Item 1 - Financial Statements.
APPLIED DNA SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2016
|
|
|
September 30,
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,086,773
|
|
|
$
|
7,312,184
|
|
Accounts receivable, net of allowance of $22,387 and $7,140 at June 30, 2016 and September 30, 2015, respectively
|
|
|
4,792,308
|
|
|
|
3,929,517
|
|
Inventories
|
|
|
126,870
|
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
|
136,783
|
|
|
|
293,351
|
|
Total current assets
|
|
|
12,142,734
|
|
|
|
11,535,052
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated depreciation of $1,161,120 at June 30, 2016 and $852,867 at September 30, 2015
|
|
|
805,761
|
|
|
|
572,107
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Long term accounts receivables
|
|
|
360,000
|
|
|
|
1,500,000
|
|
Deposits
|
|
|
61,126
|
|
|
|
62,988
|
|
Goodwill
|
|
|
285,386
|
|
|
|
285,386
|
|
Intangible assets, net of accumulated amortization of $491,933 and $238,368 at June 30, 2016 and September 30, 2015, respectively
|
|
|
1,563,766
|
|
|
|
1,598,779
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
15,218,773
|
|
|
$
|
15,554,312
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
2,184,169
|
|
|
$
|
2,385,006
|
|
Deferred revenue
|
|
|
848,782
|
|
|
|
282,050
|
|
Total current liabilities
|
|
|
3,032,951
|
|
|
|
2,667,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term accounts payable
|
|
|
—
|
|
|
|
320,400
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,032,951
|
|
|
|
2,987,456
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- shares issued and outstanding as of June 30, 2016 and September 30, 2015
|
|
|
—
|
|
|
|
—
|
|
Series A Preferred stock, par value $0.001 per share, 10,000,000 shares authorized; -0- issued and outstanding as of June 30, 2016 and September 30, 2015
|
|
|
—
|
|
|
|
—
|
|
Series B Preferred stock, par value $0.001 per share, 10,000,000 shares authorized; -0- issued and outstanding as of June 30, 2016 and September 30, 2015
|
|
|
—
|
|
|
|
—
|
|
Common stock, par value $0.001 per share; 500,000,000 shares authorized at June 30, 2016 and September 30, 2015; 24,078,636 and 21,504,578 shares issued and outstanding as of June 30, 2016 and September 30, 2015, respectively
|
|
|
24,079
|
|
|
|
21,505
|
|
Additional paid in capital
|
|
|
233,564,055
|
|
|
|
224,186,760
|
|
Accumulated deficit
|
|
|
(221,402,312
|
)
|
|
|
(211,641,409
|
)
|
Total stockholders’ equity
|
|
|
12,185,822
|
|
|
|
12,566,856
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
15,218,773
|
|
|
$
|
15,554,312
|
|
See the accompanying notes to the unaudited
condensed consolidated financial statements
APPLIED DNA SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
652,896
|
|
|
$
|
2,267,671
|
|
|
$
|
2,550,332
|
|
|
$
|
5,028,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
121,260
|
|
|
|
129,015
|
|
|
|
304,611
|
|
|
|
129,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,707,420
|
|
|
|
3,222,692
|
|
|
|
8,616,246
|
|
|
|
10,323,809
|
|
Research and development
|
|
|
1,077,916
|
|
|
|
466,841
|
|
|
|
2,861,583
|
|
|
|
1,587,326
|
|
Depreciation and amortization
|
|
|
168,641
|
|
|
|
121,339
|
|
|
|
557,968
|
|
|
|
354,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,953,977
|
|
|
|
3,810,872
|
|
|
|
12,035,797
|
|
|
|
12,265,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(3,422,341
|
)
|
|
|
(1,672,216
|
)
|
|
|
(9,790,076
|
)
|
|
|
(7,366,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
2,660
|
|
|
|
5,052
|
|
|
|
9,567
|
|
|
|
(26,807
|
)
|
Other income (expense), net
|
|
|
52,670
|
|
|
|
(3,718
|
)
|
|
|
19,606
|
|
|
|
(16,853
|
)
|
Loss on conversion of promissory notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(980,842
|
)
|
Loss on change in fair value of warrant liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,994,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before provision for income taxes
|
|
|
(3,367,011
|
)
|
|
|
(1,670,882
|
)
|
|
|
(9,760,903
|
)
|
|
|
(11,385,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(3,367,011
|
)
|
|
$
|
(1,670,882
|
)
|
|
$
|
(9,760,903
|
)
|
|
$
|
(11,385,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share-basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding- Basic and diluted
|
|
|
24,075,225
|
|
|
|
21,444,335
|
|
|
|
23,563,164
|
|
|
|
18,075,506
|
|
See the accompanying notes to the unaudited
condensed consolidated financial statements
APPLIED DNA SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,760,903
|
)
|
|
$
|
(11,385,102
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
557,968
|
|
|
|
354,144
|
|
Stock-based compensation expense
|
|
|
1,444,170
|
|
|
|
3,531,205
|
|
Change in fair value of warrant liability
|
|
|
—
|
|
|
|
2,994,540
|
|
Loss on sale of property, plant and equipment
|
|
|
5,520
|
|
|
|
—
|
|
Loss on conversion of promissory notes
|
|
|
—
|
|
|
|
980,842
|
|
Common stock issued for consulting services
|
|
|
78,134
|
|
|
|
64,426
|
|
Provision for bad debts
|
|
|
106,247
|
|
|
|
21,750
|
|
Change in operating assets and liabilities
:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
170,962
|
|
|
|
(1,275,189
|
)
|
Inventories
|
|
|
(136,783
|
)
|
|
|
—
|
|
Prepaid expenses and other current assets and deposits
|
|
|
107,343
|
|
|
|
(59,315
|
)
|
Accounts payable and accrued liabilities
|
|
|
(589,705
|
)
|
|
|
(75,515
|
)
|
Deferred revenue
|
|
|
566,732
|
|
|
|
(378,499
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,450,315
|
)
|
|
|
(5,226,713
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment
|
|
|
5,500
|
|
|
|
—
|
|
Purchase of property, plant and equipment
|
|
|
(594,808
|
)
|
|
|
(221,659
|
)
|
Purchase of intangible assets
|
|
|
(43,353
|
)
|
|
|
(238,082
|
)
|
Net cash used in investing activities
|
|
|
(632,661
|
)
|
|
|
(459,741
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of common stock and warrants
|
|
|
7,853,155
|
|
|
|
19,114,418
|
|
Proceeds from the exercise of warrants
|
|
|
4,410
|
|
|
|
—
|
|
Purchase and cancelation of previously issued warrants
|
|
|
—
|
|
|
|
(4,090,952
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
7,857,565
|
|
|
|
15,023,466
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(225,411
|
)
|
|
|
9,337,012
|
|
Cash and cash equivalents at beginning of period
|
|
|
7,312,184
|
|
|
|
1,393,132
|
|
Cash and cash equivalents at end of period
|
|
$
|
7,086,773
|
|
|
$
|
10,730,144
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid during period for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash paid during period for income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of promissory notes payable
|
|
$
|
—
|
|
|
$
|
1,843,750
|
|
Offering costs incurred, and included in accounts payable and accrued liabilities
|
|
$
|
—
|
|
|
$
|
68,489
|
|
Property, plant and equipment acquired, and included in accounts payable
|
|
$
|
—
|
|
|
$
|
13,825
|
|
Intangible assets acquired, and included in accounts payable
|
|
$
|
60,468
|
|
|
$
|
29,296
|
|
Reclassification of deferred offering costs to additional paid in capital
|
|
$
|
—
|
|
|
$
|
181,104
|
|
See the accompanying notes to the unaudited
condensed consolidated financial statements
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2016
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES
General
The accompanying condensed consolidated
financial statements as of June 30, 2016 and for the three and nine month periods ended June 30, 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 nine month periods ended June 30, 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. To facilitate comparison of information across periods, certain reclassifications have been made to prior
year amounts to conform to the current year's presentation.
Inventories
Inventories, which consist primarily of
raw materials, and finished goods, is stated at the lower of cost or market, with cost determined by using the first-in, first-out
(FIFO) method.
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 June 30,
2016 and September 30, 2015, the Company recorded deferred revenue of $848,782 and $282,050, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 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 $210,219 and $993,266 from these contract awards during the
three and nine month periods ended June 30, 2016, respectively
and $657,708 and $1,919,031
for the three and nine month periods ended June 30, 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.
On June 29, 2016, Himatsingka waived its portion of the tagging fee for up to $250,000. 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. Under the Company’s memorandum of understanding with Louis Dreyfus Commodities, as of June 30, 2016 and September
30, 2015 there was $4,263,400 and $2,893,400 included in short term accounts receivable, respectively. As of June 30, 2016 and
September 30, 2015 there was $360,000 and $1,500,000 included in long-term accounts receivable, respectively. Also, as of June
30, 2016 there was $400,000 included in deferred revenue for a shipment during the third fiscal quarter of
2016. 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 nine month periods ended
June 30, 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
June 30, 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 nine month periods ended June 30, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
7,323,060
|
|
|
|
6,062,487
|
|
Employee options
|
|
|
4,414,865
|
|
|
|
3,456,989
|
|
|
|
|
11,737,925
|
|
|
|
9,519,476
|
|
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 and nine month periods ended June 30, 2016 included an aggregate of 77% and 63% from
two customers, respectively. One customer accounted for 90% and 85% of the Company’s total accounts receivable at June
30, 2016 and September 30, 2015, respectively.
The Company’s revenues earned from sale of products and
services for the three and nine month periods ended June 30, 2015 included an aggregate of 87% and 73%, respectively, from two
customers of the Company’s total revenues.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11"). ASU 2015-11 simplifies the accounting for
the valuation of all inventory not accounted for using the last-in, first-out ("LIFO") method by prescribing that inventory
be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for financial statements issued for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. The Company does not
expect the adoption of ASU 2015-11 to have a material effect 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 ASU 2014-12 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 ASU 2014-09 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
June 30, 2016
(unaudited)
NOTE B — LIQUIDITY AND MANAGEMENT’S
PLAN
The Company has recurring net losses,
which have resulted in an accumulated deficit of $221,402,312 as of June 30, 2016. The Company incurred a net loss of $9,760,903 and generated negative operating cash flow of $7,450,315 for the nine month period ended June 30, 2016.The Company also had
working capital of $9,109,783 and cash and cash equivalents of $7,086,773 as of June 30, 2016. The Company’s current
capital resources include cash and cash equivalents, accounts receivable, inventories 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 having filed
with the SEC on July 22, 2016, certain audited historical financial statements relating to the assets of Vandalia Research, Inc.
acquired in September 2015, which was past 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 December 1, 2016.
NOTE C — INVENTORIES
Inventories consist of the following:
|
|
June 30,
|
|
|
|
2016
|
|
Raw materials
|
|
$
|
45,156
|
|
Finished goods
|
|
|
81,714
|
|
Total
|
|
$
|
126,870
|
|
NOTE D — ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
Accounts payable and accrued liabilities
are as follows:
|
|
June 30,
2016
|
|
|
September 30,
2015
|
|
Accounts payable
|
|
$
|
1,478,830
|
|
|
$
|
1,237,973
|
|
Accrued salaries payable
|
|
|
591,839
|
|
|
|
1,002,743
|
|
Other accrued expenses
|
|
|
113,500
|
|
|
|
144,290
|
|
Total
|
|
$
|
2,184,169
|
|
|
$
|
2,385,006
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2016
(unaudited)
NOTE E — 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 nine 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 nine 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 F — STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes
in warrants outstanding and the related prices for the shares of common stock issued to non-employees of the Company. These warrants
were granted in lieu of cash 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
|
|
|
(3,334
|
)
|
|
|
(11.79
|
)
|
Balance at June 30, 2016
|
|
|
7,323,060
|
|
|
$
|
3.67
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2016
(unaudited)
NOTE F — 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. As of June 30, 2016, a total of 275,572 shares have been issued and options to purchase
5,211,407 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
|
|
|
1,090,273
|
|
|
|
2.93
|
|
|
|
|
|
Exercised
|
|
|
(79,000
|
)
|
|
|
(2.86
|
)
|
|
|
|
|
Cancelled or expired
|
|
|
(55,313
|
)
|
|
|
(3.96
|
)
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
4,414,865
|
|
|
$
|
4.12
|
|
|
|
|
|
Vested at June 30, 2016
|
|
|
2,810,749
|
|
|
$
|
4.23
|
|
|
$
|
691,227
|
|
Non-vested at June 30, 2016
|
|
|
1,604,116
|
|
|
|
|
|
|
$
|
747,204
|
|
During the three and nine month periods ended June 30, 2016,
the Company issued an aggregate of 550,000 and 1,090,273 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 nine
month period ended June 30, 2016 and 500,000 performance based options granted to an employee during May 2016. These options vest
in tranches as certain performance conditions are met by the employee.
The fair value of options granted to employees
and consultants during the three and nine month periods ended June 30, 2016 was determined using the Black Scholes Option Pricing
Model with the following weighted average assumptions:
|
|
Three
Months
Ended
June 30, 2016
|
|
|
Nine
Months
Ended
June 30, 2016
|
|
Stock price
|
|
$
|
3.06
|
|
|
$
|
3.05
|
|
Exercise price
|
|
$
|
2.82
|
|
|
$
|
2.93
|
|
Expected term, years
|
|
|
9.66
|
|
|
|
7.93
|
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
Volatility
|
|
|
140
|
%
|
|
|
135
|
%
|
Risk free rate
|
|
|
1.75
|
%
|
|
|
2.00
|
%
|
The Company recorded $515,496 and $1,444,170
as stock compensation expense for the three and nine month periods ended June 30, 2016, respectively, and $1,015,361 (including
$544,113 for stock option modifications) and $3,531,205 (including $673,176 for stock option modifications) for the three and nine
month periods ended June 30, 2015, respectively. As of June 30, 2016, unrecorded compensation cost related to non-vested awards
was $4,090,924, which is expected to be recognized over a weighted average period of approximately 4.95 years. The weighted average
grant date fair value per share for options granted during the three and nine month periods ended June 30, 2016 was $2.97 and $2.84,
respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2016
(unaudited)
NOTE G — COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under an
operating lease in Stony Brook, New York for its corporate headquarters. The lease is for a 30,000 square foot building. The term
of the lease commenced on June 15, 2013 and expired 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 additional three-year period is $458,098 per annum. Total rent expense for the three and nine month
periods ended June 30, 2016 was $126,126 and $406,235, respectively. Total rent expense for the three and nine month periods ended
June 30, 2015 was $124,504 and $373,772, 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. On July 28, 2016, a new employment agreement was entered into
with the Chief Executive Officer effective July 1, 2016. The initial term is from July 1, 2016 through June 30, 2017, with automatic
one-year renewal periods. The terms of the agreement are substantially the same as his original employment agreement, except the
cash incentive bonus was modified. Under the new agreement, Dr. Hayward will be eligible for a special cash incentive bonus of
up to $800,000, $300,000 of which will be payable if and when annual revenue reaches $8 million and $100,000 of which would be
payable for each $2 million of annual revenue in excess of $8 million.
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 H — 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 to Vandalia after
sixty days. On June 30, 2016, the Company received $50,000 of the remaining funds in escrow to satisfy indemnification obligations
and the balance of $100,000 was released to Vandalia.
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
|
|
|
Nine month
period ended
|
|
|
|
June 30, 2015
|
|
|
June 30, 2015
|
|
Revenue
|
|
$
|
2,293,235
|
|
|
$
|
5,232,161
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,739,124
|
)
|
|
|
(11,446,565
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.63
|
)
|
Item 2. — Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report (including but not
limited to this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”)
contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
which are subject to the “safe harbor” created by those sections. Forward-looking statements can generally be identified
by the fact that they do not relate strictly to historical or current facts and include, but are not limited to, statements using
terminology such as “can”, “may”, “could”, “should”, “assume”, “forecasts”,
“believe”, “designated to”, “will”, “expect”, “plan”, “anticipate”,
“estimate”, “potential”, “position”, “predicts”, “strategy”, “guidance”,
“intend”, “budget”, “seek”, “project” or “continue”, or the negative
thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future.
We believe it is important to communicate
our expectations. However, forward-looking statements are based on our current expectations, assumptions, estimates and projections
about our business and our industry and are subject to known and unknown risks, uncertainties and other factors. Accordingly, our
actual results and the timing of certain events may differ materially from those expressed or implied in such forward-looking statements
due to a variety of factors and risks, including, but not limited to, those set forth in this Item 2, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and in our unaudited condensed consolidated financial
statements and notes thereto included in this Quarterly Report, those set forth from time to time in our other filings with the
SEC, including our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, and the following factors and risks:
|
·
|
our short operating history, relatively new business model and lack of significant previous revenues;
|
|
·
|
our history of net losses, which may continue, and our potential inability to achieve profitability;
|
|
·
|
the possibility that we may require additional financing, which may involve the issuance of additional shares of common stock
or securities exercisable for common stock and dilute the percentage of ownership held by our current stockholders;
|
|
·
|
difficulty in obtaining, or inability to obtain, additional financing if such financing becomes necessary, including due to
constraints on our ability to raise and/or increased cost of raising capital, as a result of our inability to timely file the audited
historical financial statements of Vandalia Research, Inc.;
|
|
·
|
volatility in the price and/or trading volume of our common stock;
|
|
·
|
future short selling and/or manipulation of the price of our common stock;
|
|
·
|
our inability to implement our short and long-term strategies;
|
|
·
|
loss of strategic relationships;
|
|
·
|
dependence on a limited number of key customers;
|
|
·
|
lack of acceptance of our products and services by potential customers;
|
|
·
|
potential failure to introduce new products and services;
|
|
·
|
difficulty or failure in expanding our sales, marketing and support organizations and our distribution arrangements necessary
to enable us to reach our goals with respect to increasing market acceptance of our products and services;
|
|
·
|
seasonality in revenues related to our cotton customer contracts;
|
|
·
|
inability to continue to retain the services of Dr. Hayward, our Chief Executive Officer, or Dr. Liang, our Chief Scientific
Officer;
|
|
·
|
inability to compete effectively in the industries in which we operate;
|
|
·
|
lack of success in our research and development efforts for new products;
|
|
·
|
failure to manage our growth in operations and acquisitions of new technologies and businesses;
|
|
·
|
inability to protect our intellectual property rights;
|
|
·
|
intellectual property litigation against us or other legal actions or proceedings in which we may become involved;
|
|
·
|
unauthorized disclosure of sensitive or confidential data (including customer data) and cybersecurity breaches; and
|
|
·
|
adverse changes in worldwide or domestic economic, political or business conditions.
|
All forward-looking statements and risk factors included in
this Quarterly Report are made as of the date hereof, based on information available to us as of the date hereof, and we assume
no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law. Assumptions relating
to the forward-looking statements included in this Quarterly Report involve judgments with respect to, among other things, future
economic, competitive and market conditions, future business decisions, and the time and money required to successfully complete
development and commercialization of our technologies, all of which are difficult or impossible to predict accurately and many
of which are beyond our control.
Any of the assumptions underlying the forward-looking statements
contained in this Quarterly Report could prove inaccurate and, therefore, we cannot assure you that any of the results or events
contemplated in any of such forward-looking statements will be realized and we caution you against relying on any of the forward-looking
statements contained herein.
Note
Our trademarks in the United States include SigNature® DNA,
fiberTyping®, DNAnet®, digitalDNA® and Sentry. All trademarks, service marks and trade names included or incorporated
by reference in this Quarterly Report are the property of their respective owners, including, without limitation, SmokeCloak®,
a mark owned by MSS Professional A/S and/or its affiliates, and PimaCott™, a mark owned by Himatsingka America (formerly
known as Divatex Home Fashion, Inc.) and/or its affiliates.
Introduction
Using biotechnology as a forensic foundation,
we create unique security solutions addressing the challenges of modern commerce. Whether for supply chain security, brand protection
or law enforcement applications, it is our goal to help establish secure flourishing environments that foster quality, integrity
and success. With secure taggants, high-resolution DNA authentication, and comprehensive reporting, our plant-based DNA technologies
are designed to deliver what we believe to be the greatest levels of security, deterrence and legal recourse strength. Through
our acquisition of substantially all of the assets of Vandalia Research, Inc. (“Vandalia”), we are also engaged in
the large-scale production of specific DNA sequences using the polymerase chain reaction (“PCR”).
Our principal anti-counterfeiting and product
authentication solutions can be used in numerous industries, including, but not limited to microcircuits and other electronics,
cash-in-transit (transport and storage of banknotes), textiles and apparel, home asset marking, automotive, printing and packaging,
homeland security, law enforcement, industrial materials, agrochemicals, pharmaceuticals, consumer products, and food and beverage.
The large-scale production of specific DNA sequences is used in the diagnostics and reagent industries and also helps to ensure
our capacity to manufacture enough DNA markers for all our current and future customers.
SigNature DNA
.
SigNature
DNA is our platform ingredient, at the core of all our security solutions. The vehicle which carries SigNature DNA is custom designed
to suit the particular application for which it is being used. Exhaustive development efforts have yielded a flexible and durable
marker. SigNature DNA provides forensic power and protection for a wide array of applications. Highly secure, robust, and
durable, SigNature DNA markers are an ingredient that can be used to fortify brand protection efforts, mark, track and convict
criminals, and strengthen supply chain security. Custom DNA sequences can be embedded into a wide range of host carriers including
ink, varnish, thread, laminates and metal coatings. These items can then be tested for the presence of SigNature DNA markers through
optical screening or a forensic level authentication. Hundreds of millions of SigNature DNA markers now exist in the public domain
on items ranging from cotton to consumer product packaging to microcircuits. We believe that no markers have ever been copied.
SigNature T DNA and fiberTyping
.
There
is one common thread that runs through the global textile industry: success breeds counterfeiting and diversion. SigNature T DNA
markers are used for brand protection efforts and raw material source compliance programs. For example, cotton fibers can be tagged
at source, verified as “American grown” and then traced through every step of the supply chain. Its information is
stored in our database, operating much like a bar code. In addition, our patented genotyping platform, known as “fiberTyping’,
is complementary to tagging with SigNature T botanical DNA. fiberTyping indicates the cotton species while SigNature T DNA is used
as an identifier for traceability. fiberTyping cannot be used to track a specific cotton batch through the supply chain, a function
which can only be accomplished by our SigNature T DNA system. For example, entities in the cotton industry use fiberTyping to differentiate
purity or blends of higher-end Pima Extra Long Staple cotton and lower-end upland cotton, in conjunction with SigNature T DNA marking
applied at the gin, for traceability to the source.
DNAnet.
Recognizing that
DNA-based evidence is the cornerstone of the modern era of law enforcement, we have created what we believe to be an effective
crime fighting tool: DNAnet, a DNA marker that can be used to definitively link evidence and offenders to specific crime scenes
and help return stolen or lost property to its rightful owner. As the crime is investigated, the fluorescing DNA marker can assist
police in linking the offender and stolen items to a specific crime scene, creating a greater ability to identify and convict.
Sentry.
Sentry intruder tagging
spray systems help to expand and strengthen any security effort by providing the police and prosecutors a means of directly linking
criminals to crimes. Each spray canister is designed to be unique to each store, warehouse, or sting operation. In the event of
a crime, the fleeing offender is sprayed with an indelible, fluorescing DNA taggant. As the crime is investigated, the fluorescing
DNA marker can assist police in linking the offender and stolen items to a specific crime scene, creating a greater ability to
identify and convict. Whether deployed as an offender spray, fog in a retail location or a degradation dye in cash handling boxes,
DNA markers facilitate conviction, and establish a heightened level of deterrence. While any commercial/retail establishment could
benefit from the addition of a Sentry system, ideal areas of use include: banks, ATMs, pharmacies, jewelry stores, convenience
stores, pawn brokers and gun shops.
SmokeCloak DNA
.
When deployed
in pharmacies, banks, commercial or retail locations, SmokeCloak DNA helps protect staff, customers and assets. A thick and disorienting
fog wards off offenders and deposits a unique, location-specific DNA marker on skin, clothing and stolen items to serve as a strong
crime fighting and loss prevention tool.
digitalDNA.
digitalDNA is a software platform
that enables customers to manage the security of DNA-marked goods from point of marking to point of authentication or validation
to end of life. The system offers DNA custody management, location-based tracking, forensic sample submission, certificate of DNA
authentication issuance, customer account administration, and online training. The cloud-based platform can be customized for each
customer’s business processes and conforms to strict security standards for the International Organization for Standardization,
PCI, and Federal Information Processing Standards. The digitalDNA platform is the data management and reporting hub for DNA on-site
authentication and optical mark in-field validation with our Multi-Mode Reader, third-party bar code readers and other data input
devices.. Embedding our proprietary DNA into bar code ink serves as the forensic backstop for tags which can be easily copied.
The system is designed to share data with third-party applications.. Market-specific configurations are used in government and
textiles supply chain applications for over two years, accumulating over 150,000 marked items..
Large-scale production of specific DNA sequences using
PCR.
Our Triathlon™ PCR systems allow for the large-scale production of specific DNA sequences. The systems are self-contained
and modular, can work together in mass production or can be used individually throughout the world, offering the advantage of delivering
DNA locally and securely. These DNA sequences are being used by customers as a diagnostic and reagent.
Plan of Operations
General
To date, the substantial portion of our
revenues have been generated from sales of our SigNature DNA and SigNature T DNA, our principal anti-counterfeiting and product
authentication solutions. We expect to continue to grow revenues from sales of our SigNature DNA platform ingredient, including
our Signature T DNA, DNAnet, Sentry, digitalDNA, and SmokeCloak DNA offerings as well as from large scale production of specific
DNA sequences using PCR. Our revenues in recent periods have been driven in part by developments in the textile and
apparel authentication, electronics authentication, cash-in-transit, and asset protection markets. We intend
to pursue both domestic and international sales opportunities in each of these vertical markets, and select other vertical markets.
The cotton ginning season in the United States takes place between September and December each year, therefore, revenues from our
cotton customer contracts may be seasonal. For a discussion on seasonality see Note A to the accompanying condensed consolidated
financial statements.
Critical Accounting Policies
See Note A to the accompanying unaudited
condensed consolidated financial statements for our critical accounting policies.
Comparison of Results of Operations
for the Three Month Periods Ended June 30, 2016 and 2015
Revenues
For the three month periods ended
June 30, 2016 and 2015, we generated $652,896 and $2,267,671, respectively, in revenues. The decrease in revenues in the
three month period ended June 30, 2016 of $1,614,775 or 71% was primarily due to a decrease in revenue related to sales to
the textile industry for protecting cotton supply chains of $1,200,000 and a decrease in revenues from government contract
awards of approximately $447,000, which one expired on July 14, 2016 and the other expires the end of August 2016.
Costs and Expenses
Cost of Revenues
Cost of revenues expense for the three
month period ended June 30, 2016 decreased by $7,755 or 6% from $129,015 for the three month period ended June 30, 2015 to $121,260
for the three month period ended June 30, 2016. This decrease is due to lower sales to the textile industry for protecting cotton
supply chains as well as the three month period ended June 30, 2015 having more development revenue as compared to the same period
in the current fiscal year.
Selling, General and Administrative
Selling, general and administrative expenses
for the three month period ended June 30, 2016 decreased by $515,272 or 16% from $3,222,692 for the three month
period ended June 30, 2015 to $2,707,420 for the three month period ended June 30, 2016. The decrease is attributable to
a decrease in stock based compensation expense of $500,000, primarily associated with stock option modifications during the three
months ended June 30, 2015, resulting from the extension of certain stock options, as well as $160,000 in reduced legal costs
primarily associated with the Company’s proxy filing and fees related to patents.
Research and Development
Research and development expenses increased
to $1,077,916 for the three month period ended June 30, 2016 from $466,841 for the three month period ended June 30, 2015, an increase
of $611,075 or 131%. This increase is primarily due to development costs incurred in relation to the two government development
contract awards as well as costs related to the cooperative research and development agreement with the United States Department
of Agriculture (“USDA”) for enhanced cotton genotyping.
Depreciation and Amortization
In the three month period ended June 30,
2016, depreciation and amortization increased by $47,302 or 39% from $121,339 for the three month period ended June 30, 2015 to
$168,641 for the three month period ended June 30, 2016. This increase is attributable to quarterly amortization expense relating
to customer relationships and technology purchased from Vandalia during September 2015 as well as fixed assets purchased during
fiscal 2016.
Other income (expense)
In the three month period ended June 30,
2016, other income (expense) increased by $56,388 from expense of $3,718 for the three month period ended June 30, 2015 to income
of $52,670 for the three month period ended June 30, 2016. This increase is attributable to the return of escrow funds of $50,000
associated with the asset purchase agreement with Vandalia.
Net Loss
Net loss increased by $1,696,129
or 102% from a loss of $1,670,882 to a loss of $3,367,011, for the three months ended June 30, 2016, compared to the prior year
period due to the factors noted above.
Comparison of Results of Operations
for the Nine Month Periods Ended June 30, 2016 and 2015
Revenues
For the nine month periods ended June
30, 2016 and 2015, we generated $2,550,332 and $5,028,234, respectively, in revenues. The decrease in revenues in the nine
month period ended June 30, 2016 of $2,477,902 or 49% was primarily due to a decrease in revenue related to two
government contract awards of $925,000, which one expired on July 14, 2016 and the other is set to expire in August of 2016, as
well as revenues related to the set up and marking of cotton of $1,200,000. In addition, we experienced
a decrease in revenue from suppliers of the DLA due to the consolidation of our contracts with multiple individual suppliers of
the DLA to one contract directly with the DLA, as well as other decreases in revenue from another military customer for a total
decrease of approximately $571,000. These decreases were offset by an increase in revenue in DNA manufacturing for the diagnostic
market of $242,000.
Costs and Expenses
Cost of Revenues
Cost of revenues expense for the nine month
period ended June 30, 2016 increased by $175,596 or 136% from $129,015 for the nine month period ended June 30, 2015 to $304,611
for the nine month period ended June 30, 2016. This increase is attributable to purchases relating to the production of our products
within the textile and home asset marking markets as well as the nine months ended June 30, 2015 having a higher portion of its
revenue from development contracts.
Selling, General and Administrative
Selling, general and administrative expenses
for the nine month period ended June 30, 2016 decreased by $1,707,563 or 17% from $10,323,809 for the nine month period
ended June 30, 2015 to $8,616,246 for the nine month period ended June 30, 2016. The decrease is primarily attributable
to a decrease in stock-based compensation expense of approximately $2.1 million, primarily associated with grants to employees
during the nine month period ended June 30, 2016 having a four year vesting period whereas the grants to employees during the
nine month period ended June 30, 2015 vested immediately as well as with stock option modifications during the nine months ended
June 30, 2015. During the nine months ended June 30, 2016, there were also decreases in legal and professional fees of $113,000
and consulting fees of $100,000. These decreases were primarily offset by increases in accounting fees of approximately $182,000
and an increase in payroll of $450,000. The increase in payroll relates to an increase in headcount of 6 fulltime employees as
well as an accrual for estimated year-end employee bonuses. The headcount increases are related to employees in production as
well as scientists to assist with the conversion of our pilot studies to commercialization.
Research and Development
Research and development expenses increased
to $2,861,583 for the nine month period ended June 30, 2016 from $1,587,326 for the nine month period ended June 30, 2015, an increase
of $1,274,257 or 80%. This increase is primarily due to development costs incurred in relation to two government development contract
awards as well as costs related to the cooperative research and development agreement with the USDA for enhanced cotton genotyping.
Depreciation and Amortization
In the nine month period ended June 30,
2016, depreciation and amortization increased by $203,824 or 58% from $354,144 for the nine month period ended June 30, 2015 to
$557,968 for the nine month period ended June 30, 2016. This increase is attributable to $69,000 of amortized customer purchase
orders acquired from Vandalia and fulfilled by the Company during the three month period ended December 31, 2015, as well as approximately
$69,000 relating to amortization expense for customer relationships and technology purchased from Vandalia during September 2015.
Additionally, depreciation expense increased year over year due to assets purchased.
Other income (expense)
In the nine month period ended June 30,
2016, other income (expense) increased by $36,459 or 216% from expense of $16,853 for the nine month period ended June
30, 2015 to income of $19,606 for the nine month period ended June 30, 2016. This increase is attributable to the return
of escrow funds of $50,000 associated with the asset purchase agreement with Vandalia.
Loss on Change in Fair Value of Warrant
Liability
Loss from change in fair value of warrant
liability during the nine month period ended June 30, 2015 was $2,994,540. This change in fair value related to warrants containing
certain reset provisions which required us to classify them as liabilities, mark the warrants to market and record the change in
fair value at each reporting period, and upon exercise as a non-cash adjustment to our current period operations.
Net Loss
Net loss decreased $1,624,199 or
14% from a loss of $11,385,102 to a loss of $9,760,903, for the nine months ended June 30, 2016, compared to the
prior year period due to the factors noted above.
Liquidity and Capital Resources
Our liquidity needs consist of our working
capital requirements and research and development expenditure funding. As of June 30, 2016, we had working capital of $9,109,783.
For the nine month period ended June 30, 2016, we generated a net cash flow deficit from operating activities of $7,450,315 consisting
primarily of our loss of $9,760,903 net with non-cash adjustments of $557,968 in depreciation and amortization charges, $1,444,170
for stock-based compensation, $5,520 loss related to property, plant and equipment disposal, $78,134 in common stock issued for
consulting services, and $106,247 in provision for bad debt expense. Additionally, we had a net decrease in operating assets of
$141,522 and a net decrease in operating liabilities of $22,973. Cash used in investing activities was $594,808 for the purchase
of property, plant and equipment and $43,353 for the purchase of intangible assets. Cash provided by financing activities
was $7,857,565 consisting primarily of net proceeds from the sale of common stock in the public offering in November 2015 and
the concurrent private placement of warrants, which permit warrant holders to exercise by means of a cashless exercise feature
in the event we do not have an effective registration statement or current prospectus providing for the resale thereof.
We have recurring net losses, which have
resulted in an accumulated deficit of $221,402,312 as of June 30, 2016. We have incurred a net loss of $9,760,903,
for the nine month period ended June 30, 2016. At June 30, 2016 we had cash and cash equivalents of $7,086,773. Our current capital
resources include cash and cash equivalents, accounts receivable, inventories and prepaid expenses and other current assets. Historically,
we have financed our operations principally from the sale of equity securities.
We expect to finance operations and capital
expenditures primarily through the cash received from the November 2015 public offering and concurrent private placement as well
as collection of our current accounts receivables. We estimate that our cash and cash equivalents and the collection of our current
accounts receivables are sufficient to fund operations and capital expenditures for the next twelve months.
We may require additional funds to complete
the continued development of our products, product manufacturing, and to fund expected additional losses from operations, until
revenues are sufficient to cover our operating expenses. If revenues are not sufficient to cover our operating expenses, and if
we are not successful in obtaining the necessary additional financing, we will most likely be forced to reduce operations.
As a result of our having filed with the
SEC on July 22, 2016 certain audited historical financial statements relating to the assets of Vandalia acquired in September 2015,
which was past the date on which they were required to be filed, we are currently ineligible to use Form S-3, a streamlined registration
form, to offer or sell securities until December 1, 2016.
We expect capital expenditures to be less
than $1,500,000 in fiscal 2016. Our primary investments are expected to be in laboratory equipment to support prototyping, manufacturing,
our authentication services, and outside services for our detector and reader development.
All of the real property used in our business
is leased under operating lease agreements.
On December 3, 2015, we exercised our option
to extend the lease for our corporate headquarters in Stony Brook, New York for one additional three-year period. The additional
three year term commenced June 1, 2016 and will end May 31, 2019.
Subsequent Events
As disclosed in Note G to the accompanying
condensed consolidated financial statements, on July 28, 2016, effective July 1, 2016, we entered into a new employment agreement
with our Chief Executive Officer.
Product Research and Development
We anticipate spending approximately $2,750,000
for product research and development activities during the next twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Inflation
The effect of inflation on our revenue
and operating results was not significant.