UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 2005
Commission file number 002-90519
APPLIED DNA SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Nevada 59-2262718
-------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
-------------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
(631)444-6862
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the last 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
The number of shares of Common Stock, $0.001 par value, outstanding on August 9,
2005, was 110,653,025 shares, held by approximately 1,182 shareholders.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
1
EXPLANATORY NOTE
This Amendment No. 1 to Form 10-QSB/A (this "Amendment") amends the Quarterly
Report of Applied DNA Sciences, Inc. (the "Company") on Form 10-QSB for the
quarter ended June 30, 2005, as filed with the Securities and Exchange
Commission on August 15, 2005 (the "Original Filing"). This Amendment is being
filed for the purpose of correcting errors in accounting for and the disclosing
the issuance by the Company of common stock, warrants, and options to acquire
the Company's common stock for services and in exchange for previously incurred
debt. In addition the Company is correcting certain errors in accounting for the
exchange of its common stock for previously incurred debt with a Company
Director.
We have not updated the information contained herein for events occurring
subsequent to August 15, 2005, the filing date of the Original Filing.
APPLIED DNA SCIENCES, INC
Amendment No. 1 to Quarterly Report on Form 10-QSB/A for the
Quarterly Period Ending June 30, 2005
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet:
June 30, 2005 (Unaudited) 4
Condensed Consolidated Statements of Losses:
Three and nine Months Ended June 30, 2005
and 2004 (Unaudited) and the Period
from September 16, 2002 (Date of Inception)
Through June 30,
2005 (Unaudited) 5
Condensed Consolidated Statement of
Stockholder's Equity:
For the Period from September 16, 2002
(Date of Inception) Through June 30,
2005 (Unaudited) 6
Condensed Consolidated Statements
of Cash Flows:
Nine Months Ended June 30, 2005
and 2004 (Unaudited) and
the Period from September 16, 2002
(Date of Inception) Through June 30,
2005 (Unaudited) 18
Notes to Unaudited Condensed Consolidated
Financial Information:
June 30, 2005 20-40
Item 2. Management Discussion and Analysis 41
Item 3. Controls and Procedures 52
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 54
2
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds 54
Item 3. Defaults Upon Senior Securities 54
Item 4. Submission of Matters to a
Vote of Security Holders 55
Item 5. Other Information 55
Item 6. Exhibits 55
Signatures 56
3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLIED DNA SCIENCES, INC.
(A Development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
RESTATED
(Unaudited)
ASSETS
June 30, 2005
------------------------
Current assets:
Cash and Equivalents $ 1,192,465
------------------------
Total Current Assets 1,192,465
Property, plant and equipment - Net
of accumulated depreciation of
$8,844 as of June 30, 2005 20,663
Security Deposits 56,850
Patent Filing - Net 24,753
------------------------
Total Assets $ 1,294,731
========================
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,038,025
Accrued liabilities due related parties (Note C) 136,474
Note payable (Note C) 425,000
------------------------
Total Current Liabilities 1,599,499
Warrant Liability (Note D) 9,802,137
Commitments and contingencies (Note F)
Deficiency in stockholders' equity:
Preferred Stock, par value $.001
per share; 10,000,000 shares
authorized; 60,000 issued and outstanding 6
Common Stock, par value $.001
per share; 250,000,000 shares
authorized; 66,411,025 shares
issued and outstanding 66,412
Common stock Subscription (36,000)
Common stock receivable (1,000)
Additional Paid-In-Capital 53,143,538
Deficit Accumulated During Development Stage (63,279,861)
--------------------
Total Deficiency in
Stockholders' Equity (10,106,905)
Total Liabilities and
Deficiency in Stockholders' Equity $ 1,294,731
========================
See accompanying notes to unaudited condensed consolidated financial statements
4
APPLIED DNA SCIENCES, INC.
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND LOSS
(Unaudited)
September 16, 2002,
For The Three Months Ended June 30 For The Nine Months Ended June 30 (Date of Inception)
through
2005 2004 2005 2004 June 30, 2005
-------------- -------------- -------------- -------------- --------------
RESTATED RESTATED RESTATED
Operating expenses:
Selling, general and
administrative $ 1,865,631 $ 1,672,449 $ 24,188,882 $ 10,989,349 $ 45,010,419
Research and Development 88,870 -- 345,958 -- 584,493
Depreciation and amortization 3,160 351 15,187 1,053 18,348
-------------- -------------- -------------- -------------- --------------
Total operating expenses 1,957,661 1,672,800 24,550,027 10,990,402 45,613,260
-------------- -------------- -------------- -------------- --------------
Operating loss (1,957,661) (1,672,800) (24,550,027) ,990,402) (45,613,260)
Net gain on revaluation
of warrant liability 5,679,175 -- 16,454,928 -- 16,454,928
Other Income (expense) 241 -- 3,415 1,385 29,800
Interest (expense) (21,557) (558,333) (32,373,143) (1,221,245) (34,151,329)
Income (taxes) benefit -- -- -- -- --
-------------- -------------- -------------- -------------- --------------
Net income (loss) $ 3,700,198 $ (2,231,133) $ (40,464,827) $ (12,210,262) $ (63,279,861)
============== ============== ============== ============== ==============
Income(loss) per common share
(basic) $ 0.06 $ (0.10) $ (0.83) $ (0.61) $ (2.37)
============== ============== ============== ============== ==============
Income per common share
(fully diluted) $ 0.04
==============
Weighted average shares
outstanding (basic) 66,308,115 21,350,449 48,810,559 20,164,783 26,793,544
============== ============== ============== ============== ==============
Weighted average
share outstanding
(fully diluted) 109,223,832
==============
See accompanying notes to unaudited condensed consolidated financial statements
5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share - - 100,000 $ 10 $ 990 $ - $ - $ - $ 1,000
Net Loss - - - - - - - (11,612) (11,612)
--------- --------- ---------- ---------- ----------- --------- ----------- ----------- ----------
Balance at September 30, 2002 - $ - 100,000 $ 10 $ 990 $ - $ - $ (11,612) $ (10,612)
========= ========= ========== ========== =========== ========= =========== =========== ==========
Issuance of common stock in
connection with merger with
Prohealth Medical Technologies,
Inc on October 1, 2002 - - 10,178,352 1,015 - - - - 1,015
Cancellation of Common stock
in connection with merger with
Prohealth Medical
Technologies, Inc on October
21, 2002 - - (100,000) (10) (1,000) - - - (1,010)
Issuance of common stock in
exchange for services in
October 2002 at $ 0.65 per
share - - 602,000 60 39,070 - - - 39,130
Issuance of common stock in
exchange for subscription in
November and December 2002
at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - -
Cancellation of common stock
in January 2003 previously
issued in exchange for
consulting services - - (836,000) (84) (54,264) - 54,340 - (8)
Issuance of common stock in
exchange for licensing services
valued at $ 0.065 per share in
January 2003 - - 1,500,000 150 97,350 - - - 97,500
Issuance of common stock in
exchange for consulting
services valued at $ 0.13 per
share in January 2003 - - 586,250 58 76,155 - - - 76,213
Issuance of common stock in
exchange for consulting
services at $ 0.065 per share
in February 2003 - - 9,000 1 584 - - - 585
Issuance of common stock to
Founders in exchange for
services valued at $0.0001 per
share in March 2003 - - 10,140,000 1,014 - - - - 1,014
Issuance of common stock in
exchange for consulting
services valued at $2.50 per
share in March 2003 - - 91,060 10 230,624 - - - 230,634
See accompanying notes to unaudited condensed consolidated financial statements
6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Issuance of common stock in
exchange for consulting services
valued at $ 0.065 per share in
March 2003 - - 6,000 1 389 - - - 390
Common stock subscribed in
exchange for cash at $1 per
share in March 2003 - - - - 18,000 - - - 18,000
Common stock issued in
exchange for consulting
services at $ 0.065 per
share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900
Common stock issued in
exchange for cash at $ 1.00 per
share on April 9, 2003 - - 18,000 2 - - - - 2
Common stock issued in
exchange for consulting services
at $ 0.065 per share on April 9,
2003 - - 9,000 1 584 - - - 585
Common stock issued in
exchange for consulting services
at $ 2.50 per share on April 23,
2003 - - 5,000 1 12,499 - - - 12,500
Common stock issued in
exchange for consulting services
at $ 2.50 per share, on June 12,
2003 - - 10,000 1 24,999 - - - 25,000
Common stock issued in
exchange for cash at $ 1.00 per
share on June 17, 2003 - - 50,000 5 49,995 - - - 50,000
Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 27, 2003 - - - - - 24,000 - - 24,000
Common stock retired in
exchange for note payable
at $0.0118 per share,
on June 30, 2003 - - (7,500,000) (750) 750 - - - -
Common stock issued in
exchange for consulting services
at $0.065 per share, on June 30,
2003 - - 270,000 27 17,523 - - - 17,550
Common stock subscribed in
exchange for cash at $ 1.00 per
share pursuant to private
placement on June 30, 2003 - - - - - 10,000 - - 10,000
Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 30, 2003 - - - - - 24,000 - - 24,000
Common stock issued in
exchange for consulting services
at approximately $2.01 per
share, July 2003 - - 213,060 21 428,798 - - - 428,819
See accompanying notes to unaudited condensed consolidated financial statements
7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock canceled in July
2003, previously issued for
services rendered at $2.50 per
share - - (24,000) (2) (59,998) - - - (60,000)
Common stock issued in
exchange for options exercised
at $1.00 in July 2003 - - 20,000 2 19,998 - - - 20,000
Common stock issued in
exchange for exercised of
options previously subscribed at
$1.00 in July 2003 - - 10,000 1 9,999 (10,000) - - -
Common stock issued in
exchange for consulting services
at approximately $2.38 per
share, August 2003 - - 172,500 17 410,915 - - - 410,932
Common stock issued in
exchange for options exercised
at $1.00 in August 2003 - - 29,000 3 28,997 - - - 29,000
Common stock issued in
exchange for consulting services
at approximately $2.42 per
share, September 2003 - - 395,260 40 952,957 - - - 952,997
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable-September 2003 - - 19,200 2 47,998 (48,000) - - -
Common stock issued in
exchange for cash at $2.50 per
share pursuant to private
placement September 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for options exercised
at $1.00 in September 2003 - - 95,000 10 94,991 - - - 95,001
Common stock subscription
receivable reclassification
adjustment - - - - - - 2,600 - 2,600
Common Stock subscribed to
at $2.50 per share in September
2003 - - - - - 300,000 - - 300,000
Net Loss for the year
ended September 30, 2003 - - - - - - - (3,445,164) (3,445,164)
--------- --------- ---------- ----------- ----------- ---------- ----------- ----------- ----------
Balance at September 30, 2003 - $ - 17,811,082 $ 1,781 $ 2,577,568 $ 300,000 $ - $(3,456,776) $ (577,427)
========= ========= ========== =========== =========== ========== =========== =========== ==========
See accompanying notes to unaudited condensed consolidated financial statements
8
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Preferred shares issues in
exchange for services at $25.00
per share, October 2003 15,000 15 - - - - - - 15
Common stock issued in
exchange for consulting services
at approximately $2.85 per
share, October 2003 - - 287,439 29 820,389 - - - 820,418
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable-October 2003 - - 120,000 12 299,988 (300,000) - - -
Common stock canceled in
October 2003, previously issued
for services rendered at $2.50
per share - - (100,000) (10) (249,990) - - - (250,000)
Common stock issued in
exchange for consulting services
at approximately $3 per share,
November 2003 - - 100,000 10 299,990 - - - 300,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, November, 2003 - - 100,000 10 249,990 - - - 250,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, December, 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for consulting services
at approximately $2.59 per
share, December 2003 - - 2,125,500 213 5,504,737 - - - 5,504,950
Common Stock subscribed to
at $2.50 per share in Dec 2003
- - - - - 104,000 - - 104,000
Beneficial conversion feature
relating to notes payable - - - - 1,168,474 - - - 1,168,474
Beneficial conversion feature
relating to warrants - - - - 206,526 - - - 206,526
Adjust common stock par value
from $0.0001 to $0.50 per share,
per amendment of articles dated
Dec 2003 - - - 10,223,166 (10,223,166) - - - -
Common Stock issued pursuant
to subscription at $2.50 share in
Jan 2004 - - 41,600 20,800 83,200 (104,000) - - -
Common stock issued in
exchange for consulting services
at $2.95 per share, Jan 2004 - - 13,040 6,520 31,948 - - - 38,468
Common stock issued in
exchange for consulting services
at $2.60 per share, Jan 2004 - - 123,000 61,500 258,300 - - - 319,800
See accompanying notes to unaudited condensed consolidated financial statements
9
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting services
at $3.05 per share, Jan 2004 - - 1,000 500 2,550 - - - 3,050
Common stock issued in
exchange for employee services
at $3.07 per share, Feb 2004 - - 6,283 3,142 16,147 - - - 19,289
Common stock issued in
exchange for consulting services
at $3.04 per share, Mar 2004 - - 44,740 22,370 113,640 - - - 136,010
Common Stock issued for
options exercised at $1.00 per
share in Mar 2004 - - 55,000 27,500 27,500 - - - 55,000
Common stock issued in
exchange for employee services
at $3.00 per share, Mar 2004 - - 5,443 2,722 13,623 - - - 16,345
Common stock issued in
exchange for employee services
at $3.15 per share, Mar 2004 - - 5,769 2,885 15,292 - - - 18,177
Preferred shared converted to
common shares for consulting
services at $3.00 per share,
Mar 2004 (5,000) (5) 125,000 62,500 312,500 - - - 374,995
Common stock issued in
exchange for employee services
at $3.03 per share, Mar 2004 - - 8,806 4,400 22,238 - - - 26,638
Common Stock issued pursuant
to subscription at $2.50 per
share in Mar. 2004 - - 22,500 11,250 (9,000) - - - 2,250
Beneficial Conversion Feature
relating to Notes Payable - - 122,362 - - - 122,362
Beneficial Conversion Feature - -
relating to Warrants - - 177,638 - - - 177,638
Common stock issued in
exchange for consulting services
at $2.58 per share, Apr 2004 - - 9,860 4,930 20,511 - - - 25,441
Common stock issued in
exchange for consulting services
at $2.35 per share, Apr 2004 - - 11,712 5,856 21,667 - - - 27,523
Common stock issued in
exchange for consulting services
at $1.50 per share, Apr 2004 - - 367,500 183,750 367,500 - - - 551,250
Common stock returned to
treasury at $0.065 per share,
April 2004 - - (50,000) (25,000) 21,750 - - - (3,250)
Preferred stock converted to
common stock for consulting
services at $1.01 per share in
May 2004 (4,000) (4) 100,000 50,000 51,250 - - - 101,246
Common stock issued per
subscription May 2004 - - 10,000 5,000 (4,000) - (1,000) - -
See accompanying notes to unaudited condensed consolidated financial statements
10
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting
services at $0.86 per
share in May 2004 - - 137,000 68,500 50,730 - - - 119,230
Common stock issued in
exchange for consulting
services at $1.15 per
share in May 2004 - - 26,380 13,190 17,147 - - - 30,337
Common stock returned to
treasury at $0.065 per
share, Jun 2004 - - (5,000) (2,500) 2,175 - - - (325)
Common stock issued in
exchange for consulting
services at $0.67 per
share in June 2004 - - 270,500 135,250 45,310 - - - 180,560
Common stock issued in
exchange for consulting services
at $0.89 per share in June 2004 - - 8,000 4,000 3,120 - - - 7,120
Common stock issued in
exchange for consulting services
at $0.65 per share in June 2004 - - 50,000 25,000 7,250 - - - 32,250
Common stock issued pursuant
to private placement at $1.00
per share in June 2004 - - 250,000 125,000 125,000 - - - 250,000
Common stock issued in
exchange for consulting services
at $0.54 per share in July 2004 - - 100,000 50,000 4,000 - - - 54,000
Common stock issued in
exchange for consulting services
at $0.72 per share in July 2004 - - 5,000 2,500 1,100 - - - 3,600
Common stock issued in
exchange for consulting services
at $0.47 per share in July 2004 - - 100,000 50,000 (2,749) - - - 47,251
Common stock issued in
exchange for consulting
services at $0.39 per
share in August 2004 - - 100,000 50,000 (11,000) - - - 39,000
Preferred stock converted
to common stock for
consulting services at
$0.39 per share in August 2004 (2,000) (2) 50,000 25,000 (5,500) - - - 19,498
Common stock issued in
exchange for consulting
services at $0.50 per
share in August 2004 - - 100,000 50,000 250 - - - 50,250
Common stock issued in
exchange for consulting
services at $0.56 per
share in August 2004 - - 200,000 100,000 12,500 - - - 112,500
Common stock issued in
exchange for consulting
services at $0.41 per
share in August 2004 - - 92,500 46,250 (8,605) - - - 37,645
Common stock issued in
exchange for consulting
services at $0.52 per
share in September 2004 - - 1,000,000 500,000 17,500 - - - 517,500
See accompanying notes to unaudited condensed consolidated financial statements
11
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting
services at $0.46 per
share in September 2004 - - 5,000 2,500 (212) - - - 2,288
Common stock issued pursuant
to subscription at $0.50 per
share in September 2004 - - 40,000 20,000 - - - - 20,000
Preferred shares converted to
common stock for consulting
services at $0.41 per share in
September 2004 (4,000) (4) 100,000 50,000 4,000 - - - 53,996
Preferred shares issued in
exchange for service at $25 per
share in September 2004 60,000 6 - - 1,499,994 - - - 1,500,000
Fair value of 2,841,000 warrants
issued to non-employees and
consultants for services rendered
at approximately $.71 per warrant
in Septemberr 2004 - - - - 2,019,862 - - - 2,019,862
Net Loss - - - - - - - (19,358,258) (19,358,258)
------ ------ ---------- ----------- ----------- ------- --------- ------------ -----------
Balance at September 30, 2004 60,000 $ 6 23,981,054 $11,990,527 $ 6,118,993 $ - $ (1,000) $(22,815,034) $(4,706,508)
====== ====== ========== =========== =========== ======= ========= ============ ===========
See accompanying notes to unaudited condensed consolidated financial statements
12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting services
at $0.68 per share in October
2004 - - 200,000 100,000 36,000 - - - 136,000
Common stock returned
to treasury at $0.60
per share, Oct 2004 - - (1,069,600) (534,800) (107,297) - - - (642,097)
Common stock issued in
exchange for consulting services
at $0.60 per share in Oct 2004 - - 82,500 41,250 8,250 - - - 49,500
Common Stock issued pursuant
to subscription at $0.60 share in
October 2004 - - 500,000 250,000 50,000 (300,000) - - -
Common stock issued in
exchange for consulting services
at $0.50 per share in October 2004 - - 532,500 266,250 - - - - 266,250
Common Stock issued in
exchange for debt at $0.50 share
in October 2004 - - 500,000 250,000 - - - - 250,000
Common Stock issued pursuant
to subscription at $0.45 share in
October 2004 - - 1,000,000 500,000 (50,000) (450,000) - - -
Common stock issued in
exchange for consulting services
at $0.45 per share in October 2004 - - 315,000 157,500 (15,750) - - - 141,750
Common Stock issued in
exchange for consulting
services at $0.47 share
in November 2004 - - 100,000 50,000 (3,000) - - - 47,000
Common Stock issued in
exchange for consulting
services at $0.80 share
in November 2004 - - 300,000 150,000 90,000 - - - 240,000
Common Stock issued in
exchange for consulting
services at $1.44 share
in November 2004 - - 115,000 57,500 108,100 - - - 165,600
Common Stock issued in
exchange for employee
services at $1.44 share
in November 2004 - - 5,000 2,500 4,700 - - - 7,200
See accompanying notes to unaudited condensed consolidated financial statements
13
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Warrants exercised
at $0.60 per share
in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000
Beneficial Conversion discount
relating to Notes Payable - - - - 1,465,000 - - - 1,465,000
Common stock issued at $0.016
per share in exchange for note
payable in December 2004 - - 5,500,000 2,750,000 (2,661,500) - - - 88,500
Fair value of 6,063,500 warrants
issued to non employees and
consultants for services rendered
at $.52 per warrant in October
and December 2004 - - - - 3,169,052 - - - 3,169,052
Warrants exercised at $0.10 per
share in January 2005 - - 25,000 12,500 (10,000) - - - 2,500
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 1,628,789 814,395 (276,895) - - - 537,500
Fair value of warant liability
reclassed due to registration
rights granted in January 2005 - - - - (3,108,851) - - - (3,108,851)
Warrants exercised at $0.10 per
share in January 2005 - - 17,500 8,750 (7,000) - - - 1,750
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 2,399,012 1,199,504 (407,830) - - - 791,674
Common Stock issued in
exchange for consulting
services at $1.30 per share - - 315,636 157,818 252,508 - - - 410,326
in January 2005
Common Stock issued in
exchange for consulting
services at $1.44 per share
in February 2005 - - 5,796,785 2,898,393 5,418,814 - - - 8,317,207
Common stock issued in
settlement of debt at $0.50 per
share in February 2005 - - 2,930,000 1,465,000 - (125,000) - - 1,340,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 75,757 37,879 (12,879) - - - 25,000
See accompanying notes to unaudited condensed consolidated financial statements
14
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Warrants exercised at $0.10 per
share in February 2005 - - 20,000 10,000 (8,000) - - - 2,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 606,060 303,030 (103,030) - - - 200,000
Warrants exercised at $0.10 per
share in February 2005 - - 45,000 22,500 (18,000) - - - 4,500
Common Stock issued in
exchange for related party debt
at $1.31 per share in February
2005 - - 1,500,000 750,000 1,215,000 - - - 1,965,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 278,433 139,217 (47,334) - - - 91,883
Common Stock issued in
exchange for consulting services
at $1.17 per share in February
2005 - - 17,236 8,618 11,548 - - - 20,166
Common stock issued in
exchange for debt at $0.50 per
share in February 2005 - - 300,000 150,000 - - - - 150,000
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 716,500 358,250 322,425 - - - 680,675
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 10,500 5,250 4,725 - - - 9,975
Fair value of 55,000 warrants
issued to consultants for
services rendered at $.71 per
warrant in February 2005 - - - - 72,017 - - - 72,017
Common stock issued in
exchange for debt at $0.50 per
share in March 2005 - - 13,202,000 6,601,000 - - - - 6,601,000
Common Stock issued in
exchange for consulting
services at $1.19 per share
in March 2005 - - 185,000 92,500 127,650 - - - 220,150
Options exercised at $0.60 per
share in March 2005 - - 100,000 50,000 10,000 - - - 60,000
Common Stock issued in
exchange for consulting
services at $0.98 per share
in March 2005 - - 1,675,272 837,636 804,131 - - - 1,641,767
See accompanying notes to unaudited condensed consolidated financial statements
15
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting
services at $0.92 per share
in March 2005 - - 24,333 12,167 10,219 - - - 22,386
Common Stock issued in
exchange for consulting
services at $0.99 per share
in March 2005 - - 15,000 7,500 7,350 - - - 14,850
Common stock issued in exchange
for debt at $0.50 per share
in March 2005 - - 1,240,000 620,000 - - - - 620,000
Common stock canceled for
shares issued in exchange of
debt in March 2005 - - (500,000) (250,000) - - - - (250,000)
Common stock subscribed
Canceled in March 2005 - - - - - 750,000 - - 750,000
Common Stock issued in
exchange for consulting
services at $0.89 per share
in March 2005 - - 10,000 5,000 3,900 - - - 8,900
Adjust common stock par value
from $0.50 to $0.001 per share,
per amendment of articles dated
March 2005 - - - (32,312,879) 32,312,879 - - - -
Beneficial Conversion discount
relating to Notes Payable in
March 2005 - - - - 7,371,000 - - - 7,371,000
Stock options granted to
employees in exchange for
services rendered, at exercise
price below fair value of common
stock in March 2005 - - - - 180,000 - - - 180,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 160,000 160 127,840 - - - 128,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 40,000 40 31,960 - - - 32,000
See accompanying notes to unaudited condensed consolidated financial statements
16
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
RESTATED
(Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting services
at $0.75 per share in April 2005 - - 850,000 850 636,650 - - - 637,500
Common Stock issued in
exchange for consulting services
at $0.33 per share in April 2005 - - 500,000 500 164,500 - - - 165,000
Common Stock canceled during
April 2005, previously issued for
services rendered at $3.42 per
share - - (10,000) (10) (34,190) - - - (34,200)
Common Stock issued in
settlement of debt at $0.33 per
share in April 2005 - - 75,758 77 24,923 (25,000) - - -
Common Stock issued in
exchange for consulting services
at $0.68 per share in April 2005 - - 50,000 50 33,950 - - - 34,000
Proceeds received against
subscription Payable in June
2005 - - - - - 118,000 - - 118,000
Common Stock canceled in
June 2005, previously issued for
services rendered at $0.50 per
share - - (10,000) (10) (4,990) - - - (5,000)
Cancellation of previously
granted stock options granted
to employees for services
rendered, at exercise price
below fair value of common stock - - - - (180,000) - - - (180,000)
Net Loss - - - - - - - (40,464,827) (40,464,827)
------ ----- ----------- ---------- ---------- ------- ------ ------------ -----------
Balance at June 30, 2005 60,000 6 66,411,025 66,412 53,143,538 (36,000) (1,000) (63,279,861) (10,106,905)
====== ===== =========== ========== ========== ======= ====== ============ ===========
See accompanying notes to unaudited condensed consolidated financial statements
17
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the
period
September
16, 2002
(date of
For The Nine Months Ended inception)
through
2005 2004 June 30, 2005
--------------- -------------- ---------------
RESTATED RESTATED
--------------- ---------------
Cash flows from operating activities:
Net loss from operating activities....................... $ (40,464,827) $ (12,210,262) $ (63,279,861)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 15,187 1,054 18,348
Organizational Expenses.................................. -- -- 88,500
Preferred Shares issued in exchange for service.......... -- -- 1,500,000
Warrants issued to consultants 3,241,068 -- 5,260,930
Income attributable to re-pricing of warrants (16,454,929) (16,454,929)
Financing costs attributable to issuance of warrants 23,148,214 -- 23,148,214
Amortization of beneficial conversion feature-convertible 8,836,000 1,219,444 10,461,000
notes....................................................
Fair value of common stock issued to related party in
excess of previously incurred debt 1,365,000 - 1,365,000
Common stock issued in exchange for services ............ 13,396,202 8,918,032 25,793,934
Common stock canceled-previously issued for services (181,298) (285,575) (466,873)
rendered.................................................
Changes in Assets and Liabilities:
Payments for security deposits (33,291) (23,559) (56,850)
Increase in-other assets................................. -- -- (13,890)
Increase in due related parties......................... (20,631) -- 132,065
Increase (decrease) in accounts payable and accrued (833,465) 101,439 922,244
liabilities..............................................
Cash disbursed in excess of available.................... -- 17,870 --
--------------- -------------- ---------------
Net cash used in operating activities.................... (7,986,770) (2,261,557) (11,582,168)
Cash flows from investing activities:
Payments for patent filing............................... (4,347) (18,758) (25,698)
Capital expenditures..................................... -- (29,507) (29,507)
--------------- -------------- ---------------
Net cash used in investing activities.................... (4,347) (48,265) (55,205)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost.......... -- -- 432,000
Proceeds from issuance of convertible notes.............. 9,079,000 354,000 9,204,000
Proceeds from exercise of options and warrants.......... 102,750 87,000 343,750
Proceeds from loans...................................... -- 1,675,000 2,750,000
Advances from shareholders............................... -- 34,004 100,088
Proceeds from related party advance...................... -- (33,653) --
--------------- -------------- ---------------
Net cash provided by financing activities................ 9,181,750 2,116,351 12,829,838
Net increase in cash and cash equivalents................ 1,190,633 (193,471) 1,192,465
Cash and cash equivalents at beginning of period......... 1,832 193,471
--------------- --------------
--
Cash and cash equivalents at end of period............... $ 1,192,465 $ -- $ 1,192,465
=============== ============== ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest..................... -- -- --
Cash paid during period for taxes........................ -- -- --
Non-cash transactions:
Common stock issued for services......................... 13,396,202 8,918,032 25,793,934
Common stock issued in exchange for previously incurred debt 2,313,500 -- 2,313,500
Common stock canceled-previously issued for services (181,298) (285,575) (466,873)
rendered.................................................
Common stock retired..................................... -- -- --
Beneficial conversion feature attributed to convertible 8,836,000 1,219,444 10,461,000
notes....................................................
Preferred Shares in exchange for services................ -- 1,500,000
Warrants issued to consultants........................... 3,241,068 -- 5,260,930
Acquisition:
Common stock retained.................................... 1,015 1,015
Assets acquired.......................................... (135) (135)
-------------- ---------------
Total consideration paid................................. 880 880
-------------- ---------------
Organization expenses - note issued in exchange of shares 88,500
retired..................................................
18
For the
period
September
16, 2002
(date of
For The Nine Months Ended inception)
through
2005 2004 June 30, 2005
--------------- -------------- ---------------
RESTATED RESTATED
--------------- ---------------
Common stock issued in exchange for note payable......... -- -- 88,500
See accompanying notes to unaudited condensed consolidated financial statements
19
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB/A, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended June 30, 2005 are
not necessarily indicative of the results that may be expected for the fiscal
year ended September 30, 2005. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated September 30,
2004 financial statements and footnotes thereto included in the Company's SEC
Form 10-KSB, as amended.
Business and Basis of Presentation
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of Nevada. The Company is in the
development stage, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA
embedded biotechnology security solutions in the United States. To date, the
Company has generated nominal sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
inception through June 30, 2005, the Company has accumulated losses of
$63,279,861.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary ProHealth Medical Technologies, Inc. Significant
inter-company transactions have been eliminated in consolidation.
Reclassification
Certain prior period amounts have been reclassified for comparative purposes.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives of 3 to 5 years using the straight line method. At June 30, 2005
property and equipment consist of:
Furniture $ 29,507
Accumulated depreciation (8,844)
-------
Net $ 20,663
20
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended September 30, 2003 and for
the subsequent periods.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note E):
For the
Period
September, 16
For The 2002 (Date of
Three For The Three For The Nine For The Nine Inception
Months ended Months ended Months ended Months ended through
June 30, June 30, June 30, June 30, June 30,
2005 2004 2005 2004 2005
Net income (loss) - as
reported $3,700,198 $(2,231,133) $(40,464,827) $(12,210,262) $(63,279,861)
Add: Total stock based
employee compensation
expense as reported under
intrinsic value method
(APB No. 25) -- -- -- -- --
Deduct: Total stock based
employee compensation
expense as reported under
fair value method (APB No.
123) (1,406,350) -- (1,406,350) -- (1,406,350)
----------- ------------ ----------- ------------- -----------
Net income (loss) - Pro
Forma $2,293,848 $(2,231,133) $(41,871,177) $(12,210,262) $(64,686,211)
========== ============ ============= ============= =============
Net income (loss)
attributable to common
stockholders - Pro Forma $2,293,848 $(2,231,133) $(41,871,177) $(12,210,262) $(64,686,211)
========== ============ ============= ============= =============
Basic income (loss) per
share - as reported $0.06 $(0.10) $(0.83) $(0.61) $(2.37)
====== ======= ======= ======= =======
Basic income (loss) per
share - Pro Forma $0.064 $(0.10) $(0.86) $(0.61) $(2.42)
====== ======= ======= ======= =======
21
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Stock Based Compensation (continued)
Fully diluted income per
share - as reported $0.04 N/A N/A N/A N/A
====== ======= ======= ======= =======
Fully diluted income per
share - Pro Forma $0.03 N/A N/A N/A N/A
====== ======= ======= ======= =======
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact that this statement will have on the Company's
consolidated financial statements.
New Accounting Pronouncements
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
does not expect the adoption of this Interpretation to have a material impact on
its consolidated financial position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
22
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE B - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 250,000,000 shares
of common stock, with a $0.001 par value per share as the result of a
shareholder meeting conducted on February 14, 2005. Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares with a par value of $0.50. In February 2005, the Company passed a
resolution authorizing change in the par value per common shares from $0.50 per
share to $0.001 per share.
During the period September 16, 2002 through September 30, 2003, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately $1,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc.
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
During the fiscal year ended September 30, 2003, the Company issued 2,369,130
shares of common stock, net of cancellation of 860,000 shares in exchange for
consulting services. The Company valued the shares issued at $2,191,227, net of
cancellation of $60,008, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In November 2003, the Company issued 876,000 shares of common stock in exchange
for subscription at approximately $ 0.065 per share.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement (see Note I). The Company valued the shares issued at
approximately $ .065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth granted the Company an option to acquire up to 8,500,000 shares of
the Company's common stock in exchange for $100,000 (see Note C). The option
expires on December 10, 2004. On June 30, 2003, the Company exercised its option
and acquired 7,500,000 common shares under this agreement in exchange for an
$88,500 convertible promissory note payable to the former controlling owner. The
Company has an option through December 10, 2004 to acquire the remaining
1,000,000 shares from the former controlling owner in exchange for $11,500. On
June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant
to the option agreement.
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
23
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE B - CAPITAL STOCK (continued)
During the fiscal year ended September 30, 2003, the Company issued 154,000
shares of common stock in exchange for previously issued options to purchase the
Company's common stock at $1.00 per share.
During the fiscal year ended September 30, 2003, the Company issued 74,400
shares of common stock in exchange for cash at approximately $0.89 per share.
In October 2003, the Company issued 15,000 shares of convertible preferred stock
in exchange for services. The Company valued the shares issued at the $15 par
value and recorded the value for services when the shares were converted into
common shares as identified below.
During the fiscal year ended September 30, 2004, the Company issued 5,149,472
shares of common stock, net of cancellation of 155,000 shares, in exchange for
consulting services. The Company valued the shares issued at $8,787,315, net of
cancellation of $408,575, which represents the fair value of the services
received which did not differ materially from the value of the stock issued
During the fiscal year ended September 30, 2004, the Company issued 340,500
shares of common stock for shares previously subscribed at approximately $2.04
per share.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
During the fiscal year ended September 30 2004, the Company converted 15,000
preferred shares into 375,000 shares of common stock at $1.47 per share in
exchange for employee services valued at $549,750.
In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share
for total proceeds of $250,000 pursuant to private placement.
In September 2004, the Company issued 60,000 convertible preferred shares at
$25.00, in exchange for consulting services valued at $1,500,000.
In October 2004, the Company issued 200,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.68 per share for a total of $136,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, shareholders returned 1,069,600 shares to treasury issued
earlier in exchange for services valued at $642,098.
In October 2004, the Company issued 82,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.60 per share for a total of $49,500, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.60 per share pursuant to private placement.
In October 2004, the Company issued 532,500 shares of common stock to existing
noteholders in exchange for advisory services. The Company valued the shares
issued at approximately $0.50 per share and charged $266,250 to operations.
24
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE B - CAPITAL STOCK (continued)
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.50 per share pursuant to private placement.
In October 2004, the Company sold 1,000,000 shares of common stock subscribed
for cash at $0.45 per share pursuant to private placement.
In October 2004, the Company issued 315,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.45 per share for a total of $141,750, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.47 per share for a total of $47,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 300,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.80 per share for a total of $240,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 115,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$1.44 per share for a total of $165,600, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 5,000 shares of common stock in exchange
for employee services. The Company valued the shares issued at approximately
$1.44 per share for a total of $7,200, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 60,000 shares of common stock in exchange
for employee services. The Company valued the shares issued at approximately
$0.60 per share for a total of $36,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
In December 2004 , the Company issued 5,796,785 shares of common stock in
exchange for consulting services. The Company valued the shares issued at
approximately $1.44 per share for a total of $8,317,207, which represents the
fair value of the services received which did not differ materially from the
value of the stock issued.
In December , 2004, the Company issued 2,930,000 shares of common stock
subscribed for cash at $0.50 per share pursuant to the exercise terms of a note
payable. This issuance is considered exempt under Regulation D of the Securities
Act of 1933 and Rule 506 promulgated thereunder (See note D).
In January 2005, the Company received $2,500 in exchange for previously issued
warrants to purchase the Company's common stock at $0.10 per share. This
issuance is considered exempt under Regulation D of the Securities Act of 1933
and Rule 506 promulgated thereunder.
25
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE B - CAPITAL STOCK (continued)
In January 2005, the Company received $1,750 in exchange for previously issued
warrants to purchase the Company's common stock at $0.10 per share. This
issuance is considered exempt under Regulation D of the Securities Act of 1933
and Rule 506 promulgated thereunder.
In January 2005, the Company retired $791,673 of convertible notes payable for
2,399,012 shares of common stock. The Notes are convertible into shares of our
common stock at a price of $0.33 per share (see Note D).
In January 2005, the Company issued 315,636 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$1.30 per share for a total of $ 410,327, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In February 2005, the Company retired $25,000 of convertible notes payable for
75,757 shares of common stock. The Notes are convertible into shares of our
common stock at a price of $0.33 per share (see Note D).
In February 2005, the Company received $2,000 in exchange for previously issued
warrants to purchase the Company's common stock at $0.10 per share. This
issuance is considered exempt under Regulation D of the Securities Act of 1933
and Rule 506 promulgated thereunder.
In February 2005, the Company retired $200,000 of convertible notes payable for
606,060 shares of common stock. The Notes are convertible into shares of our
common stock at a price of $0.33 per share (see Note D).
In February 2005, the Company received $4,500 in exchange for previously issued
warrants to purchase the Company's common stock at $0.10 per share. This
issuance is considered exempt under Regulation D of the Securities Act of 1933
and Rule 506 promulgated thereunder.
In February 2005, the Company exchanged a related party note payable valued at
$1,965,000 with 1,500,000 shares using a price of $1.31 per share. (See note C).
The Company valued the shares at $1.31 per share for a total of $1,965,000,
which represents the fair value of the common stock on the date of the exchange.
The difference between the fair value of the common stock of $1,965,000 and the
face amount of the debt $ 600,000, or $1,365,000 has been charged to operations
as current period interest expense.
In February 2005, the Company retired $91,883 of convertible notes payable for
278,433 shares of common stock. The Notes are convertible into shares of our
common stock at a price of $0.33 per share.
In February 2005, the Company issued 17,236 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$1.17 per share for a total of $ 20,166, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In February 2005, the Company issued 300,000 shares of common stock at $0.50 per
share pursuant to the exercise terms of a note payable. This issuance is
considered exempt under Regulation D of the Securities Act of 1933 and Rule 506
promulgated thereunder. (See note D)
26
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE B - CAPITAL STOCK (continued)
In February 2005, the Company issued 716,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.95 per share for a total of $ 680,675, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In February 2005, the Company issued 10,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.95 per share for a total of $,9,975 which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In March 2005, the Company issued 13,202,000 shares of common stock at $0.50 per
share pursuant to the exercise terms of a note payable. This issuance is
considered exempt under Regulation D of the Securities Act of 1933 and Rule 506
promulgated thereunder. (See note D)
In March 2005, the Company issued 185,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $1.19
per share for a total of $ 220,150, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In March 2005, the Company received $60,000 in exchange for previously issued
options to purchase the Company's common stock at $0.60 per share.
In March 2005, the Company issued 1,675,272 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.98 per share for a total of $ 1,641,767, which represents the fair value of
the services received which did not differ materially from the value of the
stock issued.
In March 2005, the Company issued 24,333 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.92
per share for a total of $ 22,386, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In March 2005, the Company issued 15,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.99
per share for a total of $ 14,850, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In March 2005, the Company issued 1,240,000 shares of common stock at $0.50 per
share pursuant to the exercise terms of a note payable. This issuance is
considered exempt under Regulation D of the Securities Act of 1933 and Rule 506
promulgated thereunder. (See note D)
In March 2005, the Company canceled 500,000 shares of common stock related to a
debt exchange for shares valued at $0.50 per share.
In March 2005, the Company issued 10,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.89
per share for a total of $ 8,900, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
27
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE B - CAPITAL STOCK (continued)
In April 2005, the Company issued 160,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.80
per share for a total of $ 128,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In April 2005, the Company issued 40,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.80
per share for a total of $ 32,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In April 2005, the Company issued 850,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.75
per share for a total of $ 637,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In April 2005, the Company issued 500,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.33
per share for a total of $ 165,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In April 2005, the Company cancelled 10,000 shares previously issued for
services valued at $34,200 in exchange for a cash settlement.
In April 2005, the Company retired $25,000 of convertible notes payable for
75,758 shares of common stock. The Notes are convertible into shares of our
common stock at a price of $0.33 per share.
In April 2005, the Company issued 50,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.68
per share for a total of $ 34,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In June 2005, the Company cancelled 10,000 shares previously issued for services
valued at $5,000.
In accordance with EITF 96-18 the measurement date to determine fair value was
the date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued for
consulting services at the rate which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
28
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE C - RELATED PARTY TRANSACTIONS
At June 30, 2005, notes payable are as follows:
June 30, 2005
(Unaudited)
===============
Note payable, unsecured, related party, payable from August 1, 2005, right to
convert to restricted stock in lieu of cash, rate of interest 4%, 160,000 shares
prior to October 31, 2005 or 180,000 shares after that date.
425,000
===============
425,000
Less; current portion 425,000
Note Payable - long-term $ --
===============
The Company issued 1,500,000 shares of its restricted common stock to a Company
officer and Director in exchange for $600,000 of previously incurred debt. The
debt was in the form of a promissory note.
The Company valued the shares at $1.31 per share for a total of $1,965,000,
which represents the fair value of the common stock on the date of the exchange.
The difference between the fair value of the common stock of $1,965,000 and the
face value of the debt of $600,000 or $1,365,000, has been charged to current
period interest expense.
The Company's officers have advanced funds to the Company for travel related and
working capital purposes. No formal repayment terms or arrangements exist. The
amount of the advances due at June 30, 2005 was $136,474.
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES
$ 1,675,000 Convertible Notes
Convertible notes payable ("Bridge Unit Offering") in quarterly installments of
interest only at 10% per annum, secured by all assets of the Company and due on
the earlier of the 9 month anniversary date of the initial closing of the
offering or the completion of any equity financing of $3,000,000 or more; the
Company, at its sole discretion may prepay principal at any time without
penalty. The Bridge Unit Offering Notes unpaid principal and accrued and unpaid
interest were converted to an aggregate of 4,988,051 shares of the Company's
common shares at a price equal to approximately $. 33 per share during the
quarter ended March 31, 2005 (see Note B).
$ 1,465,000 Convertible Notes
Beginning in December, 2004, the Company sold a 10% convertible debenture in the
aggregate amount of $1,465,000 in a private placement and exempt offerings to
sophisticated investors, net of costs and fees ("Convertible Notes").
The Convertible Note's terms called for the debt to automatically convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.
29
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 2,930,000 shares of the
Company's common stock during the quarter ended March 31, 2005 (see Note B).
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 2,930,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants were issued in February, 2005 and lapse if unexercised by
February, 2010. A registration rights agreement was executed in December 2004
and consummated in February, 2005 requiring the Company to register the shares
of its common stock underlying the Convertible Notes and warrants so as to
permit the public resale thereof. The registration rights agreement provided for
the payment of liquidated damages of 3.5% of the aggregate Convertible Note
financing per month if the stipulated registration deadlines were not met. The
liquidated damages, which approximate $ 51,275 per month, may be paid, at the
Company's option, in cash or unregistered shares of the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible 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 $1,465,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in December 2004, the debt discount
attributed to the beneficial conversion feature of $ 1,465,000 was charged to
interest expense in its entirety during the six months ended June 30, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued a warrant in February, 2005 that has registration rights
for the underlying shares. As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet $23,148,214 and charged to operations as interest
expense. Upon the registration statement being declared effective, the fair
value of the warrant on that date will be reclassified to equity. The Company
initially valued the warrants using the Black-Scholes pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of
152.59%, (3) risk-free interest rate of 3.67%, and (4) expected life of 5 years.
In connection with the placement of the $1,465,000 of convertible notes as
described above, the Company agreed to registered shares of the Company's common
stock underlying certain previously issued and outstanding warrants that were
not subject to a registration rights agreement at the time the warrants were
issued. These warrants consist of following:
30
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
o 105,464 warrants entitling the holder to purchase 105,464 shares of
the Company's common stock at the price of $ .10 per share. These
warrants were issued in July, 2004 and lapse if unexercised by July,
2009.
o 1,602,500 warrants entitling the holder to purchase 1,602,500 shares
of the Company's common stock at the price of $ .60 per share. These
warrants were issued in October, 2003 and lapse if unexercised by
October, 2008.
As a result, the Company is required to classify the above referenced warrants
as derivative liabilities and mark them to market at each reporting date. The
fair value of the warrants that were subject to registration reclassified as
liabilities from additional paid in capital in February, 2005 totaled
$3,108,851. Upon the registration statement being declared effective, the fair
value of the warrants on that date will be reclassified to equity. The Company
initially valued the warrants using the Black-Scholes pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of
148.66%, (3) risk-free interest rate of 3.21%, and (4) expected life of 3 years.
$ 7,371,000 Convertible Notes
In January and February, 2005, the Company sold an 10% convertible debenture in
the aggregate amount of $7,371,000 in a private placement and exempt offerings
to sophisticated investors, net of costs and fees ("Convertible Notes").
The Convertible Note's terms called for the debt to automatically convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 14,742,000 shares of the
Company's common stock (see Note B).
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 14,742,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants lapse if unexercised by February, 2010. A registration rights
agreement was executed and consummated in January, 2005 requiring the Company to
register the shares of its common stock underlying the Convertible Notes and
warrants so as to permit the public resale thereof. The registration rights
agreement provided for the payment of liquidated damages of 3.5% of the
aggregate Convertible Note financing per month if the stipulated registration
deadlines were not met. The liquidated damages, which approximate $ 257,985 per
month, may be paid, at the Company's option, in cash or unregistered shares of
the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible 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 $ 7,731,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in February, 2005, 2005, the debt
discount attributed to the beneficial conversion feature of $ 7,371,000 was
charged to interest expense in its entirety during the six months ended March
31, 2005.
31
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued a warrant that has registration rights for the underlying
shares. As the contract must be settled by the delivery of registered shares and
the delivery of the registered shares is not controlled by the Company, pursuant
to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the net value of the warrants at
the date of issuance was recorded as a warrant liability on the balance sheet
$23,148,214 and charged to operations as interest expense. Upon the registration
statement being declared effective, the fair value of the warrant on that date
will be reclassified to equity. The Company initially valued the warrants using
the Black-Scholes pricing model with the following assumptions: (1) dividend
yield of 0%; (2) expected volatility of 152.59%, (3) risk-free interest rate of
3.67%, and (4) expected life of 5 years.
Revaluation of Warrant Liability
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company revalued the warrants issued subject to registration
rights as of June 30, 2005 using the Black-Scholes option pricing model.
Assumptions regarding the life, the expected dividend yield and volatility were
left unchanged but the Company did apply a risk free interest rate from 3.67% to
3.72%, a volatility of 144.181% and a deemed fair value of common stock of
$0.60, which was the closing price of the Company's common stock on June 30,
2005. The difference of $5,679,175 between the fair value of the warrants as of
June 30, 2005 and the previous valuation as of March 31, 2005 has been recorded
as a gain on revaluation of warrant liability, and included in the accompanying
consolidated financial statements.
NOTE E - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's 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 the Company's common stock.
Warrants Outstanding Weighted Exercisable
Remaining Average Weighted Weighted
Exercise Number Contractual Exercise Average Average
Prices Outstanding Life (Years) Price Exercisable Exercise Price
================ ============= ======================== =============== ============= ================
$0.10 105,464 4.04 $0.10 105,464 $0.10
$0.20 5,000 3.39 $0.20 5,000 $0.20
$0.50 50,000 4.27 $0.50 50,000 $0.50
$0.55 9,000,000 3.00 $0.55 9,000,000 $0.55
$0.60 9,132,000 3.89 $0.60 9,132,000 $0.60
$0.70 750,000 2.09 $0.70 750,000 $0.70
$0.75 17,727,000 4.24 $0.75 17,727,000 $0.75
$1.00 100,000 1.30 $1.00 100,000 $1.00
36,869,464 36,869,464
============= =============
32
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE E - STOCK OPTIONS AND WARRANTS (continued)
Transactions involving warrants are summarized as follows:
Number of Weighted Average
Shares Price Per Share
Outstanding at September 30, 2004 4,870,253 $0.63
Granted 32,873,000 0.71
Exercised (142,500) 0.10
Canceled or expired (731,289) 0.60
---------------- --------------
Outstanding at June 30, 2005 36,869,464 $0.70
================ ==============
During the nine months ended June 30, 2005, the Company granted 6,118,500
warrants to non-employees in exchange for services and financing expenses.
The estimated fair value of the compensatory warrants granted to non-employees
in exchange for services and financing expenses was determined using the
Black-Scholes pricing model and the following assumptions: contractual term of 2
to 5 years, a risk free interest rate from 2.47 to 3.53%, a dividend yield of 0%
and volatility from 65.7% to 148.7%. The amount of the expense charged to
operations for compensatory warrants granted in exchange for services and
financing expenses was $3,241,069 for the nine months ended June 30, 2005.
Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to
shareholders at June 30, 2005.
Options Outstanding Options Exercisable
--------------------------------- -----------------------------
Weighted
Average Weighed Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
------------- --------------- -------------- ----------- -------------- -----------
$ .68 3,660,000 7 $ .68 1,830,000 $ 1.35
------------- --------------- -------------- ----------- -------------- -----------
--------------- -------------- ----------- -------------- -----------
3,660,000 7 $ .68 1,830,000 $ 0.60
=============== ============== ============== ===========
Transactions involving the Company's options issuance are summarized as follows:
Weighted
Average
Number Price Per
of Shares Share
----------- ------------
Outstanding at October 1, 2004 - $ -
Granted 300,000 0.60
Exercised 3,660,000 1.35
Canceled or expired (300,000) (.60)
----------- ------------
Outstanding at June 30,2005 3,660,000 $ 1.35
=========== ============
33
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE E - STOCK OPTIONS AND WARRANTS (continued)
During the three months ended March 31, 2005, the Company granted an aggregate
of 300,000 stock options to directors that vested immediately. The exercise
prices of the stock options granted were below the fair value of the Company's
common stock at the grant date. Compensation expense of $180,000 was charged to
operations during the period ended March 30, 2005. In the quarter ended June 30,
2005, the Company canceled the unexercised 300,000 stock options and credited
expense for the previously recorded $180,000 in compensation.
The weighted-average fair value of stock options granted to employees during the
six months ended June 30, 2005 and 2004 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
2005 2004
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 3.5% N/A
Expected stock price volatility 85% N/A
Expected dividend payout - -
Expected option life (in years) 5.0 N/A
If the Company recognized compensation cost for the non-qualified employee stock
option plan in accordance with SFAS No. 123, the Company's pro forma net loss
and net loss per share would have been $( 2,293,848) and $(0.06), respectively,
for the nine months ended June 30, 2005.
NOTE F- COMMITMENTS AND CONTINGENCIES
Consulting Agreements
On August 6, 2004 the Company retained Giuliani Partners, on a non-exclusive
basis, to provide advice and assistance to the Company regarding issues
associated with Applied DNA's proprietary DNA embedded security. On April 8,
2005 Giuliani Partners terminated the agreement with the Company. Total
compensation paid to Giuliani Partners through June 30, 2005 was $1,250,000.
On March 24, 2005, the Company amended its existing Cooperative Research and
Development Agreement ("CRADA") with Battelle Energy Alliance, LLC, the
Department of Energy's National Laboratory in Idaho Falls, Idaho (the
"Amendment"). The Amendment adds additional joint research projects, including
development of marker applications for textiles, inks, gasoline, and explosive
materials. Per the Amendment and at the Company's discretion, the Company can
spend up to $1,701,216 to further develop and refine selected DNA and related
applications.
Litigation
Stern & Co. v. Applied DNA Sciences, Inc., Case No.: 05 CV 00202
Plaintiff Stern & Co. commenced this action against us in the United States
District Court for the Southern District of New York on or about January 10,
2005. In this action, Stern & Co. alleges that it entered into a contract with
us to perform media and investor relations for a monthly fee of $5,000 and stock
options. Stern & Co. claims that we failed to make certain payments pursuant to
the contract and seeks damages in the amount of $96,042.00. Although our time to
answer the complaint has not expired, we dispute the allegations of the
complaint in its entirety and intend on vigorously defending this matter.
Management believes the ultimate outcome of this matter will not have a material
adverse effect on the Company's consolidated financial position or results of
operations
34
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE F- COMMITMENTS AND CONTINGENCIES (continued)
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
Plaintiff Oceanic Consulting, S.A. commenced this action against us in the
Supreme Court of the State of New York, County of New York. Oceanic Consulting,
S.A. asserts a cause of action for breach of contract based upon the allegation
that we failed to make payments pursuant to a consulting agreement. Oceanic
Consulting, S.A. also asserts a causes of action in which it seeks reimbursement
of its expenses and attorneys' fees. Oceanic Consulting, S.A. seeks damages in
the amount of $137,500.00. Oceanic Consulting, S.A. moved for a default
judgment, which we have opposed based upon Oceanic Consulting, S.A.'s failure to
properly serve the complaint as well as our meritorious defenses. We intend on
vigorously defending this matter. Management believes the ultimate outcome of
this matter will not have a material adverse effect on the Company's
consolidated financial position or results of operations
Crystal Research Associates, LLC v. Applied DNA Sciences, Inc., Docket No.:
L-7947-04
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us in the Superior Court of New Jersey, Middlesex County. We intend to
move to vacate the default judgment on various grounds. We dispute the
allegations of the complaint and we intend to vigorously defend this matter.
Management believes the ultimate outcome of this matter will not have a material
adverse effect on the Company's consolidated financial position or results of
operations
NOTE G - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
The accompanying financial statements for the three and nine months ended June
30, 2005 as well as the period September 16, 2002 (date of inception) through
June 30, 2005 have been restated for the purpose of correcting errors in
accounting for and the disclosing the issuance by the Company of common stock,
warrants, and options to acquire the Company's common stock for services and in
exchange for previously incurred debt. In addition the Company is correcting
certain errors in accounting for the exchange of its common stock for previously
incurred debt with a Company Director.
Accordingly, the Company restated the financial statements as of and for the
nine months ended June 30, 2005 by disclosing the effect of these errors in this
amended Form 10-QSB/A.
The result of the June 30, 2005 Condensed Consolidated Balance Sheet restatement
is to:
- Increase liabilities by $54,951 for additional compensation expenses
- Reflect the reclassification of warrants from equity to liability
resulting in a $9,802,137 increase to Warrant Liability compared to the
previous filing.
- Reduced Additional Paid in Capital by $100,000 as a result of the $750,000
subscription adjustment and the $100,000 additional compensation recorded
in the restatement
- Increased Accumulated Deficit by $9,757,088
- Net Deficiency in Shareholder Equity decreased by $9,857,088 as the result
of the combination of factors described above.
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Balance Sheet as of
June 30, 2005.
35
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE G - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
For the Period Ended June 30, 2005
(As Restated) (As Reported)
ASSETS $ 1,294,731 1,294,731
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Total Current Liabilities 1,599,499 1,544,548
Warrant Liability 9,802,137 -
Deficiency in Stockholders' Equity:
Preferred Stock 6 6
Common Stock 66,412 66,412
Common Stock Subscription (37,000) (37,000)
Additional Paid-In-Capital 53,143,538 54,355,065
Deficit Accumulated During Development Stage (63,279,861) (54,634,300)
Total Deficiency in Stockholders' Equity (10,106,905) (249,817)
------------- ------------
Total Liabilities and Deficiency in Stockholders'
Equity $ 1,294,731 1,294,731
For both the nine months ended as well as the period September 16, 2002 through
June 30, 2005, the result of the June 30, 2005 Condensed Consolidated Income
Statement restatement is to:
- Increase Selling, General and Administrative for compensation expense by
$1,952,275, primarily from correction of warrant valuation issuance to
non-employees.
- Reflect a net loss on the revaluation of warrants of $9,802,136 as a
result of reclassifying warrants from equity to a liability for the nine
months ended June 30, 2005 as well as the period September 16, 2002
through June 30, 2005. A net gain on the adjustment to fair value of the
warrants of $5,679,175 for the three months ended June 30, 2005.
Net loss increased by $9,757,088 for the nine months ended as well as the period
September 16, 2002 through June 30, 2005 as a result of the combination of
factors described above. Net loss for the three months ended June 30, 2005 was
reduced by $5,624,224 to a Net Income of $2,851,151.
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Income Statement as
of June 30, 2005.
36
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE G - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
For the Period September 16, 2002
For the Three Months Ended June For the Nine Months Ended June (Date of Inception) Through June 30,
30, 2005 30, 2005 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported) (As Restated) (As Reported)
Operating Expenses:
Selling general and
administrative $ 1,865,631 $ 2,659,727 $ 24,188,882 $ 22,236,607 $ 45,010,419 $ 43,058,144
Research and development 88,870 88,870 345,958 345,958 584,493 584,493
Depreciation and
amortization 3,160 3,160 15,187 15,187 18,348 18,348
------------- ------------- ------------- ------------- ------------- -------------
Total Operating Expenses 1,957,661 2,751,757 24,550,027 22,597,752 45,613,260 43,660,985
------------ ------------- ------------- ------------- ------------- -------------
Operating Loss (1,957,661) (2,751,757) (24,550,027) (22,597,752) (45,613,260) (43,660,985)
Net gain/(loss) on
revaluation of warrant
liability 5,679,175 -- 16,454,929 -- 16,454,929 --
Other income (expense) 241 241 3,415 3,415 29,800 29,800
Interest income
(expense) (21,557) (21,557) (32,373,143) (9,224,929) (34,151,329) (11,003,115)
------------ ------------- ------------- ------------- -------------- -------------
Net Income (Loss) $ 3,700,198 $ (2,773,073) $ (40,464,827) $ (31,819,266) $ (63,279,861) $ (54,634,300)
============ ============= ============= ============= ============= =============
Net income (loss) per $ 0.06 $ (0.04) $ (0.83) $ (0.65) $ (2.37) $ (2.04)
common share-basic
============ ============= ============= ============= ============= =============
Weighted average shares 66,308,115 66,298,115 48,810,559 48,806,398 26,793,544 26,793,544
outstanding-basic
Net income per common
share-fully diluted $ 0.04
============
Weighted average shares
outstanding-fully
diluted 109,223,832
The result of the Cash Flow restatement is to:
- Increase loss for the nine months June 30, 2005 by $8,645,561 as
described above
- Reflect the $9,802,137 warrant valuation and the $100,000
compensation expense revision within operating activities and adjust
valuation of warrants issued to non-employees by $1,997,324
37
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE G - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
- Reflect $849,460 in common stock, subscription and Additional Paid in
Capital revisions - see the summarized Other Operating Activities items
within operating activities below
- Net cash flow used in operating activities decreased by $2,911,764
primarily as a result of equity revisions involving stock subscriptions as
described in the above balance sheet restatement
- Net cash flow from financing activities decreased by $3,716,784 as a
result of the combination of factors described above. See preceding
comment.
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Statement of Cash
Flows for the periods ended June 30, 2005.
Consistent with the original summary presentation, following is a reconciliation
of the Company's restatement of the Condensed Consolidated Statement of Cash
Flows for the periods ended June 30, 2005. See the full Condensed Consolidated
Statement of Cash Flows for the periods ended June 30, 2005 for additional
details.
For the Period September 16, 2002
(Date of Inception) Through June 30,
For the Nine Months Ended June 30, 2005 2005
(As Restated) (As Reported) (As Restated) (As Reported)
Cash Flows from operating
activities:
Net loss from operating
activities $ (40,464,827) $ (31,819,266) $ (63,279,861) $ (54,634,300)
Summary of adjustments to
reconcile net loss to net cash
(used in) operating activities:
Change in fair value of
warrant liabilities 6,693,285 - 6,693,285 -
Other operating activities -
see Cash Flow statement for
full details 25,784,772 20,920,732 45,004,408 40,163,927
------------- ------------- --------------- -------------
Net cash (used in) operating
activities (7,986,770) (10,898,534) (11,582,168) (14,470,373)
------------- ------------- --------------- -------------
Cash flows from investing
activities:
- see Cash Flow statement for
full details
Net cash (used in) investing
activities (4,347) (37,638) (55,205) (112,055)
------------- ------------- --------------- -------------
38
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE G - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
For the Nine Months Ended June 30, 2005 For the Period September 16, 2002
(Date of Inception) Through June 30,
2005
(As Restated) (As Reported) (As Restated) (As Reported)
Cash flows from financing
activities:
- see Cash Flow statement for
full details
Proceeds from loans 9,181,750 12,898,534 12,829,838 15,774,893
------------ ------------- --------------- -------------
Net cash provided by financing
activities
Increase (decrease) in cash
and cash
equivalents 1,190,633 1,190,633 1,192,465 1,192,465
Cash and cash equivalents,
beginning of year 1,832 1,832 - -
------------ ------------- --------------- -------------
Cash and cash equivalents, end
of year $ 1,192,465 $ 1,192,465 $ 1,192,465 $ 1,192,465
============ ============= =============== =============
NOTE H- SUBSEQUENT EVENTS
On July 15, 2005, Applied DNA Sciences, Inc. (the "Company") closed upon the
stock purchase agreement (the "Agreement") with Biowell Technology Inc., a
Taiwan corporation ("Biowell") that was executed on January 28, 2005. Pursuant
to the Agreement, the Company, through its wholly-owned subsidiary, APDN
(B.V.I.) Inc., a British Virgin Islands company, acquired all of the issued and
outstanding shares of Rixflex Holdings Limited, a British Virgin Islands company
("Rixflex"). Pursuant to an asset purchase agreement, Biowell transferred all of
its intellectual property (the "Biowell Technology") to Rixflex prior to the
Company's acquisition of Rixflex. In exchange for all of the issued and
outstanding shares of Rixflex, we issued to the shareholders of Rixflex 36
million shares of our common stock. As of August 15, 2005, the Company has
received some of the intellectual property but is still awaiting the transfer of
certain intellectual property and related paperwork.
In connection with the closing, the Company terminated the October 2002 license
agreement with Biowell, replacing it with a new Biowell license agreement
granting an exclusive license in selected Asian countries for an initial period
through December 31, 2010. If Biowell meets its performance goals, the license
agreement extends for an additional five year term. Sub-license payments due to
the Company are 50% for all fees, payments and consideration received. Biowell
is required to pay a royalty of 10% on all net sales made and is required to
meet certain minimum annual net sales in its various territories.
On July 15, 2005, Mr. Robin Hutchison, resigned as Chief Executive Officer and
Chairman of the Board of Directors with Jun-Jei Sheu elected as Chairman of the
Board.
39
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(Unaudited)
NOTE H- SUBSEQUENT EVENTS (continued)
As part of the Biowell acquisition, the Company entered into a consulting
agreement with Timpix International Limited for the consulting services of three
former Biowell employees, Jun-Jei Sheu, Ben Liang and Johnson Chen. The
consulting agreement is for the shorter of two years, or until all of the
consultants have obtained a visa to work in the United States and execute
employment agreements with the Company. Such consulting agreement shall
automatically renew for one year periods until terminated. Pursuant to the
consulting agreement, the Company shall pay $47,000 per month, which is
apportioned at $20,000 per month for Mr. Sheu, $15,000 per month for Mr. Liang
and $12,000 per month for Mr. Chen. In the event that either of Messrs. Sheu,
Liang or Chen becomes employed by the Company, the monthly consulting fee shall
be reduced accordingly.
On June 20, 2005, the Company entered into an agreement with Trilogy Capital
Partners, Inc. ("Trilogy") to provide marketing services to the Company for a
term of one year, and terminable thereafter by either party upon 30 days prior
written notice. In connection with the agreement, we agreed to pay Trilogy a
monthly fee of $12,500. The Company also issued to Trilogy a warrant to purchase
7.5 million shares of common stock at $0.55 per share, exercisable for a period
of three years from issuance. The warrant contains a "cashless" exercise
provision. The shares underlying the warrants contain registration rights. The
holder has contractually agreed to restrict its ability to convert or exercise
the warrants and receive shares of our common stock such that the number of
shares of common stock held by it after such conversion or exercise does not
exceed 5% of the then issued and outstanding shares of common stock.
In connection with the 7,371,000 million convertible debt financing in the
quarter ended March 30, 2005, the Company was obligated to complete a stock
registration by July 2005. Since the registration was not effective by July
2005, the Company anticipates paying the required $257,985 of liquidated damages
in shares of Company stock accruing at the rate of 3.5% per month on the face
value of the Notes. The Company will continue accruing liquidated damages until
the stock registration is declared effective
Subsequent to June 30, 2005, the Company issued 8 million S-8 shares to various
employees with an approximate market value of $4.8 million. These fully
registered shares are included within the total authorized 16 million Employee
Stock Ownership Plan shares, as approved on February 14, 2005.
40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this report. The quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, 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. Forward looking statements involve risks and
uncertainties and actual results could differ materially from those discussed in
forward-looking statements. All forward looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to the Company as of the date thereof, and the Company assumes no
obligations to update any forward-looking statement or risk factor, unless the
Company is required to do so by law.
Plan of Operation
Revenues
From our inception on September 16, 2002, we have not generated revenues from
operations. We believe we will begin generating revenues from operations in the
fiscal year as the Company transitions from a development stage enterprise to
that of an active growth and acquisition stage company.
Costs and Expenses
From our inception through June 30, 2005, we have incurred losses of
$63,279,861. These expenses were associated principally with equity-based
compensation to employees and consultants, warrant revaluation, product
development costs and professional services.
Selling, general and administrative expenses for the nine month period ended
June 30, 2005 compared to same period in 2004 increased $13.200 million or 220%
to $24.189 million from $10.989 million in the prior period due to financing and
related costs incurred during the March and June 2005 quarters.
Research and Development
In the nine month period ended June 30, 2005, research and development
increased to $346,000 from zero for the same period in 2004.
Depreciation and Amortization
In the nine month period ended June 30, 2005, depreciation and amortization
increased to $15,000 from $1,000 for the same period in 2004.
Total Operating Expenses
Total operating expenses during the nine month period ended June 30, 2005
increased to $24.550 million from $10.990 million, or an increase of $13.560
million as a result of the combination of factors listed above.
Other income/expense
The Company realized a fiscal year to date gain from change in fair value of
warrant liability of $16.455 million which compared to zero the same period in
2004.
Interest Expenses
41
Interest expense for the nine month period ended June 30, 2005 increased to
$32.373 million from $1.221 million in the same period of 2004, an increase of
$31.152 million primarily resulting from $23.148 million initial warrant
valuation charged to interest expense and $8.004 million in increased financing
in 2005 as compared to 2004.
Net Loss
Net Loss for the nine month period ended June 30, 2005 increased to $40.465
million from a net loss of $12.2 million in the nine months ended June 30, 2004
as a result of the combination of factors described above.
Liquidity and Capital Resources
For the nine month period ended June 30, 2005, we generated a net cash flow
deficit from operating activities of $7,986,000, consisting primarily of fiscal
year to date losses of $40,464,827, $16,454,929 in gain from warrant
revaluation, $23,148,214 loss in initial warrant valuation, $13,396,202 in net
stock issued for consulting services, $8,836,000 for beneficial conversion of
convertible notes payable and warrants, $1,365,000 in stock issued for debt,
$3,241,068 for warrants issued to consultants.
Cash used in investing activities totaled $4,347,which was utilized for patent
filings. Cash provided by financing activities totaled $9,182,000 consisting of
$9,079,000 in proceeds from common stock subscribed and $103,000 from warrants
and options.
From our inception to June 30, 2005 we have incurred an operating cash flow
deficit of $11,582,168. Cash flows used in investing activities was $55,205
during the period from September 16, 2002 (date of inception) through June 30,
2005. We met our cash flow requirements through the issuance of capital and
other notes payable (net of repayments), private placement of our common stock
and advances from our shareholders and officers.
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.
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 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 our 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.
From our inception, our priorities were to recruit and build our team, organize
our new infrastructure and to develop a successful strategy how best to exploit
our exclusive Biowell license agreement. No revenues were generated. Although
our management is of the opinion that continuing to develop and finance our
present business of providing DNA anti-counterfeit technology may ultimately be
successful, management nevertheless expects that we will need substantial
additional capital before our operations can be fully implemented.
While we have raised capital to meet our working capital and financing needs in
the past, additional financing is required in order to meet our current and
projected cash flow deficits from operations and development. We currently have
no commitments for financing. There is no guarantee that we will be successful
in raising the funds required.
The effect of inflation on our operating results was not significant. Our
operations are located in North America and there are no seasonal aspects that
would have a material effect on our financial condition or results of
operations.
Our independent certified public accountant has stated in their report included
in our September 30, 2004 Form 10-KSB, that we have incurred operating losses
from our inception, and that we are dependent upon management's
42
ability to develop profitable operations. These factors among others may raise
substantial doubt about our ability to continue as a going concern.
To obtain funding for our ongoing operations, we conducted a private placement
offering in January and February 2005, in which we sold $7,371,000 of 10%
Secured Convertible Promissory Notes to 61 investors. The 10% Secured
Convertible Promissory Notes automatically converted into shares of our common
stock, at a price of $0.50 per share, upon the filing of the registration
statement on February 15, 2005. In connection with the private placement
offering, we have issued 14,742,000 warrants. The warrants are exercisable until
five years from the date of issuance at a purchase price of $0.75 per share.
We will still need additional investments in order to continue operations to
cash flow break even. 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 and the downturn in the U.S. stock and debt markets could make
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Product Research and Development
As a result of the recent financings, the Company anticipates expending
$2,764,000 of available cash towards research and development activities during
the next twelve (12) months. The anticipated development programs consist of
Petro Chemical Marker, Ink/Substraits and Hologram projects with planned
spending of $1,245,000, $747,000 and $772,000, respectively.
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 not anticipate the acquisition of any material
property, plant or equipment during the next 12 months.
Number of Employees
From our inception through the period ended June 30, 2005, we have mainly relied
on the services of outside consultants for services. We currently have eight
employees. 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 cost for personnel.
Going Concern
The financial statements included in this filing have been prepared in
conformity with generally accepted accounting principles that contemplate the
continuance of the Company as a going concern. The Company's cash position may
be inadequate to pay all of the costs associated with testing, production and
marketing of products. Management intends to use borrowings and security sales
to mitigate the effects of its cash position, however no assurance can be given
that debt or equity financing, if and when required will be available.
43
The 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 the Company be unable to continue
existence.
Trends, Risks and Uncertainties
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to the Company's
Common Stock.
RISK FACTORS
Much of the information included in this quarterly report includes or is based
upon estimates, projections or other "forward-looking statements". Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined below. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative. Prospective investors should
consider carefully the risk factors set out below.
We Have a History Of Losses Which May Continue, Which May Negatively Impact
Our Ability to Achieve Our Business Objectives.
We incurred net losses of $19,358,259 for the year ended September 30, 2004 and
$3,445,164 for the year ended December 31, 2003. For the fiscal nine month
period ending June 30, 2005, we incurred a net loss of $40,464,827. We cannot
assure you that we can achieve or sustain profitability on a quarterly or annual
basis in the future. Our operations are subject to the risks and competition
inherent in the establishment of a business enterprise. There can be no
assurance that future operations will be profitable. Revenues and profits, if
any, will depend upon various factors, including whether we will be able to
generate revenue. As a result of continuing losses, we may exhaust all of our
resources prior to completing the development of our products. Additionally, as
we continue to incur losses, our accumulated deficit will continue to increase,
which might make it harder for us to obtain financing in the future. We may not
achieve our business objectives and the failure to achieve such goals would have
an adverse impact on us, which could result in reducing or terminating our
operations.
If We Are Unable to Obtain Additional Funding Our Business Operations Will
be Harmed and If We Do Obtain Additional Financing Our Then Existing
Shareholders May Suffer Substantial Dilution.
We will require additional funds to sustain and expand our research and
development activities. We anticipate that we will require up to approximately
$2,800,000 to fund our anticipated research and development operations for the
next twelve months, depending on revenue from operations. Additional capital
will be required to effectively support the operations and to otherwise
implement our overall business strategy. Even if we do receive additional
financing, it may not be sufficient to sustain or expand our research and
development operations or continue our business operations.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our research and development plans. Any
additional equity financing may involve substantial dilution to our then
existing shareholders.
44
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated January 11, 2005, our independent auditors stated that our
financial statements for the year ended December 31, 2004 were prepared assuming
that we would continue as a going concern. Our ability to continue as a going
concern is an issue raised due to our incurring net losses of $22,815,034 during
the period September 16, 2002 (date of inception) through September 30, 2004. In
addition, we have a deficiency in stockholder's equity of $407,034. We continue
to experience net operating losses. Our ability to continue as a going concern
is subject to our ability to generate a profit and/or obtain necessary funding
from outside sources, including obtaining additional funding from the sale of
our securities, generating sales or obtaining loans and grants from various
financial institutions where possible. Our continued net operating losses
increases the difficulty in meeting such goals and there can be no assurances
that such methods will prove successful.
Our Research and Development Efforts for New Products May be Unsuccessful.
We will incur significant research and development expenses to develop new
products and technologies. There can be no assurance that any of these products
or technologies will be successfully developed or that if developed they will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and this may materially and adversely affect our business
operations, which would result in loss of revenues and greater operating
expenses.
Our Acquired Technology Has Yet to be Independently Validated In July 2005, we
acquired certain intellectual property. Such intellectual property relating to
the botanical DNA, encapsulation methods, integrity of the technology and all
other stated claims by the seller need to be independently validated by a third
party. Satisfactory completion of this independent validation will be required
prior to their being available for commercial sale. In the event that some or
all of the technology cannot be independently validated, we will be unable to
commercially develop products utilizing such technology, which could have a
materially adverse effect on our business and results of operations.
Failure to License New Technologies Could Impair Our New Product Development.
To generate broad product lines, it is advantageous to sometimes license
technologies from third parties rather than depend exclusively on our own
employees. As a result, we believe our ability to license new technologies from
third parties is and will continue to be important to our ability to offer new
products.
In addition, from time to time we are notified or become aware of patents held
by third parties that are related to technologies we are selling or may sell in
the future. After a review of these patents, we may decide to seek a license for
these technologies from these third parties or discontinue our products. There
can be no assurance that we will be able to continue to successfully identify
new technologies developed by others. Even if we are able to identify new
technologies of interest, we may not be able to negotiate a license on favorable
terms, or at all. If we lose the rights to patented technology, we may need to
discontinue selling certain products or redesign our products, and we may lose a
competitive advantage. Potential competitors could license technologies that we
fail to license and potentially erode our market share for certain products. Our
licenses typically subject us to various commercializations, sublicensing,
minimum payment, and other obligations. If we fail to comply with these
requirements, we could lose important rights under a license. In addition,
certain rights granted under the license could be lost for reasons beyond our
control. We may not receive significant indemnification from a licensor against
third party claims of intellectual property infringement.
We Currently Have no or Limited Manufacturing, Sales, Marketing or Distribution
Capabilities.
We currently have no in-house manufacturing capability. We rely on third-party
vendors for this service. We do not currently have any arrangements with any
distributors and we may not be able to enter into arrangements with qualified
distributors on acceptable terms or at all. We currently have a limited sales
and marketing team. If we are
45
not able to develop greater sales, marketing or distribution capacity, we may
not be able to generate revenue or sufficient revenue to support our operations.
If We Fail to Introduce New Products, or Our existing Products are not Accepted
by Potential Customers, We May Not Gain or May Lose Market Share.
Rapid technological changes and frequent new product introductions are typical
for the markets we serve. Our future success will depend in part on continuous,
timely development and introduction of new products that address evolving market
requirements. We believe successful new product introductions provide a
significant competitive advantage because customers invest their time in
selecting and learning to use new products, and are often reluctant to switch
products. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
We may experience delays in the development and introduction of products. We
cannot assure that we will keep pace with the rapid rate of change in life
sciences research or that our new products will adequately meet the requirements
of the marketplace or achieve market acceptance. Some of the factors affecting
market acceptance of new products include:
o Availability, quality and price relative to competitive products;
o The timing of introduction of the product relative to competitive
products;
o Customers' opinions of the products' utility;
o Ease of use;
o Consistency with prior practices;
o Scientists' opinions of the
o products' usefulness;
o Citation of the product in published research; and
o General trends in
o life sciences research.
We have not experienced any difficulties with the preceding factors, however,
there can be no assurance that we will not experience difficulties in the
future. The expenses or losses associated with unsuccessful product development
or lack of market acceptance of our new products could materially adversely
affect our business, operating results and financial condition.
A Manufacturer's Inability to Produce Our Goods on Time and to Our
Specifications Could Result in Lost Revenue and Net Losses
We do not own or operate any manufacturing facilities and therefore depend upon
independent third parties for the manufacture of all of our products. Our
products are manufactured to our specifications. The inability of a manufacturer
to ship orders of our products in a timely manner or to meet our quality
standards could cause us to miss the delivery date requirements of our customers
for those items, which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could have a material
adverse effect as our revenues would decrease and we would incur net losses as a
result of sales of the product, if any sales could be made. Because of our
business, the dates on which customers need and require shipments of our
security products from us are critical.
If We Need to Replace Manufacturers, Our Expenses Could Increase Resulting in
Smaller Profit Margins
We compete with other companies for the production capacity of our manufacturers
and import quota capacity. Some of these competitors have greater financial and
other resources than we have, and thus may have an advantage in the competition
for production and import quota capacity. If we experience a significant
increase in demand, or if an existing manufacturer of ours must be replaced, we
may have to expand our third-party manufacturing capacity. We cannot assure you
that this additional capacity will be available when required on terms that are
acceptable to us
46
or similar to existing terms which we have with our manufacturers, either
from a production standpoint or a financial standpoint. We do not have long-term
contracts with any manufacturer. None of the manufacturers we use produces our
products exclusively.
Should we be forced to replace one or more of our manufacturers, we may
experience an adverse financial impact, or an adverse operational impact, such
as being forced to pay increased costs for such replacement manufacturing or
delays upon distribution and delivery of our products to our customers, which
could cause us to lose customers or lose revenues because of late shipments.
If a Manufacturer of Ours Fails to Use Acceptable Labor Practices, We Might
Have Delays in Shipments or Face Joint Liability for Violations, Resulting in
Decreased Revenue and Increased Expenses
While we require our independent manufacturers to operate in compliance with
applicable laws and regulations, we have no control over the ultimate actions of
our independent manufacturers. While our internal and vendor operating
guidelines promote ethical business practices and our staff and buying agents
periodically visit and monitor the operations of our independent manufacturers,
we do not control these manufacturers or their labor practices. The violation of
labor or other laws by an independent manufacturer of ours, or by one of our
licensing partners, or the divergence of an independent manufacturer's or
licensing partner's labor practices from those generally accepted as ethical in
the United States, could interrupt, or otherwise disrupt the shipment of
finished products to us or damage our reputation. Any of these, in turn, could
have a material adverse effect on our financial condition and results of
operations, such as the loss of potential revenue and incurring additional
expenses.
The Failure To Manage Our Growth In Operations And Acquisitions Of New Product
Lines And New Businesses Could Have A Material Adverse Effect On Us.
The expected growth of our operations (as to which no representation can be
made) will place a significant strain on our current management resources. To
manage this expected growth, we will need to improve our: o operations and
financial systems; o procedures and controls; and o training and management of
our employees.
Our future growth may be attributable to acquisitions of and new product lines
and new businesses. We expect that future acquisitions, if successfully
consummated, will create increased working capital requirements, which will
likely precede by several months any material contribution of an acquisition to
our net income.
Our failure to manage growth or future acquisitions successfully could seriously
harm our operating results. Also, acquisition costs could cause our quarterly
operating results to vary significantly. Furthermore, our stockholders would be
diluted if we financed the acquisitions by incurring convertible debt or issuing
securities.
Although we currently only have operations within the United States, if we were
to acquire an international operation; we will face additional risks, including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o Different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
If We Are Unable to Retain the Services of Messrs. Sheu, Brocklesby, Botash or
Klemm, or If We Are Unable to Successfully Recruit Qualified Managerial and
Sales Personnel Having Experience in Business, We May Not Be Able to Continue
Our Operations.
Our success depends to a significant extent upon the continued service of Mr.
Jun-Jei Sheu, our Chairman of the Board of Directors, Mr. Peter Brocklesby, our
President, Mr. Adrian Botash, our Chief Marketing Officer and Ms. Karin Klemm,
our Chief Operating Officer and Interim Chief Financial Officer. We do not have
employment agreements with Messrs. Sheu, Brocklesby, Botash or Klemm. Loss of
the services of Messrs. Sheu, Brocklesby, Botash or Klemm could have a material
adverse effect on our growth, revenues, and prospective business. We do
47
not maintain key-man insurance on the life of Messrs.Sheu, Brocklesby, Botash or
Klemm. We are not aware of any other named executive officer or director who has
plans to leave us or retire. In addition, in order to successfully implement and
manage our business plan, we will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business. Competition for qualified individuals is intense. There
can be no assurance that we will be able to find, attract and retain existing
employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
Failure to Attract and Retain Qualified Scientific or Production Personnel Could
Have a Material Adverse Effect On Us.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining a qualified personnel base.
Although we believe we have been and will be able to attract and retain these
personnel, there is no assurance that we will be able to continue to
successfully attract qualified personnel. In addition, our anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, government approvals, production, and marketing will require
the addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to attract and retain
these personnel or, alternatively, to develop this expertise internally would
adversely affect our business as our ability to conduct research and development
will be reduced or eliminated, resulting in fewer or no products for sale and
lower revenues. We generally do not enter into employment agreements requiring
these employees to continue in our employment for any period of time.
We Need to Expand Our Sales and Support Organizations to Increase Market
Acceptance of Our Products.
We currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
existing customers. The employment market for sales personnel, and customer
service and support personnel in this industry is very competitive, and we may
not be able to hire the kind and number of sales personnel, customer service and
support personnel we are targeting. Our inability to hire qualified sales,
customer service and support personnel may materially adversely affect our
business, operating results and financial condition.
The Biomedical Research Products Industry is Very Competitive, and We may be
Unable to Continue to Compete Effectively in this Industry in the Future.
We are engaged in a segment of the biomedical research products industry that is
highly competitive. We compete with many other suppliers and new competitors
continue to enter the market. Many of our competitors, both in the United States
and elsewhere, are major pharmaceutical, chemical and biotechnology companies,
and many of them have substantially greater capital resources, marketing
experience, research and development staff, and facilities than we do. Any of
these companies could succeed in developing products that are more effective
than the products that we have or may develop and may be more successful than us
in producing and marketing their products. It is impossible to quantify the
number of competitors since they include both the companies we attempt to sell
our products and services to through their use of internal security and various
other security product companies. Some of the anti-counterfeiting and fraud
protection competitors that we are aware of include: Authentix, InkSure, DNA
Technologies, Inc., Art Guard International, Theft Protection Systems, Tracetag
and November AG. Although it is impossible to determine the total market size
and market data information because companies are secretive about what security
methods they utilize and how much they spend on such measures, we have
determined that annual sales by some of our competitors have been as follows:
Authentix - $4.7 million
Inksure - $2.0 million
DNA Technologies, Inc. - $26 million
Suretrace - $4.3 million
November AG - $7 million
We expect this competition to continue and intensify in the future. Competition
in our markets is primarily driven by:
48
o Product performance, features and liability;
o Price;
o Timing of product introductions;
o Ability to develop, maintain and protect proprietary products and
technologies;
o Sales and distribution capabilities;
o Technical support and service;
o Brand loyalty;
o Applications support; and
o Breadth of product line.
If a competitor develops superior technology or cost-effective alternatives to
our products, our business, financial condition and results of operations could
be materially adversely affected.
Our Trademark and Other Intellectual Property Rights May not be Adequately
Protected Outside the United States, Resulting in Loss of Revenue.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent, as do the laws of the United States.
Intellectual Property Litigation Could Harm Our Business.
Litigation regarding patents and other intellectual property rights is extensive
in the biotechnology industry. In the event of an intellectual property dispute,
we may be forced to litigate. This litigation could involve proceedings
instituted by the U.S. Patent and Trademark Office or the International Trade
Commission, as well as proceedings brought directly by affected third parties.
Intellectual property litigation can be extremely expensive, and these expenses,
as well as the consequences should we not prevail, could seriously harm our
business.
If a third party claims an intellectual property right to technology we use, we
might need to discontinue an important product or product line, alter our
products and processes, pay license fees or cease our affected business
activities. Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all. We are currently not aware of any intellectual property rights
that are being infringed nor have we received notice from a third party that we
may be infringing on any of their patents.
Furthermore, a third party may claim that we are using inventions covered by the
third party's patent rights and may go to court to stop us from engaging in our
normal operations and activities, including making or selling our product
candidates. These lawsuits are costly and could affect our results of operations
and divert the attention of managerial and technical personnel. There is a risk
that a court would decide that we are infringing the third party's patents and
would order us to stop the activities covered by the patents. In addition, there
is a risk that a court will order us to pay the other party damages for having
violated the other party's patents. The biotechnology industry has produced a
proliferation of patents, and it is not always clear to industry participants,
including us, which patents cover various types of products or methods of use.
The coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent infringement, we
would need to demonstrate that our products or methods of use either do not
infringe the patent claims of the relevant patent and/or that the patent claims
are invalid, and we may not be able to do this. Proving invalidity, in
particular, is difficult since it requires a showing of clear and convincing
evidence to overcome the presumption of validity enjoyed by issued patents.
49
Because some patent applications in the United States may be maintained in
secrecy until the patents are issued, because patent applications in the United
States and many foreign jurisdictions are typically not published until eighteen
months after filing, and because publications in the scientific literature often
lag behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our licensors' issued patents or
our pending applications or our licensors' pending applications or that we or
our licensors were the first to invent the technology. Our competitors may have
filed, and may in the future file, patent applications covering technology
similar to ours. Any such patent application may have priority over our or our
licensors' patent applications and could further require us to obtain rights to
issued patents covering such technologies. If another party has filed a United
States patent application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the United States Patent
and Trademark Office to determine priority of invention in the United States.
The costs of these proceedings could be substantial, and it is possible that
such efforts would be unsuccessful, resulting in a loss of our United States
patent position with respect to such inventions.
Some of our competitors may be able to sustain the costs of complex patent
litigation more effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the initiation and
continuation of any litigation could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.
Accidents Related to Hazardous Materials Could Adversely Affect Our Business.
Some of our operations require the controlled use of hazardous materials.
Although we believe our safety procedures comply with the standards prescribed
by federal, state, local and foreign regulations, the risk of accidental
contamination of property or injury to individuals from these materials cannot
be completely eliminated. In the event of an accident, we could be liable for
any damages that result, which could seriously damage our business and results
of operations.
Potential Product Liability Claims Could Affect Our Earnings and Financial
Condition.
We face a potential risk of liability claims based on our products and services,
and we have faced such claims in the past. We currently do not have any product
liability coverage but are attempting to obtain coverage which we will believe
to be adequate. We cannot assure, however, that we will be able to obtain or
maintain this insurance at reasonable cost and on reasonable terms. We also
cannot assure that this insurance, if obtained, will be adequate to protect us
against a product liability claim, should one arise. In the event that a product
liability claim is successfully brought against us, it could result in a
significant decrease in our liquidity or assets, which could result in the
reduction or termination of our business.
We are Obligated to Pay Liquidated Damages As a Result of Our Failure to Have
this Registration Statement Declared Effective Prior to July 15, 2005, and the
Payment of Liquidated Damages Will Either Result in Depleting Our Working
Capital or Issuance of Shares of Common Stock Which Would Cause Dilution to Our
Existing Shareholders.
Pursuant to the terms of our private placement that closed in January and
February 2005, if we did not have a registration statement registering the
shares underlying the convertible notes and warrants declared effective on or
before July 15, 2005, we are obligated to pay liquidated damages in the amount
of 3.5% per month of the face amount of the notes, which equals $257,985, until
the registration statement is declared effective. At our option, these
liquidated damages can be paid in cash or restricted shares of our common stock.
We have currently decided to pay the liquidated damages due at this point in
common stock, although any future payments of liquidated damages could be made
in cash. If we decide to pay the liquidated damages in cash, we would be
required to use our limited working capital and potentially raise additional
funds. If we decide to pay the liquidated damages in shares of common stock, the
number of shares issued would depend on our stock price at the time that payment
is due. Based on the closing market price of $0.66 for our common stock on July
15, 2005, which is when our first payment of liquidate damages was due, a month
of liquidated damages would result in the issuance of approximately 390,887
shares of common stock. The issuance of shares upon payment of liquidated
damages will have the effect of further diluting the proportionate equity
interest and voting power of holders of our common stock, including investors in
this offering.
50
There Are a Large Number of Shares Underlying Our Warrants That May be Available
for Future Sale and the Sale of These Shares May Depress the Market Price of Our
Common Stock and Will Cause Immediate and Substantial Dilution to Our Existing
Stockholders.
As of August 9, 2005, we had 110,653,025 shares of common stock issued and
outstanding and outstanding warrants to purchase 28,713,717 shares of common
stock. All of the shares issuable upon exercise of our warrants may be sold
without restriction. The sale of these shares may adversely affect the market
price of our common stock. The issuance of shares upon exercise of warrants will
cause immediate and substantial dilution to the interests of other stockholders
since the selling stockholders may convert and sell the full amount issuable on
exercise.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Prior to May 2001 and new management, we were delinquent in our reporting
requirements, having failed to file our quarterly and annual reports for the
years ended 1998 - 2000 (except the quarterly reports for the first two quarters
of 1999). We have been current in our reporting requirements for the last three
years, however, there can be no assurance that in the future we will always be
current in our reporting requirements.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of the
person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
51
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: As of June 30, 2005, our
management carried out an evaluation, under the supervision of our Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design
and operation of our system of disclosure controls and procedures pursuant to
the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange
Act). Based on that evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures are not effective
to provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is not
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure. Please see the subsection "Significant
Deficiencies In Disclosure Controls And Procedures Or Internal Controls" below.
Changes in internal controls: There were no changes in internal controls over
financial reporting that occurred during the period covered by this report that
have materially affected, or are reasonably likely to materially effect, our
internal control over financial reporting. As described below, as a result of
our evaluation of our disclosure controls and procedures as of June 30, 2005, we
determined that our controls and procedures are not effective and subsequent to
the period of this report, began to implement changes to our internal controls.
Significant Deficiencies In Disclosure Controls And Procedures Or Internal
Controls
On July 11, 2005, we determined there were errors in accounting for the
valuation of equity consulting service transactions during the January through
March 2005 time period. The valuation resulted in the overstatement of
approximately $2.9 million in services provided. The errors were discovered in
connection with a comment raised by the Securities and Exchange Commission
("SEC") in their review and comment on our registration statement on Form SB-2.
The SEC requested that we provided additional disclosure regarding issuances of
common stock to non-employees in exchange for services. Upon reviewing and
updating our disclosure, we discovered our errors. We have implemented the
following procedures and policies to resolve these weaknesses and deficiencies:
1 Establish and maintain a separate binder of all board authorized
activities and a binder with forward looking "budget" of anticipated or
contemplated activity for each of the following:
a. shares issued for services;
b. shares issued for employees;
c. warrant exercises;
d. option exercises;
e. authorized shares and warrant re-pricing;
f. shares issued in exchange for debt; and
g. upcoming ESOP grants and exercises;
2 Require the signature of the principal executive and accounting officers
for all issuances of securities;
52
3 Require monthly review of share issuances compared to binders; and
4 Authorize our transfer agent to handle and track all warrants and ESOP
grants.
We believe that these actions will correct the material deficiencies and
significant weaknesses in our controls and procedures.
53
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, 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. Except as
described below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
Stern & Co. v. Applied DNA Sciences, Inc., Case No.: 05 CV 00202
Plaintiff Stern & Co. commenced this action against us in the United States
District Court for the Southern District of New York on or about January 10,
2005. In this action, Stern & Co. alleges that it entered into a contract with
us to perform media and investor relations for a monthly fee of $5,000 and
stock options. Stern & Co. claims that we failed to make certain payments
pursuant to the contract and seeks damages in the amount of $96,042.00. We
answered the complaint on May 12, 2005, denying Stern & Co.'s allegations and we
asserted a number of defenses. This action is in the early stages of discovery
and we intend to vigorously defend this matter.
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
Plaintiff Oceanic Consulting, S.A. commenced this action against us in the
Supreme Court of the State of New York, County of New York. Oceanic Consulting,
S.A. asserts a cause of action for breach of contract based upon the allegation
that we failed to make payments pursuant to a consulting agreement. Oceanic
Consulting, S.A.also asserts a causes of action in which it seeks
reimbursement of its expenses and attorneys' fees. Oceanic Consulting, S.A.
seeks damages in the amount of $137,500.00. Oceanic Consulting, S.A. moved
for a default judgment, which we have opposed based upon Oceanic Consulting,
S.A.'s failure to properly serve the complaint as well as our meritorious
defenses. Thereafter, Oceanic Consulting, S.A. agreed to withdraw its motion
for a default judgment and accepted service of our answer on May 23, 2005. We
dispute the allegations of the complaint. This action is in the early stages of
discovery and we intend to vigorously defend this matter.
Crystal Research Associates, LLC v. Applied DNA Sciences, Inc., Docket No.:
L-7947-04
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us in the Superior Court of New Jersey, Middlesex County. We intend to
move to vacate the default judgment on various grounds. We dispute the
allegations of the complaint and we intend to vigorously defend this matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2005, we issued 575,758 shares of common
stock in exchange for debt. We valued the shares issued at approximately $0.29
per share for a total of $165,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
During the three months ended June 30, 2005, we issued 1,080,000 shares of
common stock in exchange for consulting services valued at $792,300, which
represents the fair value of the services received which did not differ
materially from the value of the stock issued. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
During the three months ended June 30, 2005, we granted 3,660,000 options as
part of the authorized Employee Stock Ownership Plan (ESOP) we adopted on
February 14, 2005. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
31.1 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
31.2 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
32.1 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)
32.2 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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to Form 10-QSB report to be
signed on its behalf by the undersigned, thereunto duly authorized.
APPLIED DNA SCIENCES, INC.
Date: October 10, 2006 By: /s/ JAMES A. HAYWARD
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James A. Hayward
Chief Executive Officer (Principal
Executive Officer and Principal
Accounting Officer)
56