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
See the accompanying notes to the unaudited condensed
consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE A — NATURE OF THE BUSINESS
Applied DNA Sciences, Inc. (“Applied
DNA” or the “Company”) develops and markets DNA-based technology solutions utilizing its LinearDNATM large-scale
polymerase chain reaction (“PCR”) based manufacturing platform. The Company’s proprietary platform produces large quantities
of DNA for use in the nucleic acid-based in vitro diagnostics and preclinical nucleic-acid based drug development and manufacturing
markets (“Biotherapeutic Contract Research and Manufacturing”) and for supply chain security, anti-counterfeiting and anti-theft
technology purposes (“Non-Biologic Tagging”). In response to the SARS-CoV-2 (“COVID-19”) pandemic, the Company
developed a PCR-based molecular diagnostic test for COVID-19, which was granted Emergency Use Authorization (EUA) by the U.S. Food and
Drug Administration (“FDA”) in May 2020. The Company currently manufactures and sells its EUA authorized COVID-19 molecular
diagnostic test kit under the LineaTM COVID-19 Assay Kit trademark (“COVID-19 Diagnostic Testing”). In addition,
and in further response to the COVID-19 pandemic, the Company developed and is currently offering COVID-19 pooled surveillance testing
to detect instances of COVID-19 in defined populations. Unlike diagnostic testing, which looks for the occurrence of COVID-19 at the individual
level, surveillance testing looks for infections within a defined population or community and can be used for making health management
decisions at the population level. The Company’s COVID-19 pooled surveillance testing services are currently offered under the safeCircleTM
trademark (“COVID-19 Surveillance Testing”). As of May 10, 2021, the Company also offers COVID-19 diagnostic testing services
under its wholly owned subsidiary that holds a New York clinical laboratory permit and a CLIA certification for COVID-19 testing using
EUA authorized methods and devices (“Clinical Testing Laboratory”). The Company is also developing an invasive circulating
tumor cell capture and identification technology (“iCTC Technology”) which uses a patented functional assay to capture live
invasive circulating tumor cell and associated lymphocytes that can be identified and expanded for further analysis, including genetic
sequencing.
Biotherapeutic Contract Research and Manufacturing
The Company’s patented continuous flow
PCR systems and other proprietary PCR-based production technology and post-processing systems that comprise the LinearDNATM platform
allows for the large-scale production of specific DNA sequences. The LinearDNATM platform is currently being used for
customers to manufacture DNA as components of in vitro diagnostic tests and for preclinical nucleic acid-based drug development in the
fields of adoptive cell therapies (CAR T and TCR therapies), DNA vaccines (anti-viral and cancer), RNA therapies, clustered regularly
interspaced short palindromic repeats (CRISPR) based therapies and gene therapies.
The Company provides preclinical contract research
and manufacturing services for the nucleic acid-based therapeutic markets. It works with biotech and pharmaceutical companies to convert
plasmid-based and/or viral transduction-based preclinical biotherapeutics into PCR-produced linear DNA-based forms that can be produced
on the Company’s LinearDNATM platform. In addition, it provides contract research services to RNA based drug and
biologic customers for preclinical studies. These services include the design, development and manufacture of PCR-produced DNA templates
for RNA. In addition, the Company also uses its LinearDNATM platform to produce very large gram-scale quantities of DNA
for the in vitro diagnostic market where the Company’s DNA is used for both commercially available diagnostics and diagnostics
under development.
The Company also seeks to develop,
acquire, and commercialize, itself or with partners, a diverse pipeline of nucleic acid-based therapeutics based on PCR-produced linear
DNA to improve existing nucleic acid-based therapeutics or to create new nucleic acid-based therapeutics that address unmet medical needs.
The Company is currently directly engaged in preclinical drug candidate development activities focusing on therapeutically relevant DNA
constructs manufactured via its LinearDNATM platform in the fields of DNA-based anti-viral and anti-cancer vaccines, CAR-T
cell immunotherapy and the manufacture of rAAV vectors for gene therapy.
The Company is also engaged in preclinical and
animal drug candidate development activities focusing on therapeutically relevant DNA constructs manufactured via its PCR-based production
platform. The Company seeks to develop, acquire and commercialize, alone or with partners, a diverse pipeline of nucleic acid-based therapeutics
based on PCR-produced linear DNA. To this end, the Company is currently working with its development partners Takis S.R.L. and Evvivax
S.R.L. (“Takis/Evvivax”) to develop an amplicon-based linear DNA vaccine for COVID-19 that would be manufactured on the Company’s
LinearDNATM platform. Together with its development partners, the Company’s amplicon-based linear COVID-19 vaccine
candidate has shown efficacy in preclinical cell and small animal studies. In September 2020, the Company entered into an Animal Clinical
Trial Agreement with Takis/Evvivax and with Veterinary Oncology Services, PLLC, an affiliate of Guardian Veterinary Specialists (“GVS”),
a multi-specialty veterinary hospital. In November 2020, the Company, together with Takis/Evvivax and GVS, announced receipt of approvals
from the New York State Department of Agriculture and Markets and the U.S. Department of Agriculture (“USDA”) on an advanced
clinical strategy to conduct a veterinary trial of an amplicon-based linear DNA vaccine COVID-19 candidate. The Company’s jointly
developed amplicon-based DNA vaccine for COVID-19 is currently in a veterinary clinical trial in domestic feline cats, with the end goal
of applying for a USDA Animal and Plant Health Inspection Service conditional license to enable commercial veterinary sales
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE A — NATURE OF THE BUSINESS, continued
Biotherapeutic Contract Research and Manufacturing, continued
for veterinary applications. In April 2021, the
Company announced preliminary data from its veterinary clinical trial in felines conducted with Takis/Evvivax and GVS. The preliminary
data showed that all felines in the trial produced SARS-CoV-2 neutralizing antibodies after a single prime dose of the vaccine candidate.
COVID-19 Diagnostic Testing
On May 13, 2020 the Company received an Emergency
Use Authorization (EUA) from the Food and Drug Administration (FDA) for the clinical use of the LineaTM COVID-19 Assay
Kit for the qualitative detection of nucleic acid from SARS-CoV-2 in respiratory specimens including anterior nasal swabs, self-collected
at a healthcare location or collected by a healthcare worker, and nasopharyngeal and oropharyngeal swabs, mid-turbinate nasal swabs, nasopharyngeal
washes/aspirates or nasal aspirates, and bronchoalveolar lavage specimens collected by a healthcare worker from individuals who are suspected
of COVID-19 by their healthcare provider. Under the EUA, testing is limited to laboratories certified under the Clinical Laboratory Improvement
Amendments of 1988, 42 U.S.C. §263a (“CLIA”), that meet requirements to perform high complexity tests.. Subsequently,
during July and November 2020, the Company was granted EUA amendments that expand the installed base of PCR equipment platforms on which
our Linea™ COVID-19 Assay Kit can be processed and significantly increased the daily testing capacity of the Linea™ COVID-19
Assay Kit through the use of automation. On May 11, 2021, the Company received a re-issued EUA that expanded the intended use of the LineaTM COVID-19
Assay Kit to include use with anterior nasal swab specimens that are self-collected in the presence of an healthcare provider from individuals
without symptoms or other reasons to suspect COVID-19 when tested at least weekly and with no more than 168 hours between serially collected
specimens. The scope of the EUA, as amended, is expressly limited to use consistent with the Instructions for Use by authorized laboratories,
certified under CLIA to perform high complexity tests. The EUA will be effective until the declaration that circumstances exist justifying
the authorization of the emergency use of in vitro diagnostics for detection and/or diagnosis of COVID-19 is terminated or until the EUA’s
prior termination or revocation. The Company’s Linea™ COVID-19 Assay Kit has not been FDA cleared or approved, and the EUA’s
limited authorization is only for the detection of nucleic acid from SARS-CoV-2, not for any other viruses or pathogens. The Company currently
manufactures the LineaTM COVID-19 Assay Kit at its facilities in Stony Brook, New York.
COVID-19 Surveillance Testing
Starting in July 2020, the Company under its
wholly owned subsidiary, Applied DNA Clinical Labs LLC (“ADCL”), began offering COVID-19 pooled surveillance testing to
customers as a Testing-as-a-Service (TaaS) offering branded under the safeCircleTM trademark. Unlike diagnostic
testing, which looks for the occurrence of COVID-19 at the individual level, safeCircleTM surveillance testing looks
for infections within a defined population or community and can be used for making health management decisions at the population
level. safeCircleTM surveillance testing uses high-sensitivity pooled COVID-19 testing utilizing the Linea™
COVID-19 Assay Kit. Under the safeCircleTM surveillance testing service, pooled test results are returned to the
sponsoring organization in the aggregate only, not directly to the participating individuals, and may be performed without CLIA
certification. Once potentially infected portions of a defined population are identified by the
safeCircleTM surveillance testing service, the individuals comprising the potentially infected portions of the
defined population are referred to follow on diagnostic testing at a clinical lab to obtain individual results, which may include
ADCL. ADCL is offering its safeCircleTM surveillance testing in compliance with current CDC, FDA, CMS and New York
State Department of Health recommendations. The use of pooled sampling procedures for the safeCircleTM surveillance
testing service has been internally validated by ADCL in compliance with current CDC guidance. The use of pooled sampling procedures
is not included in the LineaTM COVID-19 Assay Kit EUA.
The Company seeks to continue to commercialize
the safeCircleTM surveillance testing TaaS offering with institutional clients such as schools, colleges and businesses.
The Company currently provides safeCircleTM surveillance testing to primary/secondary/higher education institutions,
private clients, local governments, and businesses and college athletic programs.
In addition, starting in February 2021, the Company
began the development of its LineaTM COVID-19 Selective Genomic SurveillanceTM mutation panel for the qPCR-based
detection of SARS-CoV-2 genetic mutations (the “SGS Panel”). The SGS Panel is currently undergoing validation utilizing clinical
SARS-CoV-2 positive samples obtained from Northwell Health. Use of the SGS Panel is currently limited to Research Use Only (RUO).
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE A — NATURE OF THE BUSINESS, continued
Clinical Testing Laboratory
Under the Company’s ADCL subsidiary, on
May 10, 2021 the Company received its New York clinical laboratory permit and its CLIA certification from the New York State Department
of Health, Clinical Laboratory Evaluation Program (“CLEP”) for COVID-19 testing using EUA authorized methods and devices.
Now that certification was obtained, the Company will be able to operate a clinical diagnostic laboratory for COVID-19 testing and provide
individual patient testing results. Through ADCL, the Company seeks to further commercialize its EUA authorized LineaTM COVID-19
Assay Kit. The Company also intends to work towards expanding its New York clinical laboratory permit and CLIA certifications to include,
among other diagnostic tests, its iCTC Technology, which would allow the Company to further commercialize this technology.
iCTC Technology
The Company seeks to further develop, manufacture
and commercialize its Vita-AssayTM iCTC Technology acquired from Vitatex, Inc. in August 2019. The Company’s iCTC Technology
uses a patented functional assay to capture live invasive circulating tumor cell and associated lymphocytes that can be identified and
expanded for further analysis, including genetic sequencing. The Company’s iCTC Technology has been used and is currently being
used in a human cancer drug candidate clinical trial to monitor cancer disease progression in the trial subjects as a Research Use Only
diagnostic assay. The Company seeks to further develop and commercialize this technology and to potentially integrate aspects of the
iCTC Technology with its PCR know-how and with the LinearDNATM platform for cancer research and nucleic acid-based drug development.
Non-Biological Tagging and Related Services
The Company’s supply chain security business
allows its customers to use non-biologic DNA (molecular) tags, manufactured via its LinearDNATM platform, to mark objects,
and then identify these objects by detecting the absence or presence of the molecular tag. The Company’s core products include:
|
·
|
SigNature® Molecular Tags produced by the Company’s LinearDNATM platform,
provide an approach to authenticate goods within large and complex supply chains for materials such as cotton, and leather, in-home
textiles and apparel, pharmaceuticals and nutraceuticals, cannabis and other products.
|
|
·
|
SigNify® IF portable DNA readers and SigNify consumable reagent
test kits provide definitive real-time authentication of molecular tags in the field, providing a front-line solution for supply
chain integrity backed with forensic-level molecular tag authentication. Applied DNA’s software platform enables customers
to track materials throughout a supply chain or product life.
|
|
·
|
CertainT® trademark indicates the use of Applied DNA’s tagging,
testing and tracking platforms and solutions, enabling manufacturers, brands and trade organizations to convey proof of their product
claims.
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE B – BASIS OF PRESENTATION AND SUMMARY
OF ACCOUNTING POLICIES
Interim Financial Statements
The accompanying condensed consolidated financial
statements as of March 31, 2021 and for the three and six-month periods ended March 31, 2021 and 2020 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 GAAP for complete financial statements.
In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the three and six-month periods ended March 31, 2021 are not necessarily indicative of the results that may be expected
for the fiscal year ending September 30, 2021. 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, 2020 and footnotes
thereto included in the Annual Report on Form 10-K of the Company filed with the Securities and Exchange Commission
(“SEC”) on December 17, 2020, as amended.
Principles of Consolidation
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, ADCL and its majority-owned subsidiary, LineaRx, Inc. (“LRx”). Significant
inter-company transactions and balances have been eliminated in consolidation. The condensed consolidated balance sheet as of September
30, 2020 contained herein has been derived from the audited consolidated financial statements as of September 30, 2020 but does not include
all disclosures required by GAAP.
Liquidity
The Company has recurring net losses, which have
resulted in an accumulated deficit of $276,162,006 as of March 31, 2021. The Company incurred a net loss of $6,324,140 and generated
negative operating cash flow of $7,426,015 for the six-month period ended March 31, 2021. At March 31, 2021 the Company had cash and
cash equivalents of $13,925,997 and working capital of $15,289,055.
The Company has historically financed its operations
principally from the sale of equity and equity-linked securities. Through March 31, 2021, the Company has dedicated most of its financial
resources to research and development, including the development and validation of its own technologies as well as, advancing its intellectual
property, and general and administrative activities.
As discussed in Note F, on January 13, 2021,
the Company closed on a registered direct public offering of 1,810,000 shares of Common Stock at a purchase price of $8.30 per share.
Net proceeds, after deducting underwriting discounts and commissions, and other offering expenses, were approximately $13.8 million.
In addition, during the six-month period ended March 31, 2021, 520,151 warrants were exercised, resulting in net proceeds, after deducting
underwriting commissions, to the Company of approximately $2.6 million.
The Company expects to finance its operations
primarily through cash received from the January 2021 registered direct public offering and the warrant exercises, discussed above, as
well as collection of its accounts receivable. The Company estimates that it will have sufficient cash and cash equivalents to fund operations
for the next twelve months from the date of filing of this quarterly report.
The Company may require additional funds to
complete the continued development of its products, services, product manufacturing, and to fund expected additional losses from
operations until revenues are sufficient to cover its operating expenses. In addition, if the Company is successful with any of its
preclinical vaccine candidates, the Company would require additional funds to complete the vaccine candidate development. If
revenues are not sufficient to cover the Company’s operating expenses, and if the Company is not successful in obtaining the
necessary additional financing, the Company will most likely be forced to reduce operations.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE B – BASIS OF PRESENTATION AND SUMMARY
OF ACCOUNTING POLICIES, continued
COVID-19 Risks and Uncertainties
In March 2020, the World Health Organization
declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which has spread throughout the world.
The Company is monitoring this situation, and it is unable to predict the impact that COVID-19 will have on the Company’s
future financial position and operating results due to numerous uncertainties. The Company believes that the COVID-19 pandemic adversely
impacted the global textile industry, which has resulted in a reduction of textile related revenues, specifically as it relates to our
cotton customer contract. On March 7, 2020 the Governor of New York declared a health emergency and issued an order (as amended)
to close all nonessential businesses, which was followed by a phased reopening. Portions of the Company’s business were deemed
to be an essential business, such as its government and pharmaceutical contracts, as well as its vaccine and diagnostic candidate development.
However, the Company has experienced, and may continue to experience in the future, facility closures related to its “nonessential”
businesses, and pursuant to the government order, the Company reduced the scope of its operations. The Company received a loan of approximately
$847,000 on May 1, 2020 from Bank of America as lender pursuant to the Paycheck Protection Program (“PPP”) of the
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As disclosed in Note E, the PPP loan was fully forgiven
during February 2021.
As a result of COVID-19, the Company has experienced
a decline in revenues from non-biological tagging and related services, primarily as it relates to its cotton customer contract. Historically
revenues from the Company’s cotton customer contract are seasonal and recognized primarily during the Company’s first and
fourth fiscal quarters. However, due to the impacts of the COVID-19 global pandemic, the Company did not recognize revenue for the shipment
of DNA concentrate relating to its cotton customer contract during the three or six-month periods ended March 31, 2021. However, the
Company has experienced an increase in its Biotherapeutic Contract Research and Manufacturing business as a result of COVID-19, specifically
as it relates the Company’s COVID-19 Diagnostic Testing and COVID-19 Surveillance Testing. Due to the rapid development and fluidity
of this situation, the magnitude and duration of the pandemic and its impact on the Company's future operations and liquidity is uncertain
as of the date of this Quarterly Report.
Use of Estimates
The preparation of the financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. The most complex and subjective estimates include revenue recognition, allowance for doubtful accounts, recoverability
of long-lived assets, including the values assigned to goodwill, intangible assets and property and equipment, fair value calculations
for stock-based compensation and warrants, contingencies and management’s anticipated liquidity. Management reviews its estimates
on a regular basis and the effects of any material revisions are reflected in the consolidated financial statements in the period they
are deemed necessary. Accordingly, actual results could differ from those estimates.
Revenue Recognition
The Company follows Financial Accounting Standards
Board (“FASB”) issued accounting standard updates which clarify the principles for recognizing revenue arising from contracts
with customers (“ASC 606” or “Topic 606”).
The core principle of the revenue standard is
that an entity recognizes revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASC 606 applies a five-step model for revenue measurement
and recognition and also requires increased disclosures including the nature, amount, timing, and uncertainty of revenue and cash flows
related to contracts with clients.
The Company measures
revenue at the amounts that reflect the consideration to which it is expected to be entitled in exchange for transferring control of
goods and services to customers. The Company recognizes revenue either at the point in time or over the period of time that performance
obligations to customers are satisfied. The Company’s contracts with customers may include multiple performance obligations (e.g.
taggants, maintenance, authentication services, research and development services, etc.). For such arrangements, the Company allocates
revenues to each performance obligation based on their relative standalone selling price.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE B – BASIS OF PRESENTATION AND SUMMARY
OF ACCOUNTING POLICIES, continued
Revenue Recognition, continued
The Company recognizes revenue upon transfer
of control of promised goods or services to customers in an amount that reflects the consideration it expects to receive for those goods
or services, including any variable consideration.
Due to the short-term nature of the Company’s
contracts with customers, it has elected to apply the practical expedients under Topic 606 to: (1) expense as incurred, incremental
costs of obtaining a contract and (2) not adjust the consideration for the effects of a significant financing component for contracts
with an original expected duration of one year or less.
Product Revenues
and Authentication Services
The Company’s PCR-produced linear DNA products
are manufactured in accordance with contracts with customers. The Company recognizes revenue upon satisfying its promises to transfer
goods or services to customers under the terms of its contracts. These performance obligations are satisfied at the point in time the
Company transfers control of the goods to the customer, which in nearly all cases is when title to and risk of loss of the goods transfer
to the customer. The timing of transfer of title and risk of loss is dictated by customary or explicitly stated contract terms. The Company
does not consider payment terms of a performance obligation for customers with contractual terms that are one year or less and has elected
the practical expedient. Nearly all the Company’s sales contracts reflect market pricing at the time the contract is executed,
or are one year or less, and generally provide for shipment within 30 to 60 days after the price has been agreed upon with the customer.
The Company invoices customers upon shipment, and its collection terms range, on average, from 30 to 60 days.
LineaTM COVID-19
Assay Kit Contract
Under the
Company’s LineaTM COVID-19 Assay Kit contract, the customer has the right to use certain laboratory
equipment solely for the processing of the Company’s COVID-19 Assay Kit. The current contract has a term of twelve months and
no minimum purchase requirements. This contract has an embedded lease for the right to use the Company’s equipment and the
Company determines the amount of lease revenue allocated to the equipment based on the relative standalone selling prices. The
Company evaluated the terms of this embedded lease and determined its classification as an operating lease. The cost of the
equipment is capitalized within property and equipment.
Equipment Lease Revenues
As discussed above,
the Company leases certain laboratory equipment to a customer under its LineaTM COVID-19 Assay Kit contract. The contract
includes the sale of the Company’s LineaTM COVID-19 Assay Kits (“COVID-19 Assay Kits”), as well as a
lease for certain laboratory equipment for the processing of the COVID-19 Assay Kits. Revenues for the lease of equipment under this
contract are recognized as an operating lease as the equipment is being utilized by the customer. This contract provides the
customer the right to use the equipment for the term of the contract solely for the purpose of processing the Company’s
COVID-19 Assay Kits. Lease revenue from this contract is presented in product revenues in the Company’s condensed consolidated
statement of operations. Lease revenue was $89,447 and $141,016, respectively for the three and six-month periods ended March 31,
2021. This performance obligation is satisfied over-time, as the equipment is being utilized by the customer to process the
Company’s COVID-19 Assay Kits.
Authentication Services
The Company recognizes revenue for authentication
services upon satisfying its promises to provide services to customers under the terms of its contracts. These performance obligations
are satisfied at the point in time the Company services are complete, which in nearly all cases is when the authentication report is
released to the customer.
Clinical Laboratory Testing Services
The Company records revenue for its clinical
laboratory testing service contracts, which includes its COVID-19 Surveillance Testing, upon satisfying its promise to provide services
to customers under the terms of its contracts. These performance obligations are satisfied at the point in time that Company services
are complete, which in nearly all cases is when the testing results are released to the customer.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE B – BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING
POLICIES, continued
Revenue Recognition, continued
Research and Development Services
The Company records revenue for its research
and development contracts using the over-time revenue recognition model. Revenue is primarily measured using the cost-to-cost method,
which the Company believes best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent
of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying
the identified performance obligation.
Revenues are recorded proportionally as
costs are incurred. For contracts where the total costs cannot be estimated, revenues are recognized for the actual costs incurred
during a period until the remaining costs to complete a contract can be estimated. The Company has elected not to disclose the value
of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
Disaggregation of Revenue
The following table presents revenues disaggregated
by our business operations and timing of revenue recognition:
|
|
Three Month Period
Ended:
|
|
|
|
March 31,
2021
|
|
|
March 31,
2020
|
|
Research and development services (over-time)
|
|
$
|
124,760
|
|
|
$
|
286,598
|
|
Equipment lease services (over-time)
|
|
|
60,088
|
|
|
|
-
|
|
Clinical laboratory testing services (point-in-time)
|
|
|
1,554,880
|
|
|
|
-
|
|
Product and authentication services (point-in-time):
|
|
|
|
|
|
|
|
|
Supply chain
|
|
|
67,057
|
|
|
|
12,646
|
|
Asset marking
|
|
|
140,169
|
|
|
|
110,697
|
|
Large scale DNA production
|
|
|
-
|
|
|
|
142,532
|
|
Diagnostic kits
|
|
|
724,588
|
|
|
|
-
|
|
Total
|
|
$
|
2,671,542
|
|
|
$
|
552,473
|
|
|
|
Six Month Period Ended:
|
|
|
|
March 31,
2021
|
|
|
March 31,
2020
|
|
Research and development services (over-time)
|
|
$
|
388,473
|
|
|
$
|
653,431
|
|
Equipment lease services (over-time)
|
|
|
106,088
|
|
|
|
-
|
|
Clinical laboratory testing services (point-in-time)
|
|
|
2,327,650
|
|
|
|
-
|
|
Product and authentication services (point-in-time):
|
|
|
|
|
|
|
|
|
Supply chain
|
|
|
99,999
|
|
|
|
31,320
|
|
Asset marking
|
|
|
291,927
|
|
|
|
219,269
|
|
Large scale DNA production
|
|
|
-
|
|
|
|
281,972
|
|
Diagnostic kits
|
|
|
1,073,546
|
|
|
|
-
|
|
Total
|
|
$
|
4,287,683
|
|
|
$
|
1,185,992
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE B – BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING
POLICIES, continued
Revenue Recognition, continued
Contract balances
As of March 31, 2021,
the Company has entered into contracts with customers for which revenue has not yet been recognized. Consideration received from a customer
prior to revenue recognition is recorded to a contract liability and is recognized as revenue when the Company satisfies the related
performance obligations under the terms of the contract. The Company’s contract liabilities, which are reported as deferred revenue
on the condensed consolidated balance sheet, consist almost entirely of research and development contracts where consideration has been
received and the development services have not yet been fully performed.
The opening and closing balances of the Company’s
contract balances are as follows:
|
|
Balance sheet classification
|
|
October 1,
2020
|
|
|
March 31,
2021
|
|
|
$
change
|
|
Contract liabilities
|
|
Deferred revenue
|
|
$
|
511,036
|
|
|
$
|
350,057
|
|
|
$
|
160,979
|
|
For the three and six-month
periods ended March 31, 2021, the Company recognized $19,082 and $192,167, respectively of revenue that was included in Contract liabilities
as of October 1, 2020.
Inventories
Inventories, which consist primarily of raw materials,
work in progress and finished goods, are stated at the lower of cost or net realizable value, with cost determined by using the first-in,
first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost and
depreciated using the straight-line method over their estimated useful lives. The estimated useful life for computer equipment, lab equipment
and furniture is 3 years and leasehold improvements are amortized over the shorter of their useful life or the remaining lease terms.
As of March 31, 2021, and September 30, 2020 there was $646,140 and $785,541 of construction in progress that was included in lab
equipment and leasehold improvements, respectively. In addition, as of March 31, 2021 there was $269,095 of laboratory equipment
that is being leased to a customer. The lease was determined to be an operating lease.
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 carryforwards 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 a 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
March 31, 2021
(unaudited)
NOTE B – BASIS OF PRESENTATION AND 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, warrants, and secured convertible notes.
For the three and six-month periods ended March
31, 2021 and 2020, 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 were not included in the computation of diluted net loss per share because to do so would have been
anti-dilutive for the three and six-month periods ended March 31, 2021 and 2020 are as follows:
|
|
2021
|
|
|
2020
|
|
Warrants
|
|
|
776,518
|
|
|
|
2,121,755
|
|
Stock options
|
|
|
408,085
|
|
|
|
241,557
|
|
Secured convertible notes
|
|
|
-
|
|
|
|
70,963
|
|
|
|
|
1,184,603
|
|
|
|
2,434,275
|
|
Stock-Based Compensation
The Company accounts for stock-based compensation
for employees, directors, and nonemployees in accordance with ASC 718, Compensation (“ASC 718”). ASC 718 requires all share-based
payments, 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 requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s
common stock options is 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 740, excess tax benefits realized from the exercise of stock-based awards are classified as cash flows from operating
activities. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) are recognized
as income tax expense or benefit in the consolidated statements of operations.
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 cash equivalents with high credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit. As of March 31, 2021 and September 30, 2020, the Company had cash and cash equivalents of approximately $13,308,000
and $7,300,000, respectively in excess of the FDIC insurance limit.
The Company’s revenues earned from sale
of products and services for the three-month period ended March 31, 2021 included an aggregate of 30% and 21% from two customers, respectively.
The Company’s revenues earned from sale of products and services for the six-month period ended March 31, 2021 included an aggregate
of 29% and 16% from two customers, respectively.
The Company’s revenues earned from sale
of products and services for the three-month period ended March 31, 2020 included an aggregate of 18%, 18% and 19% from three customers,
respectively. The Company’s revenues earned from sales of product and services for the six-month period ended March 31, 2020 included
an aggregate of 10%, 12%, 14% and 21% from four customers, respectively.
Two customers accounted for 65% of the Company’s
accounts receivable at March 31, 2021. Four customers accounted for 74% of the Company’s accounts receivable at September 30,
2020.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE B – BASIS OF ACCOUNTING POLICIES,
continued
Recent Accounting Standards
In August 2020, the FASB issued ASU No. 2020-06,
“Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s
Own Equity (Subtopic 815-40).” The objective of this update is to simplify the accounting for convertible preferred stock by removing
the existing guidance in ASC 470-20, “Debt: Debt with Conversion and Other Options,” that requires entities to account for
beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock.
The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated
from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting
in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and
classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected
to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives),
as well as fewer embedded features requiring separate accounting from the host contract. This amendment also further revises the guidance
in ASU 260, “Earnings per Share,” to require entities to calculate diluted earnings per share (EPS) for convertible instruments
by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an
instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for fiscal years beginning after December 15,
2023, with early adoption permitted. The Company does not expect the adoption of ASU 2020-06 to have a significant impact on its consolidated
financial statements.
NOTE C — INVENTORIES
Inventories consist of the following:
|
|
March 31,
2021
|
|
|
September 30,
2020
|
|
|
|
(unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
640,047
|
|
|
$
|
387,815
|
|
Work in-progress
|
|
|
47,666
|
|
|
|
77,667
|
|
Finished goods
|
|
|
32,825
|
|
|
|
31,885
|
|
Total
|
|
$
|
720,538
|
|
|
$
|
497,367
|
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE D — ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES
Accounts payable and accrued liabilities are
as follows:
|
|
March 31,
2021
|
|
|
September 30,
2020
|
|
|
|
(unaudited)
|
|
|
|
|
Accounts payable
|
|
$
|
1,217,207
|
|
|
$
|
1,250,021
|
|
Accrued salaries payable
|
|
|
388,818
|
|
|
|
525,602
|
|
Other accrued expenses
|
|
|
174,047
|
|
|
|
150,804
|
|
Total
|
|
$
|
1,780,072
|
|
|
$
|
1,926,427
|
|
NOTE E —NOTES PAYABLE
CARES Act Loan
The Company received a loan of approximately
$847,000 on May 1, 2020 from Bank of America as lender pursuant to the PPP of the CARES Act.
All or a portion of the loan may be forgiven
by the U.S. Small Business Administration (“SBA”) upon application by the Company beginning 60 days but not later than 130
days after loan approval and upon documentation of expenditures in accordance with the SBA requirements. Under the CARES Act, loan forgiveness
is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest, and covered utilities during
the covered period as defined by the CARES Act. The Company used the proceeds from the loan to retain employees, maintain payroll and
make lease and utility payments.
For purposes of the CARES Act, payroll costs
exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 40% of the forgiven amount
may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with
salaries of $100,000 or less annually are reduced by more than 25%. In the event the loan, or any portion thereof, is forgiven
pursuant to the PPP, the amount forgiven is applied to outstanding principal. The Company’s PPP loan, including accrued
interest was fully forgiven on February 26, 2021. The forgiveness of the loan resulted in a gain on extinguishment of debt of $839,945 for the three and six-month periods ended March 31, 2021.
Repayment of the July 2019 Notes
On October 9, 2020, the Company entered
into a letter agreement (the “Letter Agreement”) with Dillon Hill Capital, LLC (“Dillon Hill”), as sole
holder of the $1.5 million of secured convertible notes issued in July 2019 (the “July 2019 Notes”), providing for the
repayment in full of the July 2019 Notes, in an aggregate amount of $1,665,581 (the “Payoff Amount”), representing
the outstanding principal amount of the July 2019 Notes plus accrued but unpaid interest through the scheduled maturity of the
July 2019 Notes. The Company paid the Payoff Amount to Dillon Hill on October 9, 2020. As of October 9, 2020, all of
the obligations and liabilities of the Company and its affiliates under the July 2019 Notes, the Purchase Agreement, and the
Security Agreements, and any other related documents and instruments, were satisfied in full, and all related liens,
mortgages or other security interests were automatically released. Based solely on a review of Schedule 13G filings with the SEC,
Dillon Hill at the time of the repayment of the July 2019 Notes and thereafter has been a greater than 5% shareholder in the
Company’s common stock.
Warrant Exercise Agreement
In conjunction with the Letter Agreement discussed
above, on October 7, 2020, the Company entered into Warrant Exercise Agreements with Dillon Hill and its affiliate, Dillon Hill
Investment Company LLC (together, the “Investors”), whereby 318,000 of the warrants issued to the Investors in the Company’s
November 2019 underwritten public offering (the “2019 Warrants”) with an exercise price of $5.25 per share were exercised.
The gross proceeds to the Company from this partial exercise of the 2019 Warrants is $1,669,500.
In consideration of this partial exercise of
the 2019 Warrants and of the consent to repayment of the July 2019 Notes, as described above, the Company agreed to issue
159,000 replacement warrants (the “Replacement Warrants”) to the Investors, which is an amount equal to one-half the
amount of the 2019 Warrants exercised pursuant to the Warrant Exercise Agreements. The Replacement Warrants have an exercise price
of $7.54. The Warrant Exercise Agreements expired on January 5, 2021.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE E —NOTES PAYABLE, continued
Warrant Exercise Agreement, continued
Each Replacement Warrant is exercisable
beginning on the date of issuance thereof and ending on the five-year anniversary of such date. The exercise price and number of shares
of common stock issuable upon exercise of the Replacement Warrants will be subject to adjustment in the event of any stock dividend,
split, recapitalization, reorganization, or similar transaction, as described in the Replacement Warrant.
On each of December 9 and 10, 2020, the Investors
exercised 100,000 of their 2019 Warrants, for an aggregate exercise of 200,000 of their 2019 Warrants, resulting in total net proceeds
to the Company of approximately $1.1 million. As a result of these exercises, pursuant to the Warrant Exercise Agreements the Company
issued to the Investors an aggregate of 100,000 additional replacement warrants, which are substantially similar to the Replacement Warrants
described above except that 50,000 of the newly-issued replacement warrants have an exercise price of $6.57 and 50,000 of such replacement
warrants have an exercise price of $6.46.
No additional 2019 Warrants were exercised by
January 5, 2021 and no additional replacement warrants were issued.
The repayment of the July 2019 Notes resulted
in a loss on extinguishment of debt of $1,774,662 for the six-month period ended March 31, 2021. Included in the loss on extinguishment
of debt is $1,640,245 for the fair value of the Replacement Warrants (described above) that were issued in conjunction with the payoff
of the July 2019 Notes.
NOTE F — CAPITAL STOCK
On January 13, 2021, the Company closed on a
registered direct public offering (the “Offering) of 1,810,000 shares (the “Shares”) of the Company’s common
stock, pursuant to (i) the securities purchase agreement, dated January 10, 2021, by and between the Company and certain
institutional investors(the “Purchasers”) whereby the Company agreed to issue and sell the Shares directly to the
Purchasers at a price of $8.30 per share of Common Stock and (ii) the placement agency agreement, dated January 10, 2021, by and
between the Company and Roth Capital Partners, LLC (the “Placement Agent”).
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE G —WARRANTS AND STOCK OPTIONS
Warrants
The following table summarizes the changes in
warrants outstanding. These warrants were granted in lieu of cash compensation for services performed or as financing expenses in connection
with the sales of the Company’s common stock.
Transactions involving warrants (see Note E)
are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Balance at October 1, 2020
|
|
|
1,038,919
|
|
|
$
|
10.83
|
|
Granted
|
|
|
259,000
|
|
|
|
7.14
|
|
Exercised
|
|
|
(520,151
|
)
|
|
|
5.25
|
|
Cancelled or expired
|
|
|
(1,250
|
)
|
|
|
160.54
|
|
Balance at March 31, 2021
|
|
|
776,518
|
|
|
$
|
13.10
|
|
Stock Options
For the three and six-month periods ended March
31, 2021, the Company issued an aggregate of 80,862 and 154,005 options, respectively to employees, officers, non-employee board of director
members and a consultant.
The fair value of options granted during the
three and six-month periods ended March 31, 2021 was determined using the Black Scholes Option Pricing Model. For the purposes of the
valuation model, the Company used the simplified method for determining the granted options expected lives. The simplified method is
used since the Company does not have adequate historical data to utilize in calculating the expected term of options. The fair value
for options granted during the three-month period ended March 31, 2021 was calculated using the following weighted average assumptions:
stock price $5.49; exercise price $5.49; expected term 5 years; dividend yield 0; volatility 138%; and risk-free rate of 0.38%. The fair
value for options granted during the six-month period ended March 31, 2021 was calculated using the following weighted average assumptions:
stock price $6.46; exercise price $6.46; expected term 5.13 years; dividend yield 0; volatility 140 %; and risk-free rate of 0.36%.The
weighted average grant date fair value per share for options granted during the three and six-month periods ended March 31, 2021 was
$4.83 and $5.73, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE H — 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, 2017, with the option to extend the lease for 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. During November 2019, the Company extended this lease until January 15,
2020. In addition to the office space, the Company also has 2,200 square feet of laboratory space. On January 20, 2020, the Company
entered into an agreement to amend both of these leases, extending the term for the corporate headquarters as well as the laboratory
space until January 15, 2021, with a one-year renewal option. During October 2020, the Company exercised the one-year renewal
option, extending the term for this lease until January 15, 2022. The Company also has a satellite testing facility in Ahmedabad, India,
which occupies 1,108 square feet for a three-year term beginning November 1, 2017. During September 2020, the Company renewed
this lease with a new expiration date of September 30, 2021. The base rent is approximately $6,500 per annum. The Company’s
total short-term lease obligation as of March 31, 2021 is $427,925.
The total rent expense for the three and
six-month periods ended March 31, 2021 were $141,650 and $284,495, respectively. The total rent expense for the three and six-month
periods ended March 31, 2020 were $153,645 and $287,250, respectively.
Employment Agreement
The employment agreement with Dr. James Hayward,
the Company’s President and Chief Executive Officer (“CEO”), entered into in July 2016 provides that he will be the
Company’s CEO and will continue to serve on the Company’s Board of Directors. On July 28, 2017, a new employment agreement
was entered into with the CEO effective July 1, 2017. The initial term was from July 1, 2017 through June 30, 2018, with
automatic one-year renewal periods. As of June 30, 2020, the employment contract renewed for an additional year. Under the new agreement,
the CEO will be eligible for a special cash incentive bonus of up to $800,000, $300,000 of which is 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. Pursuant to
the contract, the CEO’s annual salary is $400,000. The Board of Directors, acting in its discretion, may grant annual bonuses to
the CEO. The CEO will be entitled to certain benefits and perquisites and will be eligible to participate in retirement, welfare and
incentive plans available to the Company’s other employees.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(unaudited)
NOTE H — COMMITMENTS AND CONTINGENCIES
(continued)
Employment Agreement, continued
The employment agreement with the CEO also provides
that if he is terminated before the end of the initial or a renewal term by the Company without cause or if the CEO terminates his employment
for good reason, then, in addition to previously earned and unpaid salary, bonus and benefits, and subject to the delivery of a general
release and continuing compliance with restrictive covenants, the CEO will be entitled to receive a pro rata portion of the greater
of either (X) the annual bonus he would have received if employment had continued through the end of the year of termination or
(Y) the prior year’s bonus; salary continuation payments for two years following termination equal to the greater of (i) three
times base salary or (ii) two times base salary plus bonus; company-paid COBRA continuation coverage for 18 months post-termination;
continuing life insurance benefits (if any) for two years; and extended exercisability of outstanding vested options (for three years
from termination date or, if earlier, the expiration of the fixed option term). If termination of employment as described above occurs
within six months before or two years after a change in control of the Company, then, in addition to the above payments and benefits,
all of the CEO’s outstanding options and other equity incentive awards will become fully vested and the CEO will receive a lump
sum payment of the amounts that would otherwise be paid as salary continuation. In general, a change in control will include a 30% or
more change in ownership of the Company.
Upon termination due to death or disability,
the CEO will generally be entitled to receive the same payments and benefits he would have received if his employment had been terminated
by the Company without cause (as described in the preceding paragraph), other than salary continuation payments.
Effective March 15, 2018, the Compensation
Committee of the Company’s Board of Directors (the “Compensation Committee”), approved a bonus of $121,125 that would
be payable to the CEO when the Company reaches $3,000,000 in revenues for two consecutive quarters or $12,000,000 in revenues for a fiscal
year, provided that the CEO is still employed by the Company on such date (the “Revenue Bonus”).
Effective May 2, 2018, the Compensation
Committee, increased the amount of the Revenue Bonus to $403,623; effective December 27, 2018, to $553,623; and effective December 5,
2019 to $753,623. The revenue targets underlying the Revenue Bonus have not yet been achieved. The Revenue Bonus has no expiration date
and may be earned at any time during the CEO’s employment if the Revenue Goals are achieved.
On March 2, 2021, the Company entered into an
agreement with the CEO, pursuant to which the Company agreed to accelerate the payment of $556,840 of the Revenue Bonus to the CEO in
recognition of his contributions to the Company. In exchange for the payment of the Revenue Bonus, the CEO agreed to waive his right
to earn any remaining portions of the Revenue Bonus.
The CEO voluntarily reduced his salary for the
fiscal years ended September 30, 2020 and 2019. As of October 3, 2020, the Company has re-affirmed the employment agreement’s
annual salary of $400,000, and from that date the CEO’s salary will be paid at such rate. On October 19, 2020, the Company
awarded the CEO, a one-time discretionary bonus, to be paid in cash, of $250,000, in recognition of his contributions to the Company.
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.