APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
NOTE D – CONVERTIBLE NOTES
Convertible notes payable as of June 30, 2012 and September 30, 2011 are as follows:
| |
|
June 30,
|
|
|
|
|
| |
|
2012
|
|
|
|
|
| |
|
(unaudited)
|
|
|
2011
|
|
|
Secured Convertible Note Payable dated June 4, 2010, net of unamortized debt discount of $1,332 (see below)
|
|
$
|
—
|
|
|
$
|
223,668
|
|
|
Secured Convertible Notes Payable dated July 15, 2010, net of unamortized debt discount of $26,091 (see below)
|
|
|
—
|
|
|
|
423,909
|
|
|
Secured Convertible Notes Payable dated November 19, 2010, net of unamortized debt discount of $10,479 (see below)
|
|
|
—
|
|
|
|
339,521
|
|
|
Secured Convertible Note Payable dated November 30, 2010, net of unamortized debt discount of $45,136 (see below)
|
|
|
—
|
|
|
|
704,864
|
|
|
Secured Convertible Note Payable dated January 7, 2011, net of unamortized debt discount of $65,159 (see below)
|
|
|
—
|
|
|
|
684,841
|
|
|
Secured Convertible Notes Payable, dated July 15, 2010, modified January 7, 2011, net of unamortized debt discount of $392,923 (see below)
|
|
|
—
|
|
|
|
1,104,077
|
|
|
Secured Convertible Note Payable, dated July 11, 2011
|
|
|
250,000
|
|
|
|
250,000
|
|
|
Total
|
|
|
250,000
|
|
|
|
3,730,880
|
|
|
Less: current portion
|
|
|
(250,000
|
)
|
|
|
(3,730,880
|
)
|
|
Long-term debt- net
|
|
$
|
—
|
|
|
$
|
—
|
|
10% Secured Convertible Promissory Note dated June 4, 2010
On June 4, 2010, the Company issued a $675,000 related party convertible promissory note due January 31, 2012 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of the Company’s common stock, par value $.001 per share (“Common Stock”), at a price equal to the greater of (i) 50% of the average price of the Common Stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.038866151 per share, which is equal to a 20% discount to the average volume, weighted average price of the Common Stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.038866151 per share. The Company has granted the noteholder a security interest in all the Company’s assets.
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $19,692 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($19,692) to debt discount which will be amortized to interest expense over the term of the note. Amortization of $1,332 was recorded for the nine months ended June 30, 2012; and $986 and $2,957 was recorded for the three and nine months ended June 30, 2011, respectively.
In January 2012, the Company issued an aggregate of 6,750,248 shares of Common Stock in settlement of the convertible notes and related accrued interest.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
NOTE D – CONVERTIBLE NOTES (continued)
On July 15, 2010, $450,000 of the $675,000 related party convertible promissory note was converted to the same terms and conditions as described in the 10% Secured Convertible Promissory Notes dated July 15, 2010 below.
10% Senior Secured Convertible Promissory Notes dated July 15, 2010
On July 15, 2010, the Company issued an aggregate of $2,000,000 senior secured convertible promissory notes due July 15, 2011 with interest at 10% per annum due upon maturity to “accredited investors,” as defined in regulations promulgated under the Securities Act of 1933, as amended (“Securities Act”). The notes are convertible at any time prior to maturity, at the holders’ option, into shares of Common Stock (i) prior to the occurrence of Subsequent Financing at a rate of $0.04405, or (ii) after Subsequent Financing in the event the holder elects to receive shares of Common Stock (and not securities issued in a Subsequent Financing (“Subsequent Financing Securities”) or securities issued in a Qualified Financing (the “Qualified Financing Securities”)), at a rate of $0.04405, or as of any conversion date that occurs after the closing of a Subsequent Financing at a rate of 80% of the purchase price paid by investors in the Subsequent Financing. The notes automatically convert at the earlier occurrence of (i) maturity or (ii) Qualified Financing including any accrued and unpaid interest, at a rate as described above. The Company has granted the note holders a security interest in all the Company’s assets and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary.
A “Subsequent Financing” is defined for purposes of this Note D as the issuance and sale by the Company or its affiliates during the term of the promissory note of securities that do not qualify as Qualified Financing. A “Qualified Financing” is defined for purposes of this Note D as the issuance and sale by the Company or an affiliate thereof of equity or debt securities in a single transaction that results in gross proceeds of at least $10,000,000 (before transaction fees and expenses).
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $678,774 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense.
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($678,774) to debt discount which will be amortized to interest expense over the term of the notes.
On January 7, 2011, upon the completion of a Subsequent Financing, the above described conversion rate changed from $0.04405 to $0.037104 with an extended due date from July 15, 2011 to January 7, 2012 on $1,550,000 of the $2,000,000 issued senior convertible promissory notes. All other terms are remaining the same. Although the conversion rate of the remaining $450,000 senior secured convertible promissory notes remained the same, the due date was extended also to January 7, 2012. In conjunction with the conversion rate and term modifications of the $1,550,000 senior secured convertible promissory notes, the Company wrote off the remaining unamortized debt discount of $331,332 to operations. See below discussion of the restructured senior secured convertible promissory notes.
Amortization of $26,091 was recorded for the nine months ended June 30, 2012; and $362,865 and $470,920 was recorded for the three and nine months ended June 30, 2011, respectively.
In January 2012, the Company issued an aggregate of 11,729,821 shares of Common Stock in settlement of the convertible notes and related accrued interest.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
NOTE D – CONVERTIBLE NOTES (continued)
10% Senior Secured Convertible Promissory Notes dated November 19, 2010
On November 19, 2010, the Company issued an aggregate of $350,000 in principal amount of senior secured convertible notes bearing interest at a rate of 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act. The notes are convertible, in whole or in part, at any time, at the option of the noteholders, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of each note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price of $ 0.032825817 (equal to a 20% discount to the average volume, weighted average price of the Common Stock for the ten trading days prior to issuance, which is referred to as the “Common Conversion Price” for purposes of this Note D) or (B) Subsequent Financing Securities at a conversion price equal to 80% of the price per Subsequent Security paid by investors for Subsequent Financing Securities in a Subsequent Financing (which is referred to as the “Subsequent Financing Price” for purposes of this Note D). A noteholder may convert its notes in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings. The notes shall be automatically converted upon the earlier of (I) November 19, 2011 and (II) the completion of a Qualified Financing at the election of each noteholder into either (A) shares of Common Stock at the applicable Common Conversion Price, (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) Qualified Financing Securities at a conversion price equal to 80% of the price per Qualified Financing Security paid by investors for the Qualified Financing Securities (which is referred to as the “Qualified Financing Price” for purposes of this Note D).
The notes bear interest at the rate of 10% per annum and are due and payable in full on November 19, 2011.
Until the principal and accrued but unpaid interest under the notes are paid in full, or converted into Common Stock, Subsequent Financing Securities or Qualified Financing Securities (collectively, “Conversion Shares”) pursuant to their terms, the Company’s obligations under the notes will be secured by a lien on all assets of the Company and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary.
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $76,494 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense.
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($76,494) to debt discount which will be amortized to interest expense over the term of the notes. Amortization of $10,479 was recorded for the nine months ended June 30, 2012; and $19,071 and $46,734 was recorded for the three and nine months ended June 30, 2011, respectively.
In November 2011, the Company issued an aggregate of 11,693,102 shares of Common Stock in settlement of the convertible notes and related accrued interest.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
NOTE D – CONVERTIBLE NOTES (continued)
10% Senior Secured Convertible Promissory Note dated November 30, 2010
On November 30, 2010, the Company issued a $750,000 principal amount senior secured convertible note bearing interest at a rate of 10% per annum to an “accredited investor,” as defined in regulations promulgated under the Securities Act. The note is convertible, in whole or in part, at any time, at the option of the noteholder, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of each note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price of $ 0.03088 (the applicable Common Conversion Price) or (B) Subsequent Financing Securities at the Subsequent Financing Price. The noteholder may convert its note in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings. The note shall be automatically converted upon the earlier of (I) November 30, 2011 and (II) the completion of a Qualified Financing at the election of the noteholder into either (A) shares of Common Stock at the applicable Common Conversion Price, (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) Qualified Financing Securities at a conversion price equal to 80% of the Qualified Financing Price.
The note bears interest at the rate of 10% per annum and is due and payable in full on November 30, 2011.
Until the principal and accrued but unpaid interest under the note is paid in full, or converted into Conversion Shares pursuant to its terms, the Company’s obligations under the note will be secured by a lien on all assets of the Company and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary.
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $270,078 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense.
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($270,078) to debt discount which will be amortized to interest expense over the term of the note. Amortization of $45,136 was recorded for the nine months ended June 30, 2012; and $67,334 and $156,867 was recorded for the three and nine months ended June 30, 2011, respectively.
On November 30, 2011, the Company issued an aggregate of 26,716,321 shares of Common Stock in settlement of the convertible notes and related accrued interest.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
NOTE D – CONVERTIBLE NOTES (continued)
10% Senior Secured Convertible Promissory Note dated January 7, 2011.
On January 7, 2011, the Company issued a $750,000 principal amount senior secured convertible note bearing interest at a rate of 10% per annum to an “accredited investor,” as defined in regulations promulgated under the Securities Act.
The Note is convertible, in whole or in part, at any time, at the option of the noteholder, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of the Note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price of $ 0.05529 (the applicable Common Conversion Price) or (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price. The noteholder may convert its Notes in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings.
The Note shall be automatically converted upon the earlier of (I) January 7, 2012 and (II) the completion of a Qualified Financing at the election of the noteholder into either (A) shares of Common Stock at the applicable Common Conversion Price, (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) Qualified Financing Securities at a conversion price equal to 80% of the Qualified Financing Price.
Pursuant to a joinder agreement, the noteholder became party to the registration rights agreement, dated as of July 15, 2010 (the “Registration Rights Agreement”), with the Company, pursuant to which the Company has agreed to prepare and file a registration statement with the SEC to register under the Securities Act resales from time to time of the Conversion Shares issued or issuable upon conversion or redemption of the Note. The Company is required to file a registration statement within 45 days of receiving a Demand Registration Request (as defined in the Registration Rights Agreement), and to cause the registration statement to be declared effective within 45 days (or 90 days if the registration statement is reviewed by the SEC). The Company will be required to pay penalties to the noteholder in the event that these deadlines are not met.
The Note bears interest at the rate of 10% per annum and is due and payable in full on January 7, 2012. Until the principal and accrued but unpaid interest under the Note is paid in full, or converted into Conversion Shares pursuant to its terms, the Company’s obligations under the Note will be secured by a lien on all assets of the Company and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary, in favor of Etico Capital, LLC, as Collateral Agent for the Purchasers named therein pursuant to security agreements dated as of July 15, 2010, to which the noteholder became party pursuant to joinder agreements.
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $240,233 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense.
Amortization of $65,159 was recorded for the nine months ended June 30, 2012; and $59,894 and $114,522 was recorded for the three and nine months ended June 30, 2011, respectively.
In January 2012, the Company issued an aggregate of 14,921,324 shares of Common Stock in settlement of the convertible notes and related accrued interest.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
NOTE D – CONVERTIBLE NOTES (continued)
10% Senior Secured Convertible Promissory Notes issued on July 15, 2010, modified on January 7, 2011
On January 7, 2011, the Company modified previously issued senior secured promissory notes initially dated July 15, 2010 totaling $1,550,000 in principal amount bearing interest at a rate of 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act. The notes are convertible, in whole or in part, at any time, at the option of the noteholders, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of each note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price of $ 0.037104 (the applicable Common Conversion Price) or (B) Subsequent Financing Securities at a conversion price equal to 80% of Subsequent Financing Price. A noteholder may convert its note in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings. The notes shall be automatically converted upon the earlier of (I) January 7, 2012 and (II) the completion of a Qualified Financing at the election of the noteholder into either (A) shares of Common Stock at the applicable Common Conversion Price, (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) Qualified Financing Securities at a conversion price equal to 80% of the Qualified Financing Price. The effect of this refinancing was recognized as “debt modification” in the financial statements.
The notes bear interest at the rate of 10% per annum and are due and payable in full on January 7, 2012.
Until the principal and accrued but unpaid interest under the notes are paid in full, or converted into Conversion Shares pursuant to their terms, the Company’s obligations under the notes will be secured by a lien on all assets of the Company and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary.
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $1,499,536 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense.
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($1,499,536) to debt discount which will be amortized to interest expense over the term of the notes. Amortization of $392,923 was recorded for the nine months ended June 30, 2012; and $391,576 and $732,566 was recorded for the three and nine month periods ended June 30, 2011, respectively.
On October 26, 2011, the Company issued 1,497,826 shares of Common Stock in settlement of $50,000 of convertible notes and related accrued interest.
In January 2012, the Company issued an aggregate of 44,778,815 shares of Common Stock in settlement of the remaining convertible notes and related accrued interest.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
NOTE D – CONVERTIBLE NOTES (continued)
Adjustment of Conversion Price of Certain 10 % Senior Secured Convertible Promissory Notes dated July 15, 2010.
In February 2011, the Company adjusted the conversion price of $1,550,000 of the $2,000,000 in principal amount of senior secured convertible promissory notes issued on July 15, 2010 (the “July 15 Notes”), from $0.04405 to $0.037104. The remaining $450,000 aggregate principal amount of the July 15 Notes, held by James A. Hayward, the Company’s Chairman, President and Chief Executive Officer, will continue to have a conversion price of $0.04405.
4% Senior Secured Convertible Promissory Note issued on July 11, 2011
On July 11, 2011, the Company issued a $250,000 related party convertible promissory note due July 11, 2012 with interest at 4% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of Common Stock at $0.0585 per share. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.0585 per share. The Company has granted the note holder a security interest in all the Company’s assets.
The embedded conversion feature present in the note equaled the fair value of the underlying Common Stock at the date of issuance, therefore the Company did not record a beneficial conversion feature.
NOTE E - RELATED PARTY TRANSACTIONS
The Company’s current and former officers and stockholders advance funds to the Company for travel related and working capital purposes. As of June 30, 2012 and September 30, 2011, there were no advances outstanding.
On July 11, 2011, the Company issued a $250,000 related party convertible promissory note due July 11, 2012 with interest at 4% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of Common Stock at $0.0585 per share. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.0585 per share. The Company recorded interest expense of $4,986 for the nine months ended June 30, 2012 related to the promissory note.
NOTE F - CAPITAL STOCK
The Company is authorized to issue 1,350,000,000 shares of Common Stock as the result of a vote of stockholders conducted on January 27, 2012 which effected an increase in the authorized shares of Common Stock from 800,000,000 to 1,350,000,000. In addition, the Company is authorized to issue 10,000,000 shares of preferred stock with a $0.001 par value per share. As of June 30, 2012 and September 30 2011, there were 626,989,884 and 473,325,859 shares of Common Stock issued and outstanding, respectively.
During the nine month periods ended June 30, 2012 and 2011, the Company has expensed $58,238 and $567,083 related to stock based compensation, respectively.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
NOTE G - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the related prices for the shares of Common Stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses in connection with the sale of Common Stock.
| |
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Outstanding
|
|
|
Weighted
|
|
|
|
|
|
Exercisable
|
|
| |
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Exercise
|
|
|
Number |
|
|
Contractual
|
|
|
Exercise
|
|
|
Average
|
|
|
Average
|
|
|
Prices
|
|
|
Outstanding |
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
| $ |
0.03088 |
|
|
|
2,428,756 |
|
|
|
5.42 |
|
|
$ |
0.03088 |
|
|
|
2,428,756 |
|
|
$ |
0.03088 |
|
| $ |
0.03283 |
|
|
|
533,116 |
|
|
|
5.39 |
|
|
$ |
0.03283 |
|
|
|
533,116 |
|
|
$ |
0.03283 |
|
| $ |
0.04 |
|
|
|
3,000,000 |
|
|
|
3.17 |
|
|
$ |
0.04 |
|
|
|
3,000,000 |
|
|
$ |
0.04 |
|
| $ |
0.04405 |
|
|
|
3,007,946 |
|
|
|
5.04 |
|
|
$ |
0.04405 |
|
|
|
3,007,946 |
|
|
$ |
0.04405 |
|
| $ |
0.04750 |
|
|
|
7,578,978 |
|
|
|
6.04 |
|
|
$ |
0.04750 |
|
|
|
7,578,978 |
|
|
$ |
0.04750 |
|
| $ |
0.05529 |
|
|
|
1,356,484 |
|
|
|
5.53 |
|
|
$ |
0.05529 |
|
|
|
1,356,484 |
|
|
$ |
0.05529 |
|
| $ |
0.06 |
|
|
|
12,000,000 |
|
|
|
2.63 |
|
|
$ |
0.06 |
|
|
|
12,000,000 |
|
|
$ |
0.06 |
|
| $ |
0.07 |
|
|
|
75,000 |
|
|
|
2.33 |
|
|
$ |
0.07 |
|
|
|
75,000 |
|
|
$ |
0.07 |
|
| $ |
0.071 |
|
|
|
1,000,000 |
|
|
|
2.57 |
|
|
$ |
0.071 |
|
|
|
— |
|
|
$ |
0.071 |
|
| $ |
0.09 |
|
|
|
9,900,000 |
|
|
|
4.18 |
|
|
$ |
0.09 |
|
|
|
9,900,000 |
|
|
$ |
0.09 |
|
| $ |
0.10 |
|
|
|
1,500,000 |
|
|
|
0.74 |
|
|
$ |
0.10 |
|
|
|
1,500,000 |
|
|
$ |
0.10 |
|
| $ |
0.50 |
|
|
|
9,700,000 |
|
|
|
0.54 |
|
|
$ |
0.50 |
|
|
|
9,700,000 |
|
|
$ |
0.50 |
|
| |
|
|
|
|
52,080,280 |
|
|
|
|
|
|
|
|
|
|
|
51,080,280 |
|
|
|
|
|
Transactions involving warrants are summarized as follows:
| |
|
Number of
Shares
|
|
|
Weighted Average
Price Per Share
|
|
|
Balance, September 30, 2010
|
|
|
69,207,946
|
|
|
$
|
0.237
|
|
|
Granted
|
|
|
11,897,334
|
|
|
|
0.044
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
(22,900,000
|
)
|
|
|
(0.384
|
)
|
|
Balance at September 30, 2011
|
|
|
58,205,280
|
|
|
$
|
0.140
|
|
|
Granted
|
|
|
1,075,000
|
|
|
|
0.071
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Cancelled or expired
|
|
|
(7,200,000
|
)
|
|
|
(0.10
|
)
|
|
Balance, June 30, 2012
|
|
|
52,080,280
|
|
|
$
|
0.14
|
|
Transactions involving warrants are summarized as follows:
On October 31, 2011, warrants totaling 75,000 were issued in connection with services. The warrants are exercisable for three years from the date of issuance at an exercise price of $0.07 per share with vesting immediately. The fair value of the warrants of $1,363 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 157.69% and risk free rate from 0.41% and were charged to current period operations.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
On January 25, 2012, warrants totaling 1,000,000 were issued in connection with services. The warrants are exercisable for three years from the date of issuance at an exercise price of $0.071 per share and will vest in full on the first anniversary of the date of grant. The fair value of the warrants of $56,875 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 147.53% and risk free rate from 0.81% and were charged to current period operations.
Employee Stock Options
On January 26, 2005, the Board of Directors, and on February 15, 2005, the holders of a majority of the outstanding shares of Common Stock approved the 2005 Incentive Stock Plan and authorized the issuance of 16,000,000 shares of Common Stock as stock awards and stock options thereunder. On May 16, 2007, at the annual meeting of stockholders, the holders of a majority of the outstanding shares of Common Stock approved an increase in the number of shares subject to the 2005 Incentive Stock Plan to 20,000,000 shares of Common Stock. On June 17, 2008, the Board of Directors unanimously adopted an amendment to the 2005 Incentive Stock Plan that increased the total number of shares of Common Stock issuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000 shares to a total of 100,000,000 shares, which was approved by our stockholders at the 2008 annual meeting of stockholders held on December 16, 2008. On November 30, 2011, the Board of Directors unanimously adopted an amendment to the 2005 Incentive Stock Plan that increased the total number of shares of Common Stock issuable thereunder to 350,000,000 and the number of shares of Common Stock that can be covered by awards made to any participant in any calendar year to 50,000,000, which was approved by our stockholders at the 2012 annual meeting of stockholders held on January 27, 2012.
The 2005 Incentive Stock Plan is designed to retain directors, executives, and selected employees and consultants by rewarding them for making contributions to our success with an award of options to purchase shares of Common Stock. As of June 30, 2012, a total of 9,675,000 shares have been issued and options to purchase 127,208,825 shares have been granted under the 2005 Incentive Stock Plan.
The following table summarizes the changes in options outstanding and the related prices for the shares of Common Stock issued to employees of the Company under the 2005 Incentive Stock Plan:
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
| $ |
0.05 |
|
|
|
29,000,000 |
|
|
|
2.91 |
|
|
$ |
0.05 |
|
|
|
29,000,000 |
|
|
$ |
0.05 |
|
| $ |
0.0585 |
|
|
|
50,000,000 |
|
|
|
6.04 |
|
|
$ |
0.0585 |
|
|
|
12,500,000 |
|
|
$ |
0.0585 |
|
| $ |
0.06 |
|
|
|
30,100,000 |
|
|
|
3.00 |
|
|
$ |
0.06 |
|
|
|
15,000,000 |
|
|
$ |
0.06 |
|
| $ |
0.065 |
|
|
|
634,825 |
|
|
|
4.44 |
|
|
$ |
0.065 |
|
|
|
634,825 |
|
|
$ |
0.065 |
|
| $ |
0.068 |
|
|
|
5,724,000 |
|
|
|
4.42 |
|
|
$ |
0.068 |
|
|
|
5,724,000 |
|
|
$ |
0.068 |
|
| $ |
0.07 |
|
|
|
2,850,000 |
|
|
|
3.04 |
|
|
$ |
0.07 |
|
|
|
1,125,000 |
|
|
$ |
0.07 |
|
| $ |
0.08 |
|
|
|
2,000,000 |
|
|
|
3.52 |
|
|
$ |
0.08 |
|
|
|
500,000 |
|
|
$ |
0.08 |
|
| $ |
0.09 |
|
|
|
1,500,000 |
|
|
|
4.18 |
|
|
$ |
0.09 |
|
|
|
1,500,000 |
|
|
$ |
0.09 |
|
| $ |
0.11 |
|
|
|
5,400,000 |
|
|
|
0.96 |
|
|
$ |
0.11 |
|
|
|
5,400,000 |
|
|
$ |
0.11 |
|
| |
|
|
|
|
127,208,825 |
|
|
|
|
|
|
$ |
0.06 |
|
|
|
71,383,825 |
|
|
$ |
0.06 |
|
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
Transactions involving stock options issued to employees are summarized as follows:
| |
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price Per Share
|
|
|
Outstanding at October 1, 2010
|
|
|
66,900,000
|
|
|
$
|
0.06
|
|
|
Granted
|
|
|
53,750,000
|
|
|
|
0.06
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
—
|
|
|
|
|
|
|
Outstanding at September 30, 2011
|
|
|
120,650,000
|
|
|
$
|
0.06
|
|
|
Granted
|
|
|
6,558,825
|
|
|
|
0.067
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
Canceled or expired
|
|
|
—
|
|
|
|
|
|
|
Outstanding at June 30, 2012
|
|
|
127,208,825
|
|
|
$
|
0.06
|
|
The Company recorded $389,533 and $1,564,311 as stock compensation expense for the three and nine month periods ended June 30, 2012, respectively, and $154,499 and $459,968 for the three and nine month periods ended June 30, 2011, respectively, for the vesting portion of all employee options outstanding.
NOTE H- COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases office space under an operating lease in Stony Brook, New York for its corporate use renewable annually. Total lease rental expenses for the three and nine month periods ended June 30, 2012 were $63,200 and $173,502, respectively. Total lease rental expenses for the three and nine month periods ended on June 30, 2011 were $36, 056 and $108,054, respectively.
Employment and Consulting Agreements
The Company has consulting agreements with outside contractors, certain of whom are also Company stockholders. The agreements are generally month to month.
Litigation
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012
(unaudited)
Demodulation, Inc. v. Applied DNA Sciences, Inc., et al. (Civil Action No. - 2:11-cv-00296-WJM-MF, District of New Jersey):
On May 18, 2011, the Company was served with a complaint in a lawsuit brought by Demodulation, Inc. against the Company, Corning Incorporated, Alfred University, and Alfred Technology Resources, Inc. On July 8, 2011, the Company filed a motion to dismiss the complaint. In response, on August 3, 2011, Demodulation, Inc. filed an amended complaint. Demodulation, Inc. alleges that it was unable to bring its microwire technology to market due to the wrongful acts of defendants, who allegedly conspired to steal Demodulation, Inc.’s trade secrets and other intellectual property and to interfere in its business opportunities. Of the 17 claims alleged in the amended complaint, five are asserted against the Company, including alleged misappropriation of trade secrets, antitrust violations, civil RICO, and patent infringement. The Company believes these claims are without merit. On September 10, 2011, Alfred University filed a motion to transfer the action from the District of New Jersey to the Western District of New York. On December 22, 2011, the Court denied the motion. On January 27, 2012, the Company filed a motion to dismiss the amended complaint for failure to state a claim and on other grounds. The Company intends to vigorously defend the action.
Smartwater, Ltd v. Applied DNA Sciences, Inc. (no. 1:12 cv- 11009-PBS)
On June 6, 2012, a complaint for patent infringement was filed against the Company by Smartwater, Ltd. in the United States District Court for the District of Massachusetts in an action entitled Smartwater, Ltd. v. Applied DNA Sciences, Inc., No. 1:12-cv-11009-PBS. The complaint alleges that the Company infringed one or more claims under two of plaintiff’s patents by selling or offering for sale, manufacturing and using certain of the Company’s products, by inducing others to infringe and by contributing to infringement by others. The plaintiff seeks injunctive relief as well as awards of damages and attorneys’ fees. The Company has not yet been served with the complaint. The Company believes that none of its products infringed any claims under either of plaintiff’s patents and moreover notes that one of plaintiff’s patents has expired. The Company denies the allegations in the complaint, believes they are without merit and intends to defend the action vigorously.
NOTE I - GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed consolidated financial statements at June 30, 2012, the Company incurred a net loss for the nine month period ended June 30, 2012 of approximately $5.4 million and has an accumulated deficit of $167.2 million. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
The Company’s existence is dependent upon management’s ability to develop profitable operations. Management is devoting substantially all of its efforts to developing DNA embedded biotechnology security solutions in the United States and Europe and there can be no assurance that the Company’s efforts will be successful and that management’s actions will result in profitable operations or the resolution of its liquidity problems. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
NOTE J - SUBSEQUENT EVENTS
On August 10, 2012, the Company closed a private placement of its common stock. The Company issued and sold 8,265,683 shares of its common stock at a purchase price of $0.04336 per share to “accredited investors,” as defined in regulations promulgated under the Securities Act, for gross proceeds of $358,400. A registered broker dealer firm acted as the placement agent with respect to the private placement. In connection with the private placement, the Company paid placement agent commissions and discounts aggregating $25,088. In addition, the placement agent was issued a warrant with a five-year term to purchase 661,255 shares of common stock with an exercise price of $0.04336 per share.
The following discussion should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and Notes thereto, included elsewhere within this report. The Quarterly Report contains forward-looking statements, including statements using terminology such as “can”, “may”, “believe”, “designated to”, “will”, “expect”, “plan”, “anticipate”, “estimate”, “potential” or “continue”, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. You should read statements that contain these words carefully because they:
|
●
|
discuss our future expectations;
|
|
●
|
contain projections of our future results of operations or of our financial condition; and
|
|
●
|
state other “forward-looking” information.
|
We believe it is important to communicate our expectations. However, forward looking statements involve risks and uncertainties and our actual results and the timing of certain events could differ materially from those discussed in forward-looking statements as a result of certain factors, including those set forth under “Risk Factors,” “Business” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law.
Introduction
We are a provider of botanical-DNA based security and authentication solutions that can help protect products, brands and intellectual property of companies, governments and consumers from theft, counterfeiting, fraud and diversion. SigNature® DNA, SmartDNA, Cashield™, DNANet™, BioMaterial™ Genotyping and digitalDNA™, our principal anti-counterfeiting product authentication and crime prevention solutions, can be used in numerous industries, including but not limited to cash-in-transit (transport and storage of banknotes), textiles and apparel, semiconductors, identity cards and other secure documents, pharmaceuticals, wine, and luxury consumer goods.
SigNature DNA. We use the DNA of plants to manufacture highly customized and encrypted botanical DNA markers, or SigNature DNA Markers, which we believe are virtually impossible to replicate. We have embedded SigNature DNA Markers into a range of our customers’ products, including various inks, dyes, textile treatments, thermal ribbon, thread, varnishes and adhesives. These items can then be tested for the presence of SigNature DNA Markers through an instant field detection or a forensic level authentication. Our SigNature DNA solution provides a secure, accurate and cost-effective means for users to incorporate our SigNature DNA Markers in, and then quickly and reliably authenticate and identify, a broad range of items, such as recovered banknotes, branded textiles and apparel products, semiconductors, pharmaceuticals and cosmetic products, identity cards and other secure documents, digital media, artwork and collectibles and fine wine. Having the ability to reliably authenticate and identify counterfeit versions of such items enables companies and governments to detect, deter, interdict and prosecute counterfeiting enterprises and individuals.
SmartDNA. SmartDNA is a unique and patented security system based on botanical DNA, a new and effective crime protection system for stores, warehouses, banks, pharmacies, ATMs and the protection of valuables. The system contains a water-based, non-toxic spray which may be triggered during a crime, marking the perpetrator and remaining on their person for weeks after the crime. Each SmartDNA product is designed to be unique to each store, warehouse or sting operation allowing the police and prosecutors to link criminals to the crimes.
Cashield. Cashield is a family of cash degradation inks that permanently stain banknotes stolen from cash-handling or ATM systems. Cashield extends our offering beyond our prior singular product, AzSure®, to a family of security inks that include Red, Violet, Green, Teal, Indigo, and the original AzSure® Blue. Current degradation dyes suffer from a critical technical weakness, as the dyes may be removed by the use of solvents. We initiated the development of Cashield in response to demand for a more effective carrier for our SigNature DNA markers. Cashield has been certified for use in the EU by the Laboratoire National de Métrologie et d’Essais (LNE) and passed all 47 individual dye penetration and wash-out-resistance tests. Additionally, a CViT study presented by the University of Leeds cited Cashield AzSure Blue ink as having improved performance versus staining inks from other suppliers. In this study, the AzSure blue ink was tested across a range of currencies, including British pounds, Euros, and U.S. dollars. The evaluation involved exposure to numerous industrial solvents. Final analysis of the results concluded that the AzSure blue ink was bound strongly in five seconds or less to a variety of banknotes, and could not be removed with any solvent.
DNANet. In 2010, we developed DNANet tactical DNA products for law enforcement, in the form of DNA-marked fixative sprays and liquids as well as transferable grease. These products, being marketed to global police forces were created to help link criminals to crimes. DNANet is a tactical forensic system providing unique DNA codes for covert operations that require absolute proof of authentication.
BioMaterial GenoTyping. Our BioMaterial GenoTyping solution refers to the development of genetic assays to distinguish between varieties or strains of biomaterials, such as cotton, wool, tobacco, fermented beverages, natural drugs and foods, that contain their own source DNA. We have developed two proprietary genetic tests (FiberTyping™ and PimaTyping™) to track American Pima cotton from the field to finished garments. These genetic assays provide the cotton industry with what we believe to be the first authentication tools that can be applied throughout the U.S. and worldwide cotton industry from cotton growers, mills, wholesalers, distributors, manufacturers and retailers through trade groups and government agencies.
digitalDNA. We have launched a new product called digitalDNA, which is a DNA-secured form of the QR (“quick read”) code. digitalDNA is a new security tool that utilizes the flexibility of mobile communications, the instant accessibility of secure, cloud-based data, and the absolute certainty of DNA to make item tracking and authentication fast, easy and definitive, while providing the opportunity to create a new and exciting customer interface. The product uses forensic authentication of a botanical DNA marker, sequence-encrypted within a secure QR code, and physically included within the ink used to digitally print the code. The resulting pattern or “rune” can be scanned via an Apple-approved app with an iPhone to assure originality. These mobile scans can be performed anywhere along the supply chain without limit. Tracking information is fed into “tunable algorithms” that use pattern recognition to automatically identify supply-chain risks, for counterfeits or product diversion. Rapid-reading reporters, associated with the DNA marker, are also embedded in the ink, and prevent the secure code from being digitally copied.
The digitalDNA platform is designed to meet compliance specifications defined by the PCI (Payment Card Industry) Security Standards Council, the new and strict standards developed for handling credit card transactions, and HIPAA (Health Insurance Portability and Accountability Act), the stringent requirements for protecting personal health information.
We acquired rights to certain software and intellectual property pursuant to an agreement we entered into with DivineRune Inc., a secure cloud-computing specialist, in January this year. DivineRune was issued a 3 year warrant to purchase one million shares of our common stock, par value $.001 per share (“Common Stock”) as compensation for a license to DivineRune’s patent portfolio. We will also share revenues on any future sales of products generated as a result of this agreement. We expect that the partnership will enhance and extend our core anti-counterfeiting, anti-diversion, and security systems into the digital track-and-trace sphere. James A. Hayward, our President, Chairman and Chief Executive Officer, and Yacov Shamash, a member of our Board of Directors, were among the early investors in DivineRune where Mr. Sayan is the founder and CEO. In addition, Dr. Hayward and Dr. Shamash both serve on the Board of Directors of Softheon, a document security company, where Mr. Sayan is the Founder, CEO and Chairman of the Board.
To date, the substantial portion of our revenues has been generated from sales of our SigNature DNA and BioMaterial Genotyping, our principal anti-counterfeiting and product authentication solutions (“authentication services”). We have continued to incur expenses in expanding our laboratory and office facilities and increasing our personnel to meet anticipated future demand. We have limited sources of liquidity. We expect to generate revenues from sales of our SigNature Program, Cashield, DNANet, SmartDNA, BioMaterial Genotyping and digitalDNA. We have developed or are currently attempting to develop business in the following target markets: cash-in-transit, semiconductor authentication, textile and apparel authentication, secure documents, pharmaceuticals, consumer products, fine wine, art and collectibles, and digital and recording media. Our developments in the cash-in-transit, semiconductor authentication and textile and apparel authentication markets have contributed to the increase in our revenues. We intend to pursue both domestic and international sales opportunities in each of these vertical markets.
|
Critical Accounting Policies
|
Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
● Revenue recognition;
● Allowance for uncollectible receivables; and
● Fair value of intangible assets.
Revenue Recognition
Revenues are derived from research, development, qualification and production testing for certain commercial products.
Revenue from fixed price testing contracts is generally recorded upon completion of the contracts, which are generally short-term, or upon completion of identifiable contractual tasks. At the time we enter into a contract that includes multiple tasks, we estimate the amount of actual labor and other costs that will be required to complete each task based on historical experience. Revenues are recognized which provide for a profit margin relative to the testing performed. Revenue relative to each task and from contracts which are time and materials based is recorded as effort is expended. Billings in excess of amounts earned are deferred. Any anticipated losses on contracts are charged to income when identified. To the extent management does not accurately forecast the level of effort required to complete a contract, or individual tasks within a contract, and we are unable to negotiate additional billings with a customer for cost over-runs, we may incur losses on individual contracts. All selling, general and administrative costs are treated as period costs and expensed as incurred.
For revenue from product sales, we recognize revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”). ASC 605-10 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (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 and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. We defer any revenue for which the product has not been delivered or is subject to refund until such time that we and the customer jointly determine that the product has been delivered or no refund will be required.
ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing ASC05-25 on our financial position and results of operations are not significant.
Allowance for Uncollectible Receivables
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. We use a combination of write-off history, aging analysis and any specific known troubled accounts in determining the allowance. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.
Fair Value of Intangible Assets
We have adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). The Statement requires that long-lived assets and certain identifiable intangibles held and used by us be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period.
We evaluate the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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.
Comparison of Results of Operations for the Three Months Ended June 30, 2012 and 2011
Revenues
For the three months ended June 30, 2012, we generated $528,574 in revenues from operations principally from the sales of authentication services. For the three months ended June 30, 2011, we generated $229,710 in revenues from operations. The increase in sales for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily caused by our continued sales efforts in expanding our product usage in our target markets.
Costs and Expenses
Selling, General and Administrative
Selling, general and administrative expenses increased from $1,580,788 for the three months ended June 30, 2011 to $1,752,501 for the three months ended June 30, 2012. The increase of $171,713, or 11%, is primarily attributable to the cost of stock based compensation incurred in the current period compared to the same period last year.
Research and Development
Research and development expenses increased from $47,988 for the three months ended June 30, 2011 to $99,958 for the three months ended June 30, 2012. The increase of $51,970 is attributable to additional research and development activity needed with current operations.
Depreciation and Amortization
In the three months ended June 30, 2012, depreciation and amortization increased by $11,446 from $91,892 for the three months ended June 30, 2011 to $103,338 for the three months ended June 30, 2012. The increase is attributable to acquisition of recent property and equipment.
Total Operating Expenses
Total operating expenses increased to $1,955,797 for the three months ended June 30, 2012 from $1,720,668 for the three months ended June 30, 2011, or an increase of $235,129 primarily attributable to an increase in equity based compensation and in R&D expenditures.
Interest Expenses
Interest expense for the three months ended June 30, 2012 decreased by $661,615 to $2,422 from $664,037 for the three months ended June 30, 2011. The decrease in interest expense was due to conversion of our debt and related reduction in our non cash amortization of debt discounts associated with our issued convertible notes.
Net Income (Loss)
Net loss for the three months ended June 30, 2012 decreased to $1,429,645 from a net loss of $2,154,995 for the three months ended June 30, 2011 primarily attributable to factors described above.
Comparison of Results of Operations for the Nine Months Ended June 30, 2012 and 2011
Revenues
For the nine months ended June 30, 2012, we generated $1,563,880 in revenues from operations principally from the sales of authentication services. For the nine months ended June 30, 2011, we generated $687,970 in revenues from operations. The increase in sales for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011 was primarily caused by our continued sales efforts in expanding our product usage in our target markets.
Costs and Expenses
Selling, General and Administrative
Selling, general and administrative expenses increased from $4,529,352 for the nine months ended June 30, 2011 to $5,729,575 for the nine months ended June 30, 2012. The increase of $1,200,223, or 26%, is primarily attributable to the cost of stock based compensation and other operating costs incurred in the current period compared to the same period last year.
Research and Development
Research and development expenses increased from $161,645 for the nine months ended June 30, 2011 to $274,528 for the nine months ended June 30, 2012. The increase of $112,883 is attributable to additional research and development activity needed with current operations.
Depreciation and Amortization
In the nine months ended June 30, 2012, depreciation and amortization increased by $23,811 from $276,608 for the nine months ended June 30, 2011 to $300,419 for the nine months ended June 30, 2012. The increase is attributable to acquisition of recent property and equipment.
Total Operating Expenses
Total operating expenses increased to $6,304,522 for the nine months ended June 30, 2012 from $4,967,605 for the nine months ended June 30, 2011, or an increase of $1,336,917 primarily attributable to an increase in equity based compensation, other operating costs and in R&D expenditures.
Interest Expenses
Interest expense for the nine months ended June 30, 2012 decreased by $1,175,335 to $642,790 from $1,818,125 for the nine months ended June 30, 2011. The decrease in interest expense was due to conversion of our debt and related reduction in our non cash amortization of debt discounts associated with our issued convertible notes.
Net Income (Loss)
Net loss for the nine months ended June 30, 2012 decreased to $5,383,432 from a net loss of $6,097,760 for the nine months ended June 30, 2011 primarily attributable to factors described above.
Liquidity and Capital Resources
Our liquidity needs consist of our working capital requirements, indebtedness payments and research and development expenditure funding. Historically, we have financed our operations through the sale of equity and convertible debt as well as borrowings from various credit sources. In fiscal 2010 and 2011 as well as in prior fiscal years, we have relied in part on cash infusions from our President, Chairman and Chief Executive Officer, James A. Hayward, in order to fund our operations. During fiscal 2011, Dr. Hayward provided $750,000 in new loans. Dr. Hayward has not had to provide new loans during the nine months ended June 30, 2012. In the absence of third party investment, curtailment of cash investments by Dr. Hayward could harm our cash availability and our ability to fund our operations, including our ability to meet our payroll and accounts payable obligations.
As of June 30, 2012, we had working capital of $1,152,670. For the nine months ended June 30, 2012, we used net cash flow in operating activities of $2,968,008 consisting primarily of year to date loss of $5,383,432. Non cash adjustments included $927,514 in depreciation and amortization charges, $1,622,549 for equity based compensation and $507,939 for settlement of accrued interest. Additionally, we had a net increase in operating assets of $278,427 and a net decrease in operating liabilities of $364,151.
Cash flows used in investing activities for the nine months ended June 30, 2012 was $65,792 from the acquisition of equipment. Cash provided by financing activities for the nine months ended June 30, 2012 was $1,542,600 consisting of the proceeds from the sale of common stock.
We expect capital expenditures to be less than $200,000 in fiscal 2012. Our primary investments will be in laboratory equipment to support prototyping and our authentication services.
Exploitation of potential revenue sources is expected to be financed primarily through the sale of equity securities and convertible debt, exercise of outstanding warrants, issuance of notes payable and other debt or a combination thereof, depending upon the transaction size, market conditions and other factors. Any issuances of preferred stock will be on such terms and conditions as are approved by our board of directors, may have rights, preferences and privileges senior to those of our Common Stock and may dilute the rights of holders of our Common Stock.
While we have raised capital to meet our working capital and financing needs in the past, additional financing is required within the next 12 months in order to meet our current and projected cash flow deficits from operations and development. We have sufficient funds to conduct our operations until approximately November 2012. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.
To the extent our revenues continue to increase over comparable year periods, our liquidity will be enhanced. However, we expect to require additional financing to sustain our growth and operations, including an increase in the number of employees.
By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.
Our registered independent certified public accountants have stated in their report dated December 8, 2011, that we have incurred operating losses in the last two years, and that we are dependent upon management’s ability to develop profitable operations and raise additional capital. These factors among others may raise substantial doubt about our ability to continue as a going concern.
Recent Debt and Equity Financing Transactions
Fiscal 2010
During the year ended September 30, 2010, we issued and sold an aggregate principal amount of $2,545,000 in secured convertible promissory notes bearing interest at 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act of 1933, as amended (the “Securities Act”). On January 7, 2012, all principal and interest accrued on such promissory notes has been converted pursuant to their terms into shares of our Common Stock at a conversion price equal to a 20% discount to the average volume, weighted average price of our Common Stock for the ten trading days prior to issuance.
Fiscal 2011
During the year ended September 30, 2011, we issued and sold an aggregate of $1,850,000 in principal amount of senior secured convertible notes bearing interest at a rate of 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act. The notes are convertible, in whole or in part, at any time, at the option of the noteholders, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of each note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price which is equal to a 20% discount to the average volume, weighted average price of our Common Stock for the ten trading days prior to issuance (the “Common Conversion Price”) or (B) securities issued in any Subsequent Financing (“Subsequent Financing Securities”) at a conversion price equal to 80% of the price per Subsequent Security paid by investors for Subsequent Securities in a Subsequent Financing (the “Subsequent Financing Price”). The conversion prices of the notes range between $0.03088 and $0.05529. A “Subsequent Financing” is the sale of our securities at any time after the date of issuance of the notes and prior to the earlier of (i) a Qualified Financing or (ii) the one-year anniversary of the issuance of the notes. A noteholder may convert its notes in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings. The notes shall be automatically converted upon the earlier of (I) the one year anniversary of their issuance and (II) the completion of a Qualified Financing at the election of each noteholder into either (A) shares of Common Stock at the Common Conversion Price, (B) Subsequent Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) securities issued in a Qualified Financing (the “Qualified Financing Securities”) at a conversion price equal to 80% of the price per Qualified Financing Security paid by investors for the Qualified Financing Securities in the Qualified Financing. A “Qualified Financing” is the sale of our securities in a single transaction resulting in gross proceeds of at least $10 million (before transaction fees and expenses). The notes bear interest at the rate of 10% per annum and are due and payable in full on the one year anniversary of issuance of the notes. Until the principal and accrued but unpaid interest under the notes are paid in full, or converted into, Subsequent Financing Securities or Qualified Financing Securities pursuant to their terms, our obligations under the notes will be secured by a lien on all our assets, including the assets of APDN (B.V.I.) Inc., our wholly-owned subsidiary.
In addition, on July 15, 2011, we closed a private placement of Common Stock. We issued and sold 105,263,158 shares of Common Stock at a purchase price of $0.0475 per share to accredited investors for gross proceeds of $5,000,000.
A registered broker dealer firm acted as our placement agent with respect to the private placement. In connection with the private placement, we paid placement agent commissions and discounts aggregating $265,000. In addition, the placement agent or its designees were issued warrants with a seven-year term to purchase an aggregate of 7,578,948 shares of Common Stock with an exercise price of $0.0475 per share.
Fiscal 2012 (through June 30, 2012)
On June 21, 2012, we closed a private placement of our Common Stock. We issued and sold 35,576,568 shares of Common Stock at a purchase price of $0.04336 per share (which is equal to a 20% discount to the average volume, weighted average price of the Common Stock for the ten trading days prior to the closing) to an “accredited investor,” as defined in regulations promulgated under the Securities Act, for gross proceeds of $1,542,600.
Subsequent Events
On August 10, 2012, the Company closed a private placement of its common stock. The Company issued and sold 8,265,683 shares of its common stock at a purchase price of $0.04336 per share to “accredited investors,” as defined in regulations promulgated under the Securities Act, for gross proceeds of $358,400. A registered broker dealer firm acted as the placement agent with respect to the private placement. In connection with the private placement, the Company paid placement agent commissions and discounts aggregating $25,088. In addition, the placement agent was issued a warrant with a five-year term to purchase 661,255 shares of common stock with an exercise price of $0.04336 per share.
We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not been a material source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. We intend to pursue the building of a re-seller network outside the United States, and if successful, the re-seller agreements would constitute a source of liquidity and capital over time. In order to obtain capital, we may need to sell additional shares of Common Stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding and execution of re-seller agreements outside the Unites States.
We need to seek additional capital to sustain or expand our prototype and sample manufacturing, and sales and marketing activities, and to otherwise continue our business operations beyond November 2012. We have no commitments for any future funding, and may not be able to obtain additional financing or grants on terms acceptable to us, if at all, in the future. If we are unable to obtain additional capital this would restrict our ability to grow and may require us to curtail or discontinue our business operations. Additionally, while a reduction in our business operations may prolong our ability to operate, that reduction would harm our ability to implement our business strategy. If we can obtain any equity financing, it may involve substantial dilution to our then existing stockholders.
Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our Common Stock has made it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our Common Stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
Substantially all of the real property used in our business is leased under operating lease agreements.
Product Research and Development
We anticipate spending approximately $500,000 for product research and development activities during the next twelve months.
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the sale of any material property, plant or equipment during the next 12 months. We do anticipate spending approximately $50,000 on the acquisition of leasehold improvements during the next 12 months. To manage our expected growth, if any, over the next 2 to 3 years, we anticipate seeking additional space.
Number of Employees
We currently have 25 full-time employees and two part-time employees, including two in management, 17 in operations, 7 in sales and marketing and 1 in investor relations. We expect to increase our staffing dedicated to sales, product prototyping, manufacturing of DNA markers and forensic authentication services. Expenses related to travel, marketing, salaries, and general overhead will be increased as necessary to support our growth in revenue. In order for us to attract and retain quality personnel, we anticipate we will have to offer competitive salaries to future employees. We anticipate that it may become desirable to add additional full and/ or part time employees to discharge certain critical functions during the next 12 months. This projected increase in personnel is dependent upon our ability to generate revenues and obtain sources of financing. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees. As we continue to expand, we will incur additional costs for personnel. As of June 23, 2012,the Company began working with Insperity Inc. to help us manage many of the back-end administrative human resources responsibilities of our Company. This change is being done to provide Fortune 500 type benefits to our current employees, making the Company more attractive to new hires as well as saving the Company money by not having to build out an internal HR department at this point in time. Insperity Inc. is a publicly traded company (NYSE: NSP) that supports businesses with payroll, medical benefits, 401k, online-training, and human resources services and support.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Inflation
The effect of inflation on our revenue and operating results was not significant.
Going Concern
The accompanying unaudited condensed consolidated financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate our continuance as a going concern. Our auditors, in their report dated December 8, 2011, have expressed substantial doubt about our ability to continue as a going concern. Our cash position may be inadequate to pay all of the costs associated with the testing, production and marketing of our products. Management intends to use borrowings and the sale of equity or convertible debt to mitigate the effects of its cash position, however no assurance can be given that debt or equity financing will be available. The accompanying unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should we be unable to continue existence.
We are a smaller reporting company as defined by Rule 12b-2 under the Exchange Act of 1934, as amended (the “Exchange Act”) and are not required to provide the information required under this item.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2012, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended June 30, 2012, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. See Note H, “Commitments and Contingencies –Litigation,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of current legal proceedings as well as Item 8.01 of the Form 8-K dated June 21, 2012.
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31.1*
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Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
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31.2*
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Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
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32.1**
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
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32.2**
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
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101 INS***
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XBRL Instance Document
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101 SCH***
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XBRL Taxonomy Extension Schema Document
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101 CAL***
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XBRL Taxonomy Extension Calculation Linkbase Document
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101 LAB***
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XBRL Extension Label Linkbase Document
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101 PRE***
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XBRL Taxonomy Extension Presentation Linkbase Document
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* Filed herewith.
** Furnished herewith.
*** In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Applied DNA Sciences, Inc.
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Dated: August 14, 2012
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/s/ JAMES A. HAYWARD, PH. D.
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James A. Hayward, Ph. D.
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Chief Executive Officer
(Duly authorized officer)
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/s/ KURT H. JENSEN
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Kurt H. Jensen
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Chief Financial Officer
(Duly authorized officer and
principal financial officer)
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