See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
See the accompanying notes to the unaudited
condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES
General
The accompanying condensed consolidated
financial statements as of June 30, 2017 and for the three and nine month periods ended June 30, 2017 and 2016 are unaudited.
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the
requirements of Regulation S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to
Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles
for complete 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, 2017 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2017. 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, 2016 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
6, 2016.
The condensed consolidated balance sheet
as of September 30, 2016 contained herein has been derived from the audited consolidated financial statements as of September
30, 2016, but does not include all disclosures required by GAAP.
Business and Basis of Presentation
The Company is principally devoted to
developing and marketing SigNature DNA technology solutions in the United States, Europe and Asia. To date, the Company has had
a limited operating history with its current business model, and as a result, its operations have produced limited recurring revenues
from its products and services; 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., Applied DNA Sciences Europe
Limited, and Applied DNA Sciences India Private Limited which currently have no operations or activity. Applied DNA Sciences India
Private Limited was incorporated in India on June 22, 2017. 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,
2017 and September 30, 2016, the Company recorded deferred revenue of $674,429 and $2,737,588, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(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. Revenue for firm fixed price government contract awards
are recognized over the period of the contract. The Company recognized revenue from these contracts of $62,337 for the three and
nine month period ended June 30, 2017. The Company recognized revenue from these contracts of $210,219 and $993,266 for the three
and nine month periods ended June 30, 2016, respectively.
The Company recognized the revenue
under its former memorandum of understanding ("MOU"), which expired on May 30, 2017, with LD Commodities Cotton
LLC ("Dreyfus") when the product has been shipped, as there is no right of return under this arrangement and there
is a commitment from their customer to purchase the marked cotton. 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 former mutual license agreement with Himatsingka
America Inc. (formerly known as Divatex Home Fashion, Inc.) (“Himatsingka”), the Company has 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.
The Company had an accounts receivable balance due from Dreyfus related to the former MOU of $2,783,246 and
tagging fees payable to Himatsingka of $594,614 as of June 30, 2017. The Company received proceeds in respect of the accounts receivable
balance of $1,286,320 on August 4, 2017, net of Himatsingka’s portion of the tagging fee.
On June 23, 2017, the Company entered
into a new licensing agreement (the “Licensing Agreement”) with Himatsingka, which replaces the terms of the MOU.
The Licensing Agreement terminates an earlier licensing agreement dated March 25, 2015 between Divatex Home Fashion, Inc. (a predecessor
to Himatsingka) and the Company. Under the terms of the Licensing Agreement, Himatsingka will be solely responsible for promoting,
marketing and selling on a worldwide basis the Company’s technology with respect to finished and unfinished cotton products.
The Licensing Agreement grants Himatsingka an exclusive license to use the Company’s technology in respect of cotton, subject
to certain carve-outs including governmental users, non-commercial trade associations and others. The Licensing Agreement has
a term that continues until June 23, 2042, except in the case of patents, in which case the term continues with respect to a patent
until such patent is no longer in effect. The Company will no longer ship taggant to mark
cotton pursuant to the terms of the MOU with Dreyfus. Instead, the Company will ship taggant to mark cotton to locations designated
by Himatsingka, and Himatsingka will take possession of inventory upon shipment. The Licensing Agreement provides that Himatsingka
will make payments for the use of the Company’s taggant technology on a net 60 days basis (with the exception of the first
delivery which was on a 180 day basis). In addition, Himatsingka will make royalty payments on a quarterly basis in arrears in
the event the Company’s technology is used on non-home products. Himatsingka is responsible for the inspection and compliance
within the supply chain. Himatsingka is generally required to use the Company’s technology during the term of the Licensing
Agreement, subject, among other things, to their customers’ requirements. As part of the Licensing Agreement, the Company
will establish an independent testing laboratory in Ahmedabad, India.
The Licensing Agreement includes customary mutual indemnification provisions.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
The cotton ginning season in the United
States takes place between September and February 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.
Income Taxes
The Company recognizes deferred tax liabilities
and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates
the degree to which tax assets and credit carry forwards will result in a benefit based on expected profitability by tax jurisdiction.
In its interim financial statements, the
Company follows the guidance in ASC 270, “Interim Reporting” and ASC 740 “Income Taxes”, whereby the Company
utilizes the expected annual effective tax rate in determining its income tax provisions for the interim periods. That rate differs
from U.S. statutory rates primarily as a result of valuation allowance related to the Company’s net operating loss carryforward
as a result of the historical losses of the Company.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING
POLICIES (continued)
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, 2017 and 2016, common stock equivalent shares are excluded from the computation of the diluted loss per share as their
effect would be anti-dilutive.
Securities that could potentially dilute basic net income per share in the future that were not included in
the computation of diluted net loss per share because including those securities would have been anti-dilutive for the three and
nine month periods ended June 30, 2017 and 2016. Common stock equivalents as of June 30, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
9,548,969
|
|
|
|
7,323,060
|
|
Stock options
|
|
|
5,276,222
|
|
|
|
4,414,865
|
|
|
|
|
14,825,191
|
|
|
|
11,737,925
|
|
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.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
The Company’s revenues earned from sale of products and services for the three month period ended June
30, 2017 included an aggregate of 11% and 71% from two customers, respectively. The Company’s revenues earned from sale of
products and services for the nine month period ended June 30, 2017 included an aggregate of 15%, 18%, and 38% from three customers,
respectively.
The Company’s revenues earned from
sale of products and services for the three month period ended June 30, 2016 included 34% and 43% from two customers, respectively.
The Company’s revenues earned from sale of products and services for the nine month period ended June 30, 2016 included
16% and 47%, from two customers, respectively.
Two customers accounted for 59% and 32% of the Company’s
accounts receivable at June 30, 2017. One customer accounted for 78% of the Company’s total accounts receivable at September
30, 2016.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(unaudited)
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
In May 2017, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2017-09, Compensation – “Stock
Compensation (Topic 718): Scope of Modification Accounting”
,
which provides guidance about which changes to the terms
or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement
is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not
expect the adoption of ASU 2016-09 to have a material impact on our condensed consolidated financial statements and related disclosures.
In January 2017, the FASB ASU 2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments
in this update are to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business
affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating
the impact of adopting this guidance.
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).
The purpose of the amendment is to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from
the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s
goodwill with the carrying amount of that goodwill. For public entities, the amendments in ASU 2017-04 are effective for interim
and annual reporting periods beginning after December 15, 2019. The Company is currently assessing the impact of ASU 2017-04
on its condensed consolidated financial statements.
In March 2016, the FASB issued 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 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 May 2014, the FASB issued ASU No. 2014-09, “Revenue
from Contracts with Customers” (“ASU 2014-09”), which was subsequently modified in August 2015 by ASU No. 2015-14, Revenue
from Contracts with Customers: Deferral of the Effective Date. This guidance will be effective for fiscal years (and interim reporting
periods within those years) beginning after December 15, 2017. The core principle of ASU No. 2014-09 is that companies should
recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company
expects to receive. It requires additional disclosures to describe the nature, amount, timing and uncertainty of revenue and cash
flows from contracts with customers. In 2016 and 2017, the FASB issued additional ASUs that clarify the implementation guidance
on principal versus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and
on narrow-scope improvements and practical expedients (ASU 2016-12), revenue recognition criteria and other technical corrections
(ASU 2016-20) as well as clarifying the scope of asset derecognition guidance and accounting for partial sales of nonfinancial
assets (ASU 2017-05). The Company is in the process of evaluating the provisions of these ASU’s and assessing the potential
effect on the Company’s condensed consolidated financial position or results of operations. However, based upon the revenue
recognized for the current contracts in place as of June 30, 2017, we expect to identify similar performance obligations under
these ASUs as compared with the deliverables and separate units of accounting previously identified. As a result, we expect the
timing of our revenue to be the same assuming that there are no significant changes to our current contracts and arrangements.
The Company is also evaluating the transition guidance under ASU 2014-09 to determine if it will apply the full retrospective
or modified retrospective approach.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(unaudited)
NOTE B — LIQUIDITY AND MANAGEMENT’S
PLAN
The Company has recurring net
losses, which have resulted in an accumulated deficit of $
233,818,477
as of June 30, 2017. The Company incurred a net loss of $10,001,089 and generated negative operating cash flow of
$6,565,280 for the nine month period ended June 30, 2017. The Company also had working capital of $5,738,584 and cash and
cash equivalents of $2,402,809 as of June 30, 2017. The Company’s current capital resources include cash and
cash equivalents, accounts receivable, and inventories. Historically, the Company has financed its operations principally
from the sale of equity securities. As discussed in Note E, on November 7, 2016, the Company closed a private placement of
common stock and warrants to purchase common stock, for aggregate gross proceeds of $5 million, before deducting placement
agent fees and offering expenses. Total net proceeds were approximately $4.3 million. On June 28, 2017, the Company entered
into subscription agreements in connection with a private placement of common stock for aggregate gross proceeds of
$1,805,000. Total net proceeds were approximately $1,771,000. Included in the aggregate proceeds was $1,505,000 in stock
subscriptions receivable as of June 30, 2017. Proceeds of $505,000 related to the stock subscriptions receivable were
received from July 1, 2017 through the date of filing of this Form 10-Q, and therefore were reflected as an asset in the
condensed consolidated balance sheet. The Company agreed to extend the payment term of $1,000,000 with respect to one
investor for an additional 30 days to August 28, 2017, and therefore this amount is reflected as a reduction of
stockholders’ equity in the condensed consolidated balance sheet.
The Company expects to finance operations
and capital expenditures primarily through cash received from the November 2016 and June 2017 private placements, and the collection
of its current accounts receivables. The Company estimates that it will have sufficient cash and cash equivalents to fund operations
for the next twelve months from the balance sheet date.
The Company may require additional funds
to expand the marketing and 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. If revenues are not sufficient
to cover the Company's operating expenses, and if the Company is not successful in obtaining necessary additional financing, it
will most likely be forced to reduce operations.
NOTE C — INVENTORIES
Inventories consist of the following:
|
|
June 30,
2017
|
|
|
September 30,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
190,365
|
|
|
$
|
100,420
|
|
Finished goods
|
|
|
186,155
|
|
|
|
197,339
|
|
Total
|
|
$
|
376,520
|
|
|
$
|
297,759
|
|
NOTE D — ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
Accounts payable and accrued liabilities
are as follows:
|
|
June 30,
2017
|
|
|
September 30,
2016
|
|
|
|
(unaudited)
|
|
|
|
|
Accounts payable
|
|
$
|
1,016,204
|
|
|
$
|
1,530,258
|
|
Accrued salaries payable
|
|
|
537,510
|
|
|
|
678,982
|
|
Other accrued expenses
|
|
|
176,846
|
|
|
|
38,101
|
|
Total
|
|
$
|
1,730,560
|
|
|
$
|
2,247,341
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(unaudited)
NOTE E — CAPITAL STOCK
On November 2, 2016, the Company entered
into a securities purchase agreement with an institutional investor providing for the purchase of $5 million of common stock and
warrants at a combined price of $2.20 per share of common stock and warrant (the “Private Placement”). In the Private
Placement, the Company sold 2,272,727 shares of its common stock and warrants to purchase 2,272,727 shares of its common stock.
The warrants have the same terms as the Company's existing publicly traded warrants (APDNW) with an exercise price of
$3.50 per share and an expiration date of November 20, 2019. The offering closed on November 7, 2016.
The Company agreed to file a registration
statement providing for the resale of these securities on Form S-3 by December 7, 2016. On December 6, 2016, the Company filed
the Form S-3, which was declared effective by the SEC on December 13, 2016. Upon effectiveness of the registration statement,
the common stock and warrants issued in the Private Placement became freely tradeable on The NASDAQ Capital Market under the symbols
"APDN" and "APDNW", respectively.
The aggregate gross proceeds to the
Company from the Private Placement were $5 million before deducting the placement agents' fee and other offering expenses. As
a result of the placement agents’ fee and other offering expenses attributable to the Private Placement, the net proceeds
were $4,319,861.
In connection
with the closing of this Private Placement, as partial compensation, on November 7, 2016, the Company granted warrants to purchase
an aggregate of 68,182 shares of its common stock to the Company's placement agents, Maxim Group LLC and Imperial Capital LLC
(the “Placement Agent Warrants”) at an exercise price of $2.53 (115% of the public offering price), subject to adjustment
as set forth therein (including for stock dividends and splits and certain other distributions and “Fundamental Transactions,”
as defined therein). The Placement Agent Warrants will be exercisable beginning six months following the closing date of the Private
Placement and terminate at 5:00 P.M. (Eastern Standard Time) on November 7, 2021. In addition, the Placement Agent Warrants provide
for cashless exercise, which the Placement Agents may elect if there is no effective registration statement registering the resale
of the shares issuable upon exercise of the Placement Agent Warrants. The number of shares of common stock that may be acquired
by the Placement Agents upon any exercise of the Placement Agent Warrants (or otherwise in respect hereof) shall be limited to
the extent necessary to insure that, following such exercise, the total number of shares of common stock then beneficially owned
by the Placement Agent and its Affiliates (as defined therein) and any other Persons whose beneficial ownership of common stock
would be aggregated with the Placement Agent pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), does not exceed 9.99% of the total number of issued and outstanding shares of common stock.
On June 28, 2017 the Company entered
into subscription agreements for a private placement of its common stock,with a group of investors, including a strategic
investor which is also a key customer and intellectual property licensee of the Company as well as all of the Company’s
executive officers and all members of the Board of Directors. As a result of the private placement, the Company agreed to
issue 1,025,574 shares of common stock at a price of $1.76 per share for total gross proceeds of $1,805,000. As part of the
private placement, the Company’s management and Board of Directors purchased 315,346 shares of common stock for gross
proceeds of $555,000.
Included in the aggregate
proceeds was $1,505,000 in stock subscriptions receivable as of June 30, 2017. Proceeds of $505,000 related to the stock
subscriptions receivable were received from July 1, 2017 through the date of filing of this Form 10-Q, and therefore were
reflected as an asset in the condensed consolidated balance sheet. The Company agreed to extend the payment term of
$1,000,000 with respect to one investor for an additional 30 days to August 28, 2017, and therefore this amount is reflected as a reduction of
stockholders’ equity in the condensed consolidated balance sheet. The issuance of the Common Stock was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) of such Securities Act and Regulation D
promulgated thereunder and such Common Stock will therefore be restricted. Each investor gave representations that he, she or
it was an “accredited investor” (as defined under Rule 501 of Regulation D) and that he, she or it is purchasing
such securities without a present view toward a distribution of the securities. In addition, there was no general
solicitation conducted in connection with the offer and sale of the securities.
NOTE F — STOCK OPTIONS AND WARRANTS
Warrants
During the nine month period ended June 30, 2017, the Company issued
warrants
to purchase 2,272,727 shares of its common stock as part of the Private Placement (See Note E). In addition, warrants to purchase
an aggregate of 68,182 shares of common stock were issued to the Company's placement agents, Maxim Group LLC and Imperial Capital
LLC (See Note E).
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(unaudited)
NOTE F — STOCK OPTIONS AND WARRANTS
(continued)
Warrants
, continued
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.
Transactions involving warrants are summarized
as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Balance at October 1, 2016
|
|
|
7,208,060
|
|
|
$
|
3.64
|
|
Granted
|
|
|
2,340,909
|
|
|
|
3.47
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
Balance at June 30, 2017
|
|
|
9,548,969
|
|
|
$
|
3.60
|
|
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”).
The number of shares of common stock that can be issued as stock awards and stock options thereunder is 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 is
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, 2017, a total of 275,752 shares have been issued and options to purchase 5,798,790 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
|
|
|
Weighted Average Contractual Life (Years)
|
Outstanding at October 1, 2016
|
|
|
4,403,234
|
|
|
$
|
4.08
|
|
|
|
|
|
|
|
Granted
|
|
|
1,039,010
|
|
|
|
2.27
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(166,022
|
)
|
|
|
(4.20
|
)
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
5,276,222
|
|
|
$
|
3.72
|
|
|
|
|
|
|
|
Vested at June 30, 2017
|
|
|
3,823,720
|
|
|
$
|
3.93
|
|
|
$
|
-
|
|
|
4.25
|
Non-vested at June 30, 2017
|
|
|
1,452,502
|
|
|
|
|
|
|
$
|
-
|
|
|
7.64
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(unaudited)
NOTE F — STOCK OPTIONS AND WARRANTS
(continued)
Stock Options
, continued
During the nine month period ended June 30, 2017, the Company
issued an aggregate of 1,039,010 options to employees, non-employee board of director members (including award modifications of
119,182 options), a consultant and members of the strategic advisory board. Included in these grants were 300,000 options granted
to executives during the nine month period ended June 30, 2017 and 5,000 performance based options granted to a consultant. These
performance based options vest when a certain performance condition is met by the consultant. During the three month period ended
June 30, 2017, the Company issued an aggregate of 125,001 options (including award modifications of 45,001 options) to employees,
non-employee members of the board of directors, and members of the strategic advisory board. Included in these grants were 20,000
options issued to a member of the board of the directors.
The Company uses the Black Scholes Option
Pricing Model to determine the fair value of options issued to employees and consultants. The following significant assumptions
in the Black Scholes Option Pricing Model were utilized to estimate the fair value of share based payment awards during the three
and nine month periods ended June 30, 2017 and 2016:
|
|
Three
Month Period
Ended
June 30, 2017
|
|
|
Nine
Month Period
Ended
June 30, 2017
|
|
Stock price
|
|
$
|
1.58
|
|
|
$
|
2.01
|
|
Exercise price
|
|
$
|
2.58
|
|
|
$
|
2.29
|
|
Expected term, years
|
|
|
6.93
|
|
|
|
5.47
|
|
Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Volatility
|
|
|
115
|
%
|
|
|
112
|
%
|
Risk free rate
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
Three
Month Period
Ended
June 30, 2016
|
|
|
Nine
Month Period
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 $566,377 and $515,496
as stock compensation expense for the three month periods ended June 30, 2017 and 2016, respectively. The Company recorded $2,562,300
and $1,444,170 as stock compensation expense for the nine month periods ended June 30, 2017 and 2016, respectively. Included in
this amount is $15,414 and $89,951 for the three and nine month period ended June 30, 2017 for stock option modifications primarily
to extend the term of options for certain employees and nonemployee board of director members. As of June 30, 2017, unrecorded
compensation cost related to non-vested awards was $2,527,059, which is expected to be recognized over a weighted average period
of approximately 3.37 years. The weighted average grant date fair value per share for options granted during the three and nine
month periods ended June 30, 2017 was $1.17 and $1.57, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2017
(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, 2017 was $134,519 and $417,684, respectively. Total rent expense for the three and nine month periods
ended June 30, 2016 was $126,126 and $406,235, respectively.
Employment Agreement
The Company has an employment agreement
with Dr. James Hayward, its Chief Executive Officer. 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. Dr Hayward's annual salary is $400,000.
Effective May 7, 2016, the Chief Executive
Officer's annual salary was voluntarily reduced by $100,000. Effective May 20, 2017, the Chief Executive’s annual salary
was voluntarily reduced by an additional $50,000. Accordingly, his current annual base salary as of June 30, 2017 is $250,000.
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 H– GEOGRAPHIC AREA INFORMATION
Net revenues by geographic location of
customers are as follows:
Three Month Period Ended June 30,
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
1,448,776
|
|
|
$
|
366,522
|
|
Europe
|
|
|
326,606
|
|
|
|
266,618
|
|
Asia and other
|
|
|
22,000
|
|
|
|
19,756
|
|
Total
|
|
$
|
1,797,382
|
|
|
$
|
652,896
|
|
Nine Month Period Ended June 30,
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
2,592,719
|
|
|
$
|
1,812,740
|
|
Europe
|
|
|
953,944
|
|
|
|
654,621
|
|
Asia and other
|
|
|
59,100
|
|
|
|
82,971
|
|
Total
|
|
$
|
3,605,763
|
|
|
$
|
2,550,332
|
|