the following weighted average assumptions:
|
|
Three
Months
Ended
March 31, 2016
|
|
|
Six
Months
Ended
March 31, 2016
|
|
Stock price
|
|
$
|
2.78
|
|
|
$
|
3.03
|
|
Exercise price
|
|
$
|
2.78
|
|
|
$
|
3.03
|
|
Expected term, years
|
|
|
10.00
|
|
|
|
6.17
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Volatility
|
|
|
142
|
%
|
|
|
130
|
%
|
Risk free rate
|
|
|
1.74
|
%
|
|
|
1.79
|
%
|
The Company recorded $489,349 and $886,338
as stock compensation expense for the three and six month periods ended March 31, 2016, respectively, and $517,320 and
$2,515,843 for the three and six month periods ended March 31, 2015, respectively. As of March 31, 2016, unrecorded compensation
cost related to non-vested awards was $2,973,920, which is expected to be recognized over a weighted average period of
approximately 2.22 years. The weighted average grant date fair value per share for options granted during the three and six month
periods ended March 31, 2016 was $2.72 and $2.71, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2016
(unaudited)
NOTE F - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under an operating
lease in Stony Brook, New York for its corporate headquarters. The lease is for a 30,000 square foot building. The term of the
lease commenced on June 15, 2013 and expires on May 31, 2016, with the option to extend the lease for up to two additional three-year
periods. The Company has exercised its option to extend the lease for one additional three-year period, ending May 31, 2019. The
base rent during the initial lease term and during the additional three-year period is $449,142 per annum. Total rent expense for
the three and six month periods ended March 31, 2016 was $135,393 and $280,109, respectively. Total rent expense for the three
and six month periods ended March 31, 2015 was $124,429 and $249,268, respectively.
Employment Agreement
The Company has an employment agreement with
the Chief Executive Officer. Effective June 21, 2014, the Chief Executive Officer’s annual salary was voluntarily deferred
by $50,000. This salary deferral will be accrued and repaid when the Company reaches $3,000,000 in sales for two consecutive quarters
or the Company has net income at the end of any fiscal year. Effective January 1, 2015, the Chief Executive Officer’s annual
salary was voluntarily reduced by an additional $50,000. As of January 1, 2016, the Chief Executive Officer's salary was increased
to $400,000 pursuant to approval by the Compensation Committee of the Board of Directors. Effective May 7, 2016, the Chief Executive
Officer’s annual salary was voluntarily reduced by $100,000.
Litigation
From time to time, the Company may become involved
in various lawsuits and legal proceedings which arise in the ordinary course of business. When the Company is aware of a claim
or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount
of the loss can be reasonably estimated, the Company will record a liability for the loss. In addition to the estimated loss, the
recorded liability includes probable and estimable legal costs associated with the claim or potential claim. Litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s
business. There is no pending litigation involving the Company at this time.
NOTE G - ASSET PURCHASE AGREEMENT
As disclosed in the Company's audited consolidated
financial statements as of and for the fiscal year ended September 30, 2015 and footnotes thereto included in the Annual Report
on Form 10-K, filed with the SEC, on September 11, 2015, the Company entered into an Asset Purchase Agreement, with Vandalia
Research, Inc. a West Virginia corporation ("Vandalia"), and Derek A. Gregg, Vandalia’s Chief Executive Officer
and a director of Vandalia, providing for the purchase of substantially all the assets (“Assets”) of Vandalia. The
Company completed the acquisition of such Assets on the same date. The purchase price for the Assets was $1,500,000, which amount
was determined through arms-length negotiation. Of this amount, $500,000 was placed in an escrow account for a period of nine months
following the closing to satisfy Vandalia’s indemnification obligations, of which $350,000 was released after sixty days.
The audits of the historical financial
statements of Vandalia are currently still in process. The following unaudited supplemental pro forma information presents the
Company's financial results as if the acquisition of Vandalia had occurred October 1, 2014:
|
|
Three month
period ended
|
|
|
Six month period ended
|
|
|
|
March 31, 2015
|
|
|
March 31, 2015
|
|
Revenue
|
|
$
|
1,554,312
|
|
|
$
|
2,938,926
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,925,698
|
)
|
|
|
(9,707,441
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.59
|
)
|