Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
APDN > SEC Filings for APDN > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for APPLIED DNA SCIENCES INC

Form 10-Q for APPLIED DNA SCIENCES INC


13-Aug-2013

Quarterly Report


Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

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, 2012. 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 modified and derivatized botanical-DNA based security and authentication solutions that can help protect products, brands and intellectual property of companies, and protect governments and consumers from theft, counterfeiting, fraud and diversion. SigNature® DNA, SmartDNA®, DNANet®, BioMaterial Genotyping™, digitalDNA®, and Cashield®, our principal anti-counterfeiting and product authentication solutions, can be used in numerous industries, including cash-in-transit (transport and storage of banknotes), microcircuits and other electronics, homeland security, textiles and apparel, identity cards and other secure documents, law enforcement, 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 ribbons, threads, 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, microcircuits and other electronics, 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.

DNANet. We have recently developed DNANet tactical DNA products for law enforcement, in the form of DNA-marked sprays and liquids. These products, which are 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. DNANet is now included in the SmartDNA family of products.

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 global cotton industry from cotton growers, mills, wholesalers, distributors, manufacturers and retailers through trade groups and government agencies.

digitalDNA. digitalDNA 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 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.

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 European Union 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.

Plan of Operations

General

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 expect to generate revenues from sales of our SigNature Program, Cashield, DNANet, SmartDNA, digitalDNA and BioMaterial Genotyping offerings. We have developed or are currently attempting to develop business in the following target markets: homeland security, cash-in-transit, textile and apparel authentication, secure documents, pharmaceuticals, consumer products, law enforcement, fine wine, art and collectibles, and digital and recording media. Our developments in the cash-in-transit, component authentication and textile and apparel authentication markets have contributed to 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 doubtful accounts; and ? Equity based compensation.

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.

For revenue from product sales, we recognize revenue in accordance with ASC 605, Revenue Recognition ("ASC 605"). ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (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 incorporates ASC 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 ASC 605-25 on our financial position and results of operations are not significant.

Allowance for Uncollectible Receivables

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change. At June 30, 2013 and September 30, 2012, the Company had an allowance for doubtful accounts of $70,000 and $0, respectively. The Company writes-off receivables that are deemed uncollectible.

Equity Based Compensation

The Company follows ASC 718, Compensation ("ASC 718") which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values.

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, 2013 and 2012

Revenues

For the three months ended June 30, 2013, we generated $644,842 in revenues from operations principally from the sales of authentication services. For the three months ended June 30, 2012, we generated $528,574 in revenues from operations. The $116,268 or 22.0% increase in sales for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was primarily caused by SigNature DNA sales to suppliers of the United States Defense Logistics Agency ("DLA"). In late January 2013, the DLA announced that it would subsidize SigNature DNA marking costs for its trusted suppliers, and in March 2013, after this and other mechanisms were in place, we were able to begin SigNature DNA shipments for this market. The sales to these third party suppliers during the three months ended June 30, 2013 was offset by a decrease in sales due to the completion of our prior pilot contract with the Logistics Management Institute ("LMI").

Costs and Expenses

Selling, General and Administrative

Selling, general and administrative expenses increased from $1,752,501 for the three months ended June 30, 2012 to $3,240,815 for the three months ended June 30, 2013. The increase of $1,488,314, or 84.9%, is primarily attributable to higher professional fees, specifically for legal and consulting, increased salary due to the increase in headcount by approximately 60.0% from June 30, 2012 as compared to June 30, 2013 and bad debt expense of $70,000 for the three months ended June 30, 2013 as compared to $0 for the three months ended June 30, 2012. The increase is also due to expenses incurred for the relocation of our corporate office during the three months ended June 30, 2013.

Research and Development

Research and development expenses increased from $99,958 for the three months ended June 30, 2012 to $184,981 for the three months ended June 30, 2013. The increase of $85,023 or 85.1% is attributable to additional research and development activity needed to support the increase in current operations.

Depreciation and Amortization

In the three months ended June 30, 2013, depreciation and amortization decreased by $41,058 or 39.7% from $103,338 for the three months ended June 30, 2012 to $62,280 for the three months ended June 30, 2013. The decrease is primarily attributable to completion of the amortization of our intangible property which we incurred approximately $90,000 of amortization expense during the three months ended June 30, 2012 as compared to $19,470 for the three months ended June 30, 2013. The amortization during the three months ended June 30, 2013 related to the intellectual property acquired from RedWeb. This decrease was offset by an increase in depreciation and amortization expense for the leasehold improvements and lab equipment purchased associated with the relocation of our corporate office and intellectual property acquired with the RedWeb asset purchase agreement during the three months ended June 30, 2013.

Total Operating Expenses

Total operating expenses increased to $3,488,076 for the three months ended June 30, 2013 from $1,955,797 for the three months ended June 30, 2012, for an increase of $1,532,279 or 78.3% primarily attributable to an increase in professional fees, salaries paid and in R&D expenditures, which was offset by a decrease in depreciation and amortization expense, as described above.

Interest, net

Interest, net for the three months ended June 30, 2013 was income of $333 from a net interest expense of $2,422 for the three months ended June 30, 2012. The decrease in interest expense was due to no outstanding notes payable as of June 30, 2013.

Gain from Change in Fair Value of Warrant Liability

In November 2012, we issued warrants containing certain reset provisions which require us to classify them as a liability and mark these warrants to market and record the change in fair value each reporting period as a non-cash adjustment to our current period operations. This resulted in a gain of $707,289 for the three months ended June 30, 2013 which is included in current period operations as compared to $-0- for the same period last year. These warrants were reclassified to equity upon exercise on April 25, 2013.

Net Loss

Net loss for the three months ended June 30, 2013 increased to $2,135,612 from a net loss of $1,429,645 for the three months ended June 30, 2012, which is primarily attributable to factors described above.

Comparison of Results of Operations for the Nine Months Ended June 30, 2013 and 2012

Revenues

For the nine months ended June 30, 2013, we generated $1,307,117 in revenues from operations principally from the sales of authentication services. For the nine months ended June 30, 2012, we generated $1,563,880 in revenues from operations. The decrease of $256,763 or 16.4% in sales for the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 was primarily caused by the completion of our prior pilot contract with LMI, and a slower than anticipated replacement of that revenue by DNA marking contracts with commercial electronics manufacturers. In late January 2013, DLA announced that it would subsidize SigNature DNA marking costs for its trusted suppliers, and in March 2013, after this and other mechanisms were in place, we were able to begin SigNature DNA shipments for this market.

Costs and Expenses

Selling, General and Administrative

Selling, general and administrative expenses increased from $5,729,575 for the nine months ended June 30, 2012 to $8,516,390 for the nine months ended June 30, 2013. The increase of $2,786,815, or 48.6%, is primarily attributable to higher professional fees, specifically for legal and consulting, increased salary due to an approximate increase in headcount of 60.0% from June 30, 2012 as compared to June 30, 2013 and bad debt expense of $70,000 for the nine months ended June 30, 2013 as compared to $0 for the nine months ended June 30, 2012.

Research and Development

Research and development expenses increased from $274,528 for the nine months ended June 30, 2012 to $509,132 for the nine months ended June 30, 2013. The increase of $234,604 or 85.5% is attributable to additional research and development activity needed with current operations.

Depreciation and Amortization

In the nine months ended June 30, 2013, depreciation and amortization decreased by $195,314 or 65.0% from $300,419 for the nine months ended June 30, 2012 to $105,105 for the nine months ended June 30, 2013. The decrease is primarily attributable to completion of the amortization of our intangible property which we incurred approximately $270,000 of amortization expense during the nine months ended June 30, 2012 as compared to $19,470 for the nine months ended June 30, 2013. The amortization during the nine months ended June 30, 2013 related to the intellectual property acquired from RedWeb. This decrease was offset by an increase in depreciation and amortization expense for the leasehold improvements, lab equipment and assets acquired with the RedWeb asset purchase agreement during the nine months ended June 30, 2013.

Total Operating Expenses

Total operating expenses increased to $9,130,627 for the nine months ended June 30, 2013 from $6,304,522 for the nine months ended June 30, 2012, or an increase of $2,826,105 or 44.8% primarily attributable to an increase in professional fees paid, salaries and in R&D expenditures which was offset by a decrease in depreciation and amortization expense.

Interest, net

Interest, net for the nine months ended June 30, 2013 was income of $738 from a net interest expense of $642,790 for the nine months ended June 30, 2012. The decrease in interest expense was due to no outstanding notes payable as of June 30, 2013.

Loss from Change in Fair Value of Warrant Liability

In November 2012, we issued warrants containing certain reset provisions which require us to classify them as a liability and mark the warrants to market and record the change in fair value each reporting period as a non-cash adjustment to our current period operations. This resulted in a $6,145,229 charge to current period operations as compared to $-0- for the same period last year. These warrants were reclassified to equity upon exercise on April 25, 2013.

Net Loss

Net loss for the nine months ended June 30, 2013 increased to $13,968,001 from a net loss of $5,383,432 for the nine months ended June 30, 2012, which is primarily attributable to factors described above.

Liquidity and Capital Resources

Our liquidity needs consist of our working capital requirements and research and development expenditure funding. As of June 30, 2013, we had working capital of $1,027,531. For the nine months ended June 30, 2013, we generated a net cash flow deficit from operating activities of $5,696,917 consisting primarily of our loss of $13,968,001, net with non-cash adjustments of $105,105 in depreciation and amortization charges, $70,000 in bad debt expense, $1,771,854 for equity based compensation and $6,145,229 change in fair value of warrant liability. Additionally, we had a net increase in operating assets of $437,171 and a net increase in operating liabilities of $616,067. Cash used in investing activities was $797,574 consisting primarily of $584,080 of assets acquired under the RedWeb asset purchase agreement and $213,494 for the purchase of equipment and leasehold improvement related to the relocation of our corporate office. Cash provided by financing activities for the nine months ended June 30, 2013 totaled $7,601,500 consisting primarily of proceeds of $5,500,000 from the sale of our Series A Preferred, $2,000,000 from the sale of our common stock, $150,000 from the exercise of warrants, net with $50,000 paid to re-acquire previously issued warrants.

On January 7, 2013, we completed the second closing ("Second Closing") of our transaction with Crede CG II, Ltd. ("Crede") and sold to Crede 5,500 shares of our Series A Preferred at a price of $1,000 per share, resulting in gross proceeds to us of $5,500,000. On January 8, 2013, we exercised our option and converted the Series A Preferred held by Crede into 25,462,963 shares of our Common Stock at a conversion price of $0.216 per share.

We had entered into a Securities Purchase Agreement ("Purchase Agreement") with Crede dated November 28, 2012 pursuant to which Crede agreed to purchase the Series A Preferred on the first business day following the date a registration statement covering the resale of all shares of Common Stock issuable pursuant to the Purchase Agreement, including those underlying the Series A Preferred and Series A, B and C Warrants, is declared effective by the SEC. The Company's registration statement on Form S-3 was declared effective by the SEC on January 4, 2013.

Pursuant to the Purchase Agreement, Crede purchased at the initial closing held on November 29, 2012 ("Initial Closing") 10,752,688 shares of our Common Stock at a price of $0.186 per share, resulting in gross proceeds to us of $2,000,000. In addition, at the Initial Closing, Crede was issued (i) five year Series A Warrants allowing it to initially purchase 10,752,688 shares of Common Stock at a price of $0.2232 per share, (ii) five year Series B Warrants allowing it to initially purchase 29,569,892 shares of Common Stock at a price of $0.2232 which became exercisable at the Second Closing and (iii) Series C Warrants allowing it to initially purchase 26,881,720 shares of Common Stock which became exercisable for six months after the eleventh trading day following the Second Closing. Crede may also exchange the Warrants for Common Stock pursuant to a Black-Scholes formula. The Series A, B and C Warrants each contain a 9.9% "blocker" so that in no event shall any of the Warrants be exercisable or exchangeable into or for Common Stock to the extent that such exercise or exchange would result in Crede having "beneficial ownership" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) of more than 9.9% of the Company's Common Stock.

On January 22, 2013, the Company exercised its option to repurchase the Series C Warrants issued to Crede for $50,000. On April 25, 2013, Crede effected the cashless exercise of 10,752,688 Series A Warrants and 29,569,862 Series B Warrants, and the Company thereupon issued to Crede an aggregate of 31,257,045 shares of its Common Stock.

Crede has the right to participate in other equity or equity -linked financings completed by the Company for a period of 180 days from January 4, 2013. In addition, the Company has agreed not to issue additional Common Stock or securities convertible into Common Stock at a price below $0.186 per share or the market price of the Common Stock on the date the registration statement was is declared effective, for a period of 180 days from the effective date of the registration statement, except for issuances (i) pursuant to acquisitions, joint ventures, license arrangements, leasing arrangements and other similar arrangements, (ii) to employees, consultants, directors and officers approved by the Board or pursuant to a plan approved by the Board, (iii) pursuant to one or more contracts entered into by us with third parties which would result in revenues to us during a three-month period equal to an annual run rate of $15 Million in revenues and (iv) pursuant to a contract entered into by us with a third party which would reasonably be expected to result in more than $3 Million in annual receivables.

Until one year after the Second Closing, we are prohibited from entering into any transaction to (i) sell any convertible securities at a conversion rate or other price that is generally based on and/or varies with the trading prices of the our Common Stock at any time after the initial issuance of such convertible securities or (ii) sell securities at a future determined price, including, without limitation, an "equity line of credit" or an "at the market offering."

Management believes that our positive cash balance and working capital as of June 30, 2013, as well as the proceeds from the securities purchase agreement with Crede entered into on July 19, 2013, along with our current customer base, projected cash flow and the minimum guaranteed revenues for the next fiscal year . . .

  Add APDN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for APDN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.