UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended September 30, 2005
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number 002-90539
APPLIED DNA SCIENCES, INC.
(Exact name of small business issuer 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 (631) 444-6862
--------------------- ----- --------------
(Address of principal executive office) (Postal Code) (Issuer's telephone
number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. None
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $29,662,093.50 as of December 5, 2005.
Number of outstanding shares of the registrant's par value $0.001 common stock
as of December 5, 2005: 112,380,392
APPLIED DNA SCIENCES, INC.
AMENDMENT NO. 1 ON FORM 10-KSB/A
For the Fiscal Year Ended September 30, 2005
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-KSB/A ("Amendment No. 1") amends the Annual
Report of Applied DNA Sciences, Inc. (the "Company") on Form 10-KSB for the
fiscal year ended September 30, 2005, as filed with the Securities and Exchange
Commission on January 12, 2006 (the "Original Filing"). This Amendment No. 1 is
being filed for the purpose of correcting errors in accounting for and
disclosing the issuance by the Company of warrants to acquire the Company's
common stock. 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 January 12, 2006, the filing date of the Original Filing.
Part I Page
Item 1. Description of Business. 3
Item 2. Description of Property. 13
Item 3. Legal Proceedings. 13
Item 4. Submission of Matters to a Vote of Security Holders. 13
Part II Page
Item 5. Market for Common Equity and Related Stockholder Matters. 14
Item 6. Management's Discussion and Analysis or Plan of Operation. 14
Item 7. Financial Statements 32
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure. 33
Item 8A. Controls and Procedures. 33
Item 8B. Other Information. 33
Part III Page
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act. 34
Item 10. Executive Compensation. 36
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 37
Item 12. Certain Relationships and Related Transactions. 40
Item 13. Exhibits. 41
Item 14. Principal Accountant Fees and Services. 44
Signatures. 45
2
PART I
Forward-looking Information
This Annual Report on Form 10-KSB/A (including the section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations) contains forward-looking statements regarding our business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not deemed to represent an all-inclusive
means of identifying forward-looking statements as denoted in this Annual Report
on Form 10-KSB/A. Additionally, statements concerning future matters are
forward-looking statements.
Although forward-looking statements in this Annual Report on Form 10-KSB
reflect the good faith judgment of our management, such statements can only be
based on facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, without
limitation, those specifically addressed under the heading "Risks Related to Our
Business" below, as well as those discussed elsewhere in this Annual Report on
Form 10-KSB. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-KSB. We file reports with the Securities and Exchange
Commission ("SEC"). We make available on our website under "Investor
Relations/SEC Filings," free of charge, our annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file
such materials with or furnish them to the SEC. Our website address is
www.adnas.com. You can also read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You
can obtain additional information about the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet site (www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC, including us.
We undertake no obligation to revise or update any forward-looking statements
in order to reflect any event or circumstance that may arise after the date of
this Annual Report on Form 10-KSB. Readers are urged to carefully review and
consider the various disclosures made throughout the entirety of this Annual
Report, which attempt to advise interested parties of the risks and factors that
may affect our business, financial condition, results of operations and
prospects.
Item 1. Description of Business.
Corporate History
We are a Nevada corporation, which was initially formed under the laws of the
state of Florida as Datalink Systems, Inc. in 1983. We changed names and then
redomesticated to Nevada in 1998, and in 1999, became ProHealth Medical
Technologies, Inc. In November of 2002, we changed our corporation name to
Applied DNA Sciences, Inc. in connection with a reverse merger. As a result of
the reverse merger, we changed our business to that of our acquirer, which
involves researching, developing and selling security and anti-counterfeiting
products that utilize plant DNA for verification purposes. During this time,
most of our efforts were focused on research and development and the execution
of an exclusive license, as described further herein.
OVERVIEW
Every living organism has a unique genetic composition (DNA code or DNA
sequence) that determines the character and composition of its cells. Genetic
specificity is determined by the sequence of nucleotides in the organism's DNA.
Our technical platform involves isolation of botanical genes that are fragmented
and then reconstituted to form unique "chimers" whose sequences are known only
to us. These chimers are stabilized for use for hundreds of years by a unique
encapsulation system that is compatible with a broad universe of chemistries.
This adaptability allows us to embed our unique DNA primers in petroleum and
petroleum derivatives, inks, dyes, laminates, glues, threads, textiles and other
materials. Once embedded in a product, we offer proprietary methods to free the
unique chimers from encapsulation and embedment, whereupon the chimers are
detected by our
3
complimentary primers using methods well established in molecular biology.
Detection of the chimeric sequence unique to a particular item allows us to
authenticate its origination
We provide a platform of proprietary, embedded DNA products that protect
consumers, corporations and governments from counterfeiting, fraud, piracy,
product diversion and unauthorized intrusion. Our technologies are protected by
a broad array of intellectual property. We offer a cost effective method to
detect, deter, interdict and prosecute counterfeiting enterprises.. This
technology can also be used to authenticate microchips and circuit boards that
contain them. The DNA AC (anti-counterfeit) biochip is a product in which DNA is
embedded into a microchip. When biochips are embedded into circuitry, the
biological data can be read electronically and the component can be
authenticated. The biochip acts like a gatekeeper to guard the access to the
device; only once an authorized user is verified, can the device be accessed.
Without authentication, the device will not operate.
Sectors of commerce that could benefit from our products include: corporations,
federal government agencies, information technology, security and surveillance,
entertainment media, the arts, cosmetics, pharmaceutical and biometrics, as well
as vertical retail markets. Our applications can also enhance capabilities of
product origination, identification verification, and validation of the source
of components for critical manufacturing, defense, medical and other
highly-integrity or secure products.
Our mission is to become the recognized standard in providing total security
solutions to protect consumers, corporate and intellectual property from
counterfeiting and fraud. We intend to deliver our products to a global market
by selling directly to manufacturers, and via strategic business development
agreements with recognized leaders in the security industry and through
collaborations with leading security consultancy companies.
We believe that we have a very seasoned and experienced management team. Our
combined executive team has extensive professional experience in the areas of
anti-counterfeiting technology, microchip development, printing, marketing, IP
development and exploitation, and cross-corporate -license development. Dr.
Hayward is a molecular biologist and has spent 20 years commercializing
biotechnologies and has successfully developed several companies. Dr. Sheu is
trained as a molecular biologist and has more than 10 years of experience in
developing and commercializing DNA related applications, including DNA security
and DNA vaccines. He has been a consultant for many well-known biotechnology
companies and he is the founder of Biowell Technology Inc. Dr. Liang is the
chief scientist involved in developing DNA security-related applications. He was
also a founding member of Biowell.
AGREEMENT WITH HOLOGRAMMAS S.A. DE C.V. (HOLOMEX)
On November 10, 2004, we entered into a joint product development and marketing
agreement with Holomex, pursuant to which we agreed to work together to jointly
develop products utilizing Holomex's holographic packaging and label products
and our DNA security products. All products developed will be jointly owned by
the companies. All costs, expenses and revenues will be divided between the
parties as established on a product-by-product basis. The agreement remains in
full force and effect until such time as patents for jointly developed products
and their extensions expire and/or as long as both parties continue to produce
and market the products, whichever is longer. Either party may terminate the
agreement upon 120 days written notice, during which time the non-terminating
party has the right to purchase from the terminating part all rights to the
products and intellectual property jointly owned.
COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT (CRADA) WITH THE DEPARTMENT OF
ENERGY
On September 2, 2004, we entered into a CRADA with Bechtel BWXT Idaho, LLC, a
national laboratory contractor with the Department of Energy. As allowed
pursuant to the CRADA, we received notice from the DOE that they have decided to
terminate the CRADA, effective January 23, 2006. The DOE laboratories have
provided third party detection and authentication of items which had been tagged
with embedded DNA sequences by us.
Sub-licensing Agreement
In July of 2003, we, Biowell and G. A. Corporate Finance Ltd. entered into a
Sub-License Agreement for the United Kingdom in exchange for $3,000,000. G. A.
Corporate Finance Ltd. paid $25,000 upon its execution of the
4
Agreement, and the remaining $2,975,000 is subject to an interest bearing
promissory note, payable in twenty (20) consecutive quarterly installments of
Principal and Interest in the amount equal to the lower of $185,937.50 or 35%
of gross revenues for that quarter due on the final day of the quarter.
The minimum guarantees that G. A. Corporate Finance, LLC must meet each year
of the license agreement to retain the exclusive license for the technologies
are as follows:
Year Minimum Guarantee
-------------- ---------------------------------
1st year $ 50,000 gross purchase orders
2nd year $ 150,000 gross purchase orders
3rd year $ 300,000 gross purchase orders
4th year $ 360,000 gross purchase orders
5th year $ 432,000 gross purchase orders
Due to the lack of marketable products since execution of this agreement, we
suspended the payment under the note and the minimum guarantees owed to us. We
are currently in negotiations with this sub-licensee to either amend or
terminate this agreement.
As with our Exclusive License Agreement with Biowell, our UK Sub-Licensee will
have the opportunity to apply for new product licenses, which can remain
exclusive in its territory for the first eighteen months.
Recent Developments
On July 15, 2005, we closed upon the stock purchase agreement with Biowell
Technology Inc., a Taiwan corporation that was executed on January 28, 2005.
Pursuant to the agreement, through our wholly-owned subsidiary, APDN (B.V.I.)
Inc., a British Virgin Islands company, we acquired all of the issued and
outstanding shares of Rixflex Holdings Limited, a British Virgin Islands
company. Pursuant to an asset purchase agreement, Biowell Technology, Inc.
transferred all of its intellectual property to Rixflex prior to our 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.
The intellectual property governs the use of plant-derived, but biosynthetically
modified DNA sequences to identify original commercial and consumer products,
private and government documents, artwork and other items. The intellectual
property uses synthetically created DNA fragments that have unique
characteristics and one-of-a-kind sequences. Our proprietary DNA-embedded
biotechnology solutions protect these items from counterfeiting, fraud, piracy,
product diversion and unauthorized intrusions. Our technologies are applicable
to a large percentage of global trade. The technologies offer a cost effective
method to detect, deter, interdict and prosecute global counterfeiting
organizations. Our platform may be integrated with pre-existing alternative
anti-counterfeit technologies, such as inks, thread, labels, microchips, glues,
paints and holograms. The intellectual property defines methods that tag and
authenticate the DNA fragments to ensure that the product has not been tampered
with or counterfeited.
In connection with the closing with Biowell, we terminated the license agreement
that we had previously entered into with Biowell in October 2002, under which we
had the exclusive right to sell, market, and sub-license Biowell's technology
within the United States, the European Union, Canada, Mexico, Colombia, Saudi
Arabia and the United Arab Emirates.
In connection with the closing with Biowell, we entered into a license agreement
with Biowell, whereby we granted Biowell an exclusive license to sell, market,
and sub-license our products in selected Asian countries. The exclusive license
for such selected territories is for an initial period of until December 31,
2010, and if Biowell meets its performance goals, the license agreement will
extend for an additional five year term. The license agreement gives Biowell the
initial rights to future anti-fraud biotechnologies we develop and also new
applications for the existing technology that may be developed for the
marketplace as long as the license agreement remains in effect. In the event
that Biowell shall sub-license the products within its territories, Biowell
shall pay us 50% of all fees, payments or consideration or any kind received in
connection with the grant of the sublicense. 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. The territories and minimum net
sales are as follows:
5
Minimum Annual Net Sales
Country (Us Dollars)
--------------------------------------------------------------------------------
Year 1 Year 2 Year 3 Year 4 Year 5
--------------------------------------------------------------------------------
AUSTRALIA 200,000 250,000 500,000 750,000 1,000,000
--------------------------------------------------------------------------------
AFGHANISTAN ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
BANGLADESH ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
BHUTAN ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
BRUNEI ZERO 100,000 250,000 400,000 500,000
--------------------------------------------------------------------------------
CAMBODIA ZERO 100,000 250,000 400,000 500,000
--------------------------------------------------------------------------------
CHINA 1,000,000 2,000,000 4,000,000 6,000,000 8,000,000
--------------------------------------------------------------------------------
INDIA 500,000 1,000,000 2,000,000 3,000,000 4,000,000
--------------------------------------------------------------------------------
INDONESIA 500,000 1,000,000 2,000,000 3,000,000 4,000,000
--------------------------------------------------------------------------------
JAPAN 500,000 1,000,000 2,000,000 3,000,000 4,000,000
--------------------------------------------------------------------------------
SOUTH KOREA 250,000 500,000 1,000,000 2,000,000 4,000,000
--------------------------------------------------------------------------------
LAOS ZERO 100,000 250,000 400,000 500,000
--------------------------------------------------------------------------------
MALAYSIA ZERO 250,000 500,000 1,000,000 2,000,000
--------------------------------------------------------------------------------
MYANMAR ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
PAKISTAN ZERO 100,000 250,000 400,000 500,000
--------------------------------------------------------------------------------
PHILIPPINES 100,000 250,000 500,000 750,000 1,000,000
--------------------------------------------------------------------------------
SINGAPORE ZERO 100,000 250,000 400,000 500,000
--------------------------------------------------------------------------------
SRI LANKA ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
TAIWAN 250,000 500,000 1,000,000 2,000,000 4,000,000
--------------------------------------------------------------------------------
THAILAND 250,000 500,000 1,000,000 2,000,000 4,000,000
--------------------------------------------------------------------------------
VIETNAM 250,000 500,000 1,000,000 2,000,000 4,000,000
--------------------------------------------------------------------------------
UAE ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
BAHRAIN ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
CYPRUS ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
IRAN ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
IRAQ ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
JORDAN ZERO 100,000 250,000 500,000 750,000
--------------------------------------------------------------------------------
KUWAIT ZERO 100,000 250,000 500,000 750,000
--------------------------------------------------------------------------------
LEBANON ZERO 25,000 50,000 100,000 100,000
--------------------------------------------------------------------------------
OMAN ZERO 100,000 250,000 500,000 750,000
--------------------------------------------------------------------------------
QATAR ZERO 100,000 250,000 500,000 750,000
--------------------------------------------------------------------------------
SAUDI ARABIA ZERO 500,000 1,000,000 2,000,000 4,000,000
--------------------------------------------------------------------------------
SYRIA ZERO 100,000 250,000 500,000 750,000
--------------------------------------------------------------------------------
YEMEN ZERO 100,000 250,000 500,000 750,000
--------------------------------------------------------------------------------
TOTAL 3,800,000 9,625,000 19,800,000 33,600,000 52,100,000
--------------------------------------------------------------------------------
6
We have subsequently amended the license agreement to state that any country
that has been identified by the U.S. State Department as state sponsors of
terrorism or are subject to economic sanctions administered by the U.S. Treasury
Department's Office of Foreign Assets Control will not be a territory under the
license agreement until such time as that country has been removed from such
list of state sponsors of terrorism and are not subject to economic sanctions by
the U.S. Treasury Department's Office of Foreign Assets Control. As Syria and
Iran are currently recognized by the U.S. State Department as state sponsors of
terrorism and are subject to economic sanctions administered by the U.S.
Treasury Department's Office of Foreign Assets Control, the sections of the
license agreement concerning those countries shall be suspended until such time
as those countries have been removed from the list of the U.S. State Department
as state sponsors of terrorism and are no longer subject to economic sanctions
administered by the U.S. Treasury Department's Office of Foreign Assets Control.
In addition, we entered into a consulting agreement with Timpix International
Limited for the consulting services of three former Biowell employees, Drs.
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 us. Such
consulting agreement shall automatically renew for one year periods until
terminated. Pursuant to the consulting agreement, we 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 us, the monthly consulting fee
shall be reduced accordingly. We have negotiated an agreement in principle to
restructure the Consulting Agreement, whereby, fees owed to Timplex from July
2005 through December 2005 will be waived, and salaries for each of the three
consultants will be reduced starting January 1, 2006.
Our Products
With our acquired proprietary DNA technologies from Biowell, we will be working
to provide complete DNA anti-counterfeit and fraud prevention solutions. We will
offer comprehensive and price-competitive products and solutions. The key
characteristics of the DNA biotechnology are as follows:
Unique and Impossible to Replicate DNA Codes -- specially processed DNA
fragments, with unique characteristics and one-of-a-kind sequences, are used.
The embedded DNA concentration is extremely small (3-5 ppm) and cannot be
analyzed unless proprietary primers and reagents are used.
Easy to Customize -- We can tailor the DNA marker to meet the customer's product
marking requirements to mark a product, a specific country or factory of origin
and all associated Quality Assurance and shipping documents. The DNA codes can
be generated based on one or more DNA sources and one or more anti-counterfeit
technologies.
Easy and Quick to Use -- With the advanced DNA testing kits and detection
devices, a fast read-out can be obtained for on-site verification. The
authentication process can be performed quickly. Quantitative or Real-time PCR
methods can produce authentication in less than 15 minutes using portable
devices. We are working to condense this time course.
Low Cost and High Accuracy -- Only a minimal amount of DNA is needed to provide
forensic accuracy and proof of authenticity. It is a cost effective and secure
method for authentication and t prevention of counterfeiting.
Our technologies enable integration with other technologies that permit
line-of-sight instant verification (via DNA holograms) and forensic verification
in inks, threads, etc. We believe that these combined products will provide an
effective and timesaving deterrent against counterfeiters and smugglers.
Broad Applications -- DNA anti-counterfeiting technology can be applied to
almost any product on the market. The edible DNA ink is safe to consume and can
be used on tablets or capsules ensuring against counterfeiting pharmaceuticals.
DNA Markers
Our first products available for sales directly by us are anti-counterfeiting
products that have already been sold by Biowell to Asian customers and have been
tested in the marketplace prior to our acquisition of Biowell. These products
have included DNA-embedded teabag labels, liquor labels, food product labels and
other DNA-ink-dependent products.
7
Our second product is a DNA-encrypted hologram. The product is embedded together
with additional security features and has been sold by Biowell for application
to over 600 million CD's and DVD's as an anti-counterfeiting technology deployed
by the Government of the People's Republic of China. As of June 2005, this
product has been established by the Government of China as the new national
standard for DNA-based encryption and authentication. Applied DNA Sciences has
also developed a DNA-encrypted hologram together with Holomex.
Our third anti-counterfeiting product is a DNA Marker, embedded in a bonding
agent for thread that can be used to authenticate textile products. The DNA
Marker can be applied to the finished garment, bag, purse, shoe or domestic
household product (linens, etc). As the DNA Marker can be applied to any fabric
from cotton to wool, this will help textile vendors and governments determine
the origin of thread, yarn and fabric through to the high-end garment and luxury
fashion accessory manufacturers who suffer lost sales and product diversion at
the hands of counterfeiters. DNA Marker protection will also help preserve jobs
at the legitimate textile and clothing manufacturers as well as ensuring that
the proper taxes are collected on textiles and garments from authorities. The
DNA Marker will remain effective into the 22nd century and will be detectable
throughout the different manufacturing stages without degrading. It can be
detected in a variety of manners from inspection under UV light to laboratory
forensic analysis that authenticates it to a certainty of 99.9999 percent. The
efficacy of the DNA Marker was tested and verified by US Federal Government
Laboratories in late 2005. We will continuously assess the anti-counterfeit
needs of markets, companies and governmental organizations and will develop
proprietary technologies, solutions and products for these opportunities
Inks
DNA anti-counterfeit ink has been developed as two major applications. The first
ink is Biowell's unique anti-counterfeit ink (covert ink), which can be
authenticated at a forensic-science level of certainty with detailed DNA
analysis performed in a laboratory or on site using PCR methods.
The second application is an enhanced version of the first, integrating into the
original anti-counterfeit ink an additional instant detection function for
on-site authentication (overt ink).
This instant verification process has been designed to allow sampling at any
point in the product supply chain. By swabbing a "Q-tip" embedded with a fluid
containing a special activation buffer across the authentic DNA ink surface, a
biochemical reaction occurs between the coating of the DNA molecules in the ink
and the buffer fluid. This reaction manifests as a reversible color change, with
the ink changing color from blue to pink, and back to blue within seconds.
Testing can be repeated at various checkpoints throughout the product supply
chain. This ink can be embedded into special tamper-proof labels or directly
into packaging, lottery tickets, etc to enable simple on-the-spot verification.
The DNA-labels represent a "first" in its ability to enable consumers to
validate a product before purchase, ingestion, etc. The implications for the
food, beverage, pharmaceutical and other industries are significant.
DNA ink can be applied to:
o General Company Use: trade marks, patents, company logos, important
documents
o Financial industry: currency, stocks, checks, bills, bonds, checks
o Retail: event tickets, VIP tickets, clothing labels
o Medicines: capsule and pill surface printing
o Inner package: foil blister packs
o Outer package: boxes, bottles
o Fine Art and Collectibles: paintings, artifacts, antiques, stamps,
coins, documents,
o collectibles and memorabilia
o Others: lottery tickets, inspection stamps, custom seals, passports,
visas, etc.
Virtually any item that can be duplicated now can be protected with any of these
DNA ink applications. The applications are cost-effective and can be adapted to
any company's current branding, product tracking, or other anti-counterfeiting
program.
8
Dna Labels
DNA anti-counterfeit ink can be applied to paper or woven garment labels. It can
also be printed onto logos or on any other surface. Labels are printed with the
proprietary ink containing the specific authentication DNA code for a
manufacturer. The labels can then be easily tested for authenticity.
Knowledge that the labels are DNA-imprinted and can be quickly and easily
verified serves as a deterrent to counterfeiters. We believe this in itself will
create a demand for the proprietary DNA ink-impregnated label technology.
Dna Microchips
Computer and electronic signals constitute the basis for most corporate security
systems. These systems are of similar function and design, and are susceptible
to duplication, penetration and counterfeit. The polymorphism of DNA is
significantly more complex than electronic signals, and better suited for
security systems.
The DNA chip card is intended for both authentication of the card and
identification of an individual. For that purpose, a specific DNA (group ID) is
assigned to a set of DNA chip cards, along with an individual's identification
information, which is recorded in the chip's memory. A reader module is
configured to recognize (and therefore verify) only the chip carrying the
correct group ID. Any DNA chip card with different group ID, or indeed any other
chip card, will be rejected by the DNA chip card reader.
The DNA chip uses botanical DNA, which is artificially re-constructed. Each user
group has the same DNA code. Individuals are differentiated in the system by
identification codes stored in the chip's memory. In addition, the DNA chip can
be configured for the customer to have a particular person's own DNA as the
source DNA for that user group. The DNA chip generates unique signals and will
not function properly once removed from the casing. The empty chip is not
available anywhere else on the market, thus making it impossible to counterfeit.
Once the imbedded DNA chip is sabotaged or removed the chip, it will cease
functioning, thus preventing data on the chip from being duplicated.
The signal of a DNA chip is generated through an interaction between DNA and a
specially devised mechanism known as a DNA chip reader. A real DNA chip will
generate an analog signal upon receiving a signal from a card reader and send
back an encoded signal to the reader after the chip is stimulated. An LCD
display screen provides immediate authentication by reading the unique DNA
signals embedded in the chip.
The DNA chip function is versatile, which allows it to be integrated into the
form of slot reader, slide through reader, or contact point reader for instant
authentication. Biowell has also developed a portable, lightweight, hand-held
scanner that can be used to authenticate the DNA chips. The cost of the DNA
chip, card, and reader system is comparable to existing smart card systems.
Above all, the reader can be linked externally with existing card readers to
save replacement costs.
The DNA encrypted microchip won the prize for Best New Technology for Security
Access at the Conference of the Security Industry Association held in Washington
DC in late 2004, in competition against some of the world's largest
corporations. Shortly thereafter, we were inducted into the InteGuard Alliance,
a consortium of 29 major companies providing security services and security
technology to the US Government. We believe that the DNA chip system is more
secure than all other systems; since it cannot be copied or hacked, and works
with specially configured readers.
The DNA biochip can be applied to many products. For example:
o Security ID cards
o Passports
o Licenses
o Credit and ATM cards
o Debit cards
o Consumer merchandise (CDs, VCDs, DVDs, notebook computers, PDAs,
handbags, etc.)
o Other applications where authentication is required (antiques, paintings,
security access, ignitions, etc.)
9
Intellectual Property
Key to our success is ongoing research and development. We have over 12 patents
pending. While patents are an important asset, they are not the only instruments
used to sequester a competitive position for us. We are developing numerous
tools to maintain technical superiority, which includes licensing other
component and complementary technologies that will keep pace with our speed to
market efforts.
We regard our trade secrets and other intellectual property as an integral
component of our success. We rely on patent law, trademark law, trade secret
protection and confidentiality and/or license agreements with employees,
customers, partners and others to protect our intellectual property. Effective
patent, trademark and trade secret protection may not be available in every
country in which our products are available. We cannot be certain that we have
taken adequate steps to protect our intellectual property, especially in
countries where the laws may not protect our rights as fully as in the United
States. In addition, if our third-party confidentiality agreements are breached
there may not be an adequate remedy available to us. If our trade secrets become
publicly known, we may lose our competitive position.
Additionally, 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.
10
Patent Name Application No. Filed by Date Filed Jurisdiction
------------------------------------------------------------------------------------------------------------------------------------
A Method of Utilizing Nucleic 089108443 Biowell (1) March 17, 2000 Taiwan
Acids as
Markers for Product 00107580.2 May 18, 2000 China
Anti-Counterfeit Labeling and 09/832,048; published April 9, 2001 United States
Verification 20020187263-A1
------------------------------------------------------------------------------------------------------------------------------------
EppenLocker (A 089204158 Biowell (1) March 10, 2000 Taiwan
Leakage-Prevention Apparatus
of Microcentrifuge)
------------------------------------------------------------------------------------------------------------------------------------
Multiple Tube Structure for 089210575 Biowell (1) June 20, 2000 Taiwan
Multiple in a Closed
Container
------------------------------------------------------------------------------------------------------------------------------------
Method for Processing 89111477 Biowell (1) June 12, 2000 Taiwan
Multi-PCR in Closed Vessel
------------------------------------------------------------------------------------------------------------------------------------
Method for Mixing Nucleic 2002-294229 Biowell (1) August 31, 2002 Japan
Acid in
Water Insoluble Media and 03007023.9 March 27, 2003 European
Application Thereof Patent Office
92121973 August 11, 2003 Taiwan
------------------------------------------------------------------------------------------------------------------------------------
Method for Hiding Secret 92121490 Biowell (1) August 6, 2003 Taiwan
Message Carrying a DNA
Molecule and a Method for pending August 6, 2003 China
Decoding the Secret Message
Hiding by thereof
------------------------------------------------------------------------------------------------------------------------------------
Method for Transferring 92119302 Biowell (1) July 15, 2003 Taiwan
Giveback Funds by
Recognizing Plurality of 03150071.4 July 31, 2003 China
Objects
------------------------------------------------------------------------------------------------------------------------------------
Anti-Counterfeit Chip None Biowell (1) To be filed Taiwan
Recognizing Device
------------------------------------------------------------------------------------------------------------------------------------
A System and Method for 60/463215 Biowell (1) April 16, 2003 United States
Marking Textiles Using DNA Applied DNA Sciences
------------------------------------------------------------------------------------------------------------------------------------
A System and Method for 2004/012031 Applied DNA Sciences April 15, 2004 United States
Marking Textiles Using
Nucleic Acids
------------------------------------------------------------------------------------------------------------------------------------
System and Method for 10/825968 Applied DNA Sciences January 21, 2004 United States
Authenticating Clients on a
Local Area Network Using
Nucleic Acids
(1) All patent applications filed by Biowell have either been assigned to
us or are in the process of being assigned to us.
11
CUSTOMERS
We do not currently have any revenue-generating customers at this point. Our
targeted client base includes major corporations, government entities and
educational institutions. We will provide DNA chip technology, DNA ink
technology as well as DNA profiling/tagging technology through various types of
resale agreements. We will apply these technologies to labels and security ink,
to a chip and reader as well as textile markers and agriculture profiling.
Competition
The anti-counterfeit and fraud prevention market is highly competitive and
diverse. Since we believe that other forms of anti-counterfeiting and security
measures can be easily defeated, we expect that utilizing DNA, which cannot be
replicated, will garner great demand from the market. Some examples of
biotechnology and other security technologies include:
FINGERPRINT- a systems scans fingerprints before granting access to computer
files.
VOICE- Off-the-shelf software authenticates users based on individual vocal
patterns.
CORNEA- Scanners that scan the iris of a user's eye to match compared to a
computer database.
FACIAL SCAN- Computers can use complex algorithms to distinguish one face from
another.
IC CHIP & MAGNETIC STRIP- Integrated circuit chip that runs an electric current
through a circuit and is verified by a IC card. Is used in many parts of Europe
and Asia.
HOLOGRAPH- Optical security elements ('holograms') constitute a family of
optically variable microstructures, which are difficult to copy. Most of them
are difficult to reproduce using advanced color photocopiers and printing
techniques. This is why they are so widely used as anti-counterfeit devices.
Holograms are only one member of a family of optically variable devices which
all have several features in common. These are:
o Highly visible to the naked eye under good or reasonable conditions
of illumination.
o Colorful and change their colors with viewing angle.
o They derive their colorful effects from microstructures within the
devices, which cause interference or diffraction of the light falling
upon them.
FLUORESCENCE- X-ray Fluorescence (XRF) and elemental taggant technologies were
developed as a unique method for assaying uranium ore. Later on was used as a
handheld alloy grade identification and spectral analysis instrument. Its use is
limited to label/printing applications.
RADIOACTIVITY& RARE MOLECULES- a method of Radiation detection is very effective
but limited to use on crude oil.
Some of the bigger competitors in the field of anti-counterfeiting and fraud
protection include:
o DNA Technologies, Inc.
o Art Guard International
o Theft Protection Systems
o Cypher Science (United Kingdom) Mt. Sinai Hospital
o ChemTAG (Norway)
o NTT DATA Labs (Japan)
o November AG.
EMPLOYEES
As of January 1, 2006, we employ 5 full-time employees, of which two are in
management and three are sales & marketing executives. We expect to add
approximately 10 scientists and technical staff in R&D and product
12
development in the first half of 2006. Our recent restructuring of management
and staff has resulted in terminations and relocations of certain employees.
We are negotiating the final elements of our restructuring in early 2006. These
actions may cause short-term acrimony with our employees, but we believe that
our relations with our current employees are good.
Item 2. Description of Property.
Presently, we maintain our principal office at 25 Health Sciences Drive, Suite
113, Stony Brook, New York 11790. We signed a lease for our office and
laboratory space located in the Long Island High Technology Incubator facility
located within the campus of the State University of New York in Stony Brook in
November 2005. The laboratory and office space is provided to us for $50,000 per
year. We believe that our current office space and facilities are sufficient to
meet our present needs and do not anticipate any difficulty securing alternative
or additional space, as needed, on terms acceptable to us. We maintain a website
at www.adnas.com.
Item 3. 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
disclosed 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 for $13,000 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
13
Market Information
Our Common Stock is traded over-the-counter on the Over the Counter Bulletin
Board maintained by the National Association of Securities Dealers under the
symbol "APDN". There is no certainty assurance that the Common Stock will
continue to be quoted or that any liquidity exists for our shareholders.
The following table sets forth the quarterly quotes of high and low prices for
our Common Stock on the OTC Bulletin Board during the fiscal years September 30,
2004 and September 30, 2005. In February of 2003, we changed our year end to
September 30. We changed our fiscal year end in connection with a reverse merger
we entered into in December 2002, in which the acquirer for accounting purposes
had a fiscal year end of September 30. For ease of fiscal reporting, we adopted
the same fiscal year end.
Fiscal 2005 Fiscal 2004
========================== =========================
High Low High Low
=========== =========== ========== ===========
First Quarter $2.39 $0.42 $3.54 $2.45
Second Quarter $1.83 $0.78 $3.55 $1.51
Third Quarter $1.01 $0.58 $2.55 $0.71
Fourth Quarter $0.74 $0.48 $0.96 $0.43
Holders
As of December 5, 2005, we had approximately 1,285 holders of our common stock.
The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of common stock whose shares are
held in the names of various security brokers, dealers, and registered clearing
agencies. The transfer agent of our common stock is American Stock Transfer &
Trust Company, 6201 15th Avenue, Brooklyn, New York 11219.
Dividends
We have never declared or paid any cash dividends on our common stock. We do not
anticipate paying any cash dividends to stockholders in the foreseeable future.
In addition, any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon our financial
condition, results of operations, capital requirements, and such other factors
as the Board of Directors deem relevant.
Recent Sale of Unregistered Securities
None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto contained elsewhere in this report.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Information in this Item 6, "Management's
Discussion and Analysis or Plan of Operation," and elsewhere in this 10-KSB that
does not consist of historical facts, are "forward-looking statements."
Statements accompanied or qualified by, or containing words such as "may,"
"will," "should," "believes," "expects," "intends," "plans," "projects,"
"estimates," "predicts," "potential," "outlook," "forecast," "anticipates,"
"presume," and "assume" constitute forward-looking statements, and as such, are
not a guarantee of future performance. The statements involve factors, risks and
uncertainties including those discussed in the "Risk Factors" section contained
elsewhere in this report, the impact or occurrence of which can cause actual
results to differ materially from the expected results described in such
statements. Risks and uncertainties can include, among others, fluctuations in
general business cycles and changing economic conditions; changing product
demand and
14
industry capacity; increased competition and pricing pressures;
advances in technology that can reduce the demand for the Company's products, as
well as other factors, many or all of which may be beyond the Company's control.
Consequently, investors should not place undue reliance on forward-looking
statements as predictive of future results. The Company disclaims any obligation
to update the forward-looking statements in this report.
Plan of Operations
Sales and Marketing
Our revenues will come from three sources:
1) direct sales to manufacturer,
2) sales through our OEM relationships, and,
3) authentication (laboratory) services.
We employ a multi-tier sales and marketing strategy involving our marketing and
sales staff working together with high-level contacts in target industries and
our OEM base. We are attempting to develop strategic alliances and marketing
partners by setting up alliances with Biowell's technology partners, granting
licenses to existing anti-counterfeit suppliers and partner with industry
leaders for intellectual property development.
We are cognizant that no technology exists today to enable someone in the street
to ascertain, at the point of purchase, whether an expensive product, or a
child's foodstuff, or pharmaceutical product is genuine, worth the money being
paid and safe to use or ingest. No brand owner is able to rapidly determine
whether a product is real of fake. Many multi-billion dollar brands have no
technology to protect against counterfeiting, to detect its occurrence and to
interdict or prosecute the counterfeiter. No company has the capability to
determine with forensic certainty that it is subject to attack. Such companies
remain seriously exposed to product liability, loss of consumer confidence and
loss of revenues. Governments have no rapid detection system to determine at the
point of entry, inspection or seizure whether products are real or fake. A major
thrust of our marketing efforts is to work with consumer groups, media,
corporate officers, government departments, Customs, insurers and others to
bring home the message that, in a world of criminality and terrorism, no-one is
safe.
Business Strategy and Approach
We have established integrated business operations addressing and servicing the
needs of the global security marketplace on the part of corporations and
governments for; anti-counterfeiting, fraud prevention, product authentication,
brand protection, supply chain management and protection.
INTELLECTUAL PROPERTY DEVELOPMENT, PRODUCT OPERATIONS & PARTNERSHIPS
We have proprietary DNA security technology, and develop security solutions that
protect corporate and intellectual property from counterfeiting, fraud, piracy
and product diversion using botanical DNA as an encrypted/code molecule that can
be embedded in inks, paper, substrates, liquids, textiles, thread, plastics,
holograms and microchips.
We produce security solutions customized to our customer's needs. We market and
sell DNA anti-counterfeit and fraud prevention solutions that integrate into,
and layer with, existing security solutions. These DNA security features are
integrated at the original equipment manufacturer level with ink, paper,
liquids, thread and hologram producers, who in turn sell/supply finished
security products such as primary and secondary product packaging for
pharmaceuticals, beauty products, textiles, currency, passports, ID cards, etc.
We have strict protocols for specifying, integrating, testing, shipping and
confirming the presence of DNA in any given product.
We plan to develop new product lines that will address specific new challenges
in the security marketplace, and bring these advances to target industries,
customers and countries.
Additionally, we will identify strategic partnerships and co-marketing ventures,
and licensees to work with us to develop, market and sell our biotechnological
security products. This will include sub-licensing the technology to key
partners in specific sectors with an established base of customers. These
partners will be able to enhance their
15
product lines and client services by adding our technology to the existing
security matrix in their products, providing an enhanced solution to deter
fraud and counterfeiting.
Management Strategy
We anticipate a period of rapid change as we begin commercialization of the
products now available subsequent to: a) the signing of our licenses with
Biowell, b) the establishment of our prototyping labs at Stony Brook, and c) the
availability of products that have recently been commercialized in Asia by
Biowell.
We have organized our resources to manage our commercialization effectively,
optimizing the delivery of new prototypes for customers, and managing
outsourcing especially through our OEMs. Our Chief Executive Officer is
responsible for the strategic direction, coordinating with our overseas
technology partner Biowell and scientific development as well as corporate
governance and operations. Our President is responsible for business
development, including relations with US and foreign government agencies,
developing business relationships with target corporations and OEM's, and
securing revenues. Our Chief Financial Officer covers overall financial
management, financial reporting, corporate administration, investors relations.
Our marketing department develops strategic awareness of our technologies across
target industry sectors, their associated media and lobbying companies and
liaises with regulatory bodies (EPA, FDA, etc) and industry Associations (CTFA,
PHARMA, etc). Our sales department covers specific industries, such as the
pharmaceutical, packaging, ink, cosmetic and comestible sectors and acts as our
media spokesperson, clarifying for the pharmaceutical and nutraceutical
industries, allied health professionals and consumers the advantages of our
anti-counterfeit, diversion and piracy applications and products. Our Chairman
oversees the Biowell and Stony Brook DNA production Laboratories and the
development of core DNA sciences for current and future applications. Our
Strategic Technology Development Officer is principally engaged in the
productization of DNA markers for specific industry applications, and for
liaison with corresponding scientists from our principal OEM partners, e.g.,
petroleum markers, chemical markers, markers for precious stones, DNA-encrypted
inks, DNA markers for the pharmaceutical industry, etc.
CONSULTANT & ENFORCEMENT OPERATIONS
As nations are threatened by terrorism and corporations try to prevent corporate
fraud, counterfeiting, product diversion and industrial espionage, the need for
secure anti-counterfeiting and identification systems increases. Our technology
can provide important and cost-effective support for local, state, and federal
governments as well as corporations doing business with highly sensitive
information or products susceptible to counterfeit. Our anti-counterfeiting
technology can be used for the following types of identification and important
government documents:
o Passports
o Green cards
o Visas
o Driver's licenses
o Social Security cards
o Student visas
o Military ID's
o Other important Identity cards and official documents
We intend to work in collaboration with Biowell and other security organizations
in order to continue to research and develop new product lines derived from, but
not limited to, DNA technology. Research and development of new product lines is
an ongoing commitment and is currently underway in the Biowell labs and will
continue in the U.S. at our new facilities being established at the Long Island
High Technology Incubator (LIHTI) at Stony Brook University in New York.
Research and development objectives include the development of a new line of
detection technologies that will provide faster and more convenient ways to
authenticate DNA, continuous effort to incorporate our DNA markers with various
products for new applications, and establishment of a leading DNA authentication
service lab. We believe that we will obtain commercial revenues for these
efforts within 12-24 months, although no assurances can be given that we will
ever generate revenues. Our prototyping laboratory will customize
"off-the-shelf" products for new customers on a case-by-case basis. These new
products are typically newly configured labels, inks or packing elements. We
have identified several options for remote detection and faster detection
methodologies.
16
We will consult with our clients on a total security service offering; how to
protect their brands, intellectual property, products and physical security
access and how to reduce risk exposure, product liability exposure and product
recall liabilities. We plan to offer worldwide DNA analysis services supporting
the authentication of products and the detection, interdiction, deterrence and
prosecution of counterfeiters and related crimes, through our subcontractors,
sub-licensees and security industry collaborative partners.
International Sub-license Operations
Developing Technology - We have an in-depth understanding of DNA microchip
design and applications. We will jointly develop DNA-holograms and
DNA-Hologram-RFID devices, DNA-inks, DNA-dyes and DNA-security labels with
leading original equipment manufacturers in these specialist fields.
We will utilize our existing relationships and develop new ones to introduce our
anti-counterfeiting technology to generate business. Each industry has unique
requirements and needs for their anti-counterfeit solutions, and we believe our
DNA technology will provide maximum security technologies. For example, our
smart packaging solutions with DNA security markers in ink, paper and holograms
has widespread application in packaging for pharmaceuticals, cosmetics,
automotive markets, passports, ID's and currency. Our proprietary technology
offers immediate and affordable detection and security for their brands and
products.
Strong Technology Alliances - Our technology can also provide advanced security
dimensions to:
o Electronics security: access and physical/plant security (biometric
security cards enhanced with DNA)
o Security Holograms (DNA enhanced)
o Radio Frequency Identification systems (DNA + RFID)
o Security papers and printing
o Holograms (DNA holograms)
o Other security-related products and systems
Law Enforcement Expertise - The resources of our collaborative partners in the
security industry include former federal law enforcement, security, and
intelligence officers who provide the company with extensive contacts and
hands-on experience in:
o Intellectual property investigation
o Counter-intelligence
o Personal security services
o Anti-counterfeit technologies
o Secure communications and data management
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements; we believe the following
critical accounting policies involve the most complex, difficult and subjective
estimates and judgments:
o stock-based compensation
o fair value of intangible assets
Stock-based Compensation
In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 -
Accounting for Stock-Based Compensation, providing alternative methods of
voluntarily transitioning to the fair market value based method of accounting
17
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2003.
We elected to continue to account for stock-based compensation plans using the
intrinsic value-based method of accounting prescribed by APB No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Under the
provisions of APB No. 25, compensation expense is measured at the grant date for
the difference between the fair value of the stock and the exercise price.
From its inception, the Company has incurred significant costs in connection
with the issuance of equity- based compensation, which is comprised primarily of
our common stock and warrants to acquire our common stock, to non-employees. The
Company anticipates continuing to incur such costs in order to conserve its
limited financial resources. The determination of the volatility, expected term
and other assumptions used to determine the fair value of equity based
compensation issued to non-employees under SFAS 123 involves subjective judgment
and the consideration of a variety of factors, including our historical stock
price, option exercise activity to date and the review of assumptions used by
comparable enterprises.
We account for equity based compensation, issued to non-employees in exchange
for goods or services , in accordance with the provisions of SFAS No. 123 and
EITF No. 96-18, "Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services".
Fair Value of Intangible Assets
We have adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby we
periodically test our intangible assets for impairment. On an annual basis, and
when there is reason to suspect that their values have been diminished or
impaired, these assets are tested for impairment, and write-downs will be
included in results from operations.
On July 12, 2005, we acquired certain intellectual properties from Biowell
through an Asset Purchase Agreement in exchange for 36 million shares of our
restricted common stock having an aggregate fair value at the date of issuance
of $ 24,120,000. The value of the acquired intangible assets was $ 9,430,900,
with the balance of the purchase price, or $14,689,100, charged to operations as
a cost of the transaction.
18
The identifiable intangible assets acquired and their carrying values at
September 30, 2005 are:
Weighted
Average
Gross Amortization
Carrying Accumulated Residual Period
Amount Amortization Net Value (Years)
============= ============== ============= =========== ==============
Amortizable
Intangible
Assets:
Intellectual
Property $9,430,900 $336,818 $9,094,082 -- 7
Patents 34,237 11,764 22,493 -- 5
Total
Amortized
Identifiable
Intangible $9,465,137 $348,582 $9,116,575 -- 6.99
============= ============== =============
--
Total amortization expense charged to operations for the year ended September
30, 2005 and 2004 were $346,825 and $1,756.
Estimated amortization expense as of September 30, 2005 is as follows:
2006 $ 1,357,279
2007 1,357,279
2008 1,349,748
2009 1,347,271
2010 and after 3,704,998
Total $ 9,116,575
Recent Accounting Pronouncements
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities. SFAS 149 amends SFAS No. 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar characteristics be accounted
for on a comparable basis. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS 150 did not have a material impact on the Company's results
of operations or financial position.
19
In December 2003, the FASB issued a revision of SFAS No. 132, "Employers'
Disclosures About Pensions And Other Postretirement Benefits." This
pronouncement, SFAS No. 132-R, expands employers' disclosures about pension
plans and other post-retirement benefits, but does not change the measurement or
recognition of such plans required by SFAS No. 87, No. 88, and No. 106. SFAS No.
132-R retains the existing disclosure requirements of SFAS No. 132, and requires
certain additional disclosures about defined benefit post-retirement plans.
Except as described in the following sentence, SFAS No. 132-R is effective for
foreign plans for fiscal years ending after June 15, 2004; after the effective
date, restatement for some of the new disclosures is required for earlier annual
periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such
as the components of net periodic benefit cost, and certain key assumptions) are
effective for foreign plans for quarters beginning after December 15, 2003;
other interim-period disclosures will not be required for the Company until the
first quarter of 2005. Since the Company does not have any defined benefit
post-retirement plans, the adoption of this pronouncement did not have any
impact on the Company's results of operations or financial condition.
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152) The amendments made by Statement 152 This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005 with earlier application encouraged.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year 2005. Currently, the Company accounts for its share-based
payment transactions under the provisions of APB 25, which does not necessarily
require the recognition of compensation cost in the financial statements.
Management is assessing the implications of this revised standard, which may
materially impact the Company's results of operations in the third quarter of
fiscal year 2005 and thereafter.
On December 16, 2004, FASB issued Statement of Financial Accounting Standards
No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Non-monetary Transactions (" SFAS 153"). This statement amends
APB Opinion 29 to eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. Under SFAS 153, if a
non-monetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for non-monetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
20
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 we transition from a development stage enterprise to that of an
active growth stage company, although no assurances can be given that we will
generate any revenues from operations.
Costs and Expenses
Selling, general and administrative expenses for the twelve months ended
September 30, 2005 compared to 2004 increased 292% to $50.714 million from
$17.342 million in the prior period. See a discussion of non cash items below in
the Liquidity & Capital Resources section. Included within the $33.373 million
increase compared to the twelve months ended September 30, 2005 is $14.689
million in expensed intellectual property acquisition costs occurring during the
quarter ended September 30, 2005, $8.574 million in fund raising and consultant
costs, $1.232 million in increased salaries and wages due to a greater number of
employees, $777,000 in penalty shares related to the pending registration
statement, $550,000 in higher royalty expense, $255,000 in higher facility rent
as well as other expenses of $893,000.
Research and development expenses increased $400,000 for the twelve months ended
September 30, 2005 compared to 2004 from $239,000 to $639,000 primarily due to
increased independent testing costs.
In the twelve months ended September 30, 2005, depreciation and amortization
increased $353,000 for the period compared to 2004 from $3,000 to $356,000. In
the quarter ended September 30, 2005, we capitalized $9.431 million related to
an intellectual property asset acquisition. As a result, we recorded
amortization expense totaling $336,000 for the quarter ended September 30, 2005.
We estimate a seven-year useful life that commenced during the fourth fiscal
quarter of 2005.
Total operating expenses increased to $47.593 million from $17.583 million, or
an increase of $30.01 million as a result of the combination of factors listed
above.
Other Income/Expense
The Company realized a gain on revaluation of warrant liability which increased
by $16.701 million from zero for each of the fiscal years ended September 30,
2005 and 2004, respectively.
Other income, for the twelve months ended September 30, 2005 increased to $5,000
from $1,000 in the same period of 2004, due primarily to the $3,000 of licensing
fees received from Biowell during the quarter ended September 30, 2005.
Interest expense for the twelve months ended September 30, 2005 increased to
$32.106 million from $1.776 million in the same period of 2004, an increase of
$30.33 million. An increase of $27.266 million was related to a beneficial
conversion feature related to the sale of convertible debt and attached warrants
in the year ended September 30, 2005 and charged to interest. Additionally, we
recorded $5.116 million and $7.82 million for additional debt and related
warrants, respectively
Net loss for the twelve months ended September 30, 2005 increased to a loss of
$67.110 million from a loss of $19.358 million in the prior period as a result
of the combination of factors described above.
In the quarter ended September 30, 2005, we issued 36 million shares of stock
with a fair market value of $24.120 million to acquire intellectual property. We
capitalized $9.431 million as an intangible asset and charged $336,000 to
amortization expense for the year ended September 30, 2005. The remaining
$14.689 million was charged to operating expense.
21
Liquidity and Capital Resources
Our liquidity needs will come from working capital requirements, indebtedness
payments and research and development expenditure funding. Historically, we have
financed our operations through the sale of equity and convertible debt as well
as borrowings from various credit sources.
In 2005, we completed two sales of convertible debt. The first sale for $1.465
million was for $0.50 per share plus attached warrants for $0.75, while the
second sale for $7.371 million was also for $0.50 per share plus attached
warrants for $0.75. Of the $9.079 million in total proceeds from the equity
sales, we used the proceeds to fund financing fees, consultants and public
reporting costs, salaries and wages, royalties, research and development,
facility costs as well as and general working capital needs. Proceeds of
$102,750 resulting from the exercise of previously issued options occurred
during the current period.
Substantially all of the real property used in our business is leased under
operating lease agreements.
As of September 30, 2005, we had a working capital deficit of $2,936,929. For
the year ended September 30, 2005, we generated a net cash flow deficit from
operating activities of $9,140,000 consisting primarily of year to date losses
of $67,109,519. Non cash equity adjustments included $16,701,000 in gain from
warrant revaluation, $10,467,000 in private placement expense in excess of
beneficial conversion feature, $8,836,000 for beneficial conversion
amortization, $18,177,000 in net stock issued for consulting services,
$14,689,000 in stock issued for intellectual property, $777,000 in penalty stock
issued pursuant to a registration rights agreement, $1,365,000 in stock issued
for debt, $3,241,068 for warrants issued to consultants. Finally, non cash
depreciation and amortizations totaled $350,000 and net liabilities and other
increased by $540,000. Cash provided by investing activities totaled $12,000,
consisting of $16,000 of proceeds from the sale of furniture upon vacating the
Los Angeles facility and $4,000 was utilized for patent expenses. Cash provided
by financing activities for the year ended September 30, 2005 totaled $9,157,000
consisting of $9,079,000 in proceeds from subscribed stock, 103,000 in exercised
options proceeds and $25,000 in note payable reduction.
We expect capital expenditures to be less than $500,000 fiscal 2006. Our primary
investments will be in laboratory equipment to support prototyping and our
authentication services.
Exploitation of potential revenue sources will be financed primarily through the
sale of securities and convertible debt, exercise of outstanding warrants,
issuance of notes payable and other debt or a combination thereof, depending
upon the transaction size, market conditions and other factors.
While we have raised capital to meet our working capital and financing needs in
the past, additional financing is required within the next 12 months in order to
meet our current and projected cash flow deficits from operations and
development. We have sufficient funds to conduct our operations for several
months, but not for 12 months or more. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.
By adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial condition.
Our registered independent certified public accountants have stated in their
report dated October 21, 2005, that we have incurred operating losses in the
last two years, and that we are dependent upon management's 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 sold $1,465,000 in convertible
promissory notes to 13 investors in December 2004. Each promissory note was
automatically convertible into shares of our common stock, at a price of $0.50
per share, upon the closing of a private placement for $1 million or more. On
January 28, 2005, we closed upon a private placement transaction in excess of $1
million, and on February 2, 2005, the promissory notes were converted into an
aggregate of 2,930,000 shares of common stock. In connection with the sale of
the convertible promissory notes, we issued 2,930,000 warrants to purchase
shares of common stock. The warrants are exercisable until three years from the
date of issuance at a purchase price of $0.75 per share.
22
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 convert into shares of our common
stock, at a price of $0.50 per share, upon the filing of this registration
statement. 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.
Since the conversion price was less than the market price of the common stock at
the time the secured convertible notes were issued, we recognized a charge
relating to the beneficial conversion feature of the secured convertible notes
during the year ended September 30, 2005, aggregating $1,465,000 and $7,371,000,
respectively.
In connection with the private placement, we granted the investors registration
rights. Pursuant to the registration rights agreement, if we did not file the
registration statement by February 15, 2005, or if we did not have the
registration statement 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 closing
market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our common
stock on July 15, 2005, August 15, 2005, September 15, 2005, October 17, 2005,
November 15, 2005 and December 15, 2005, respectively, we issued approximately
390,887, 444,802, 368,550, 526,500, 806,204 and 1,289,927 shares of common stock
per month, respectively, in liquidated damages.
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.
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.
Factors That Could Affect Future Results
Because of the following factors, as wells as other variables affecting our
operating results and financial condition, past financial performance may not be
a reliable indicator of future performance, and historical trends should not be
used to anticipate results or trends in future periods.
Risks Relating to Our Business:
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, WHICH MAY NEGATIVELY IMPACT OUR
ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
23
We incurred net losses of $67,109,519 for the fiscal year ended September 30,
2005 and $19,358,259 for the fiscal year ended September 30, 2004. 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
$500,000 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.
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 October 21, 2005, our independent auditors stated that our
financial statements for the year ended September 30, 2005 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 $87,639,789
during the period September 16, 2002 (date of inception) through September 30,
2005. 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 increase the difficulty in meeting such goals and there can be no
assurances that such methods will prove successful.
OUR ESEARCH 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.
24
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 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 products' usefulness;
o Citation of the product in published research; and
o General trends in 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
25
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 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.
26
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, HAYWARD OR LIANG, 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 Dr.
Jun-Jei Sheu, our Chairman of the Board of Directors, Dr. James Hayward, our
Chief Executive Officer and Dr. Bejamin Liang, our Secretary and Strategic
Technology Development Officer. We do not have employment agreements with Drs.
Sheu, Hayward or Liang. Loss of the services of Drs. Sheu, Hayward or Liang
could have a material adverse effect on our growth, revenues, and prospective
business. We do not maintain key-man insurance on the life of Drs. Sheu, Hayward
or Liang. We are not aware of any 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 are 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 attracting 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.
27
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:
Inksure - $1.0 million
DNA Technologies, Inc. - $22.6 million
November AG - $5.8 million
We expect this competition to continue and intensify in the future. Competition
in our markets is primarily driven by:
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.
28
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.
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.
29
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 closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and
$0.20 for our common stock on July 15, 2005, August 15, 2005, September 15,
2005, October 17, 2005, November 15, 2005 and December 15, 2005, respectively,
we issued approximately 390,887, 444,802, 368,550, 526,500, 806,204 and
1,289,927 shares of common stock per month, respectively, in liquidated damages.
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.
Risks Relating to Our Common Stock:
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 December 5, 2005, we had 112,380,392 shares of common stock issued and
outstanding and outstanding warrants to purchase 37,081,967 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.
30
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.
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.
31
ITEM 7. FINANCIAL STATEMENTS.
APPLIED DNA SCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet as of September 30, 2005 F-2
Consolidated Statements of Losses for the years ended September
30, 2005 and 2004 and the period September 16, 2002 (date of
inception) to September 30, 2005 F-3
Consolidated Statement of Stockholders' Equity (Deficiency)
for the period September 16, 2002 (date of inception) to
September 30, 2005 F-4--F-16
Consolidated Statements of Cash Flows for the years ended
September 30, 2005 and 2004 and the period September 16, 2002
(date of inception) to September 30, 2005 F-17--F-18
Notes to Consolidated Financial Statements F-19--F-42
32
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Applied DNA Sciences, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Applied
DNA Sciences, Inc. (a development stage company) as of September 30, 2005 and
the related consolidated statements of losses, deficiency in stockholders'
equity, and cash flows for each of the two years in the period ended September
30, 2005 and the period September 16, 2002 (date of inception) through September
30, 2005. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on the financial
statements based upon our audits.
We have conducted our audits in accordance with auditing standards of
the Public Company Accounting Oversight Board (PCAOB) (United States of
America). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Applied DNA
Sciences, Inc. (a development stage company) at September 30, 2005 and the
results of its operations and its cash flows for each of the two years in the
period ended September 30, 2005 and the period September 16, 2002 (date of
inception) through September 30, 2005 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the Note K to the
accompanying financial statements, the Company is in the development stage and
has not established a source of revenues. This raises substantial doubt about
the company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note L, the Company has restated the consolidated
balance sheet as of September 30, 2005 and the related consolidated statements
of losses, deficiency in stockholders' equity, and cash flows for the year ended
September 30, 2005 and the period September 16, 2002 (date of inception) through
September 30, 2005.
/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
Russell Bedford Stefanou Mirchandani LLP
McLean, Virginia
October 21, 2005, except for Note K, as to which the date is November 30, 2005
and Note M, as to which date is September 15, 2006
F-1
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2005
RESTATED
ASSETS
Current Assets:
Cash $ 31,190
Accounts receivable and advances 12,429
--------------------
Total Current Assets 43,619
Property, Plant and Equipment (Note A) 12,750
Less: accumulated depreciation (4,686)
--------------------
Total Property, Plant and Equipment 8,064
Other Assets:
Deposits 14,262
Intangible assets:
Patents (net of accumulated amortization of $11,764) (Note B) 22,493
Intellectual Property (net of accumulated amortization of $336,818) (Note B) 9,094,082
--------------------
Total Other Assets 9,130,837
--------------------
$ 9,182,520
====================
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities (Note C) $ 2,570,119
Note payable- Related Party (Note E) 410,429
--------------------
Total Current Liabilities 2,980,548
Warrant Liability (Note D) 13,673,574
Commitments and contingencies (Note J)
Deficiency In Stockholders' Equity : (Note F)
Convertible Preferred Stock, par value $0.001 per share; 10,000,000 shares
authorized; 60,000 shares issued and outstanding at September 30, 2005 6
Common Stock, par value $0.001 per share; 250,000,000 authorized;
112,230,392 shares issued and outstanding at September 30, 2005 112,230
Additional paid in capital 82,320,715
Common stock subscribed 20,000
Deficit accumulated during development stage (89,924,553)
--------------------
Total deficiency in stockholders' equity (7,471,602)
Total liabilities and deficiency in stockholders' equity $ 9,182,520
====================
See the accompanying notes to the financial statements
F-2
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENTS OF LOSSES
For the Period
September 16, 2002
For the Year Ended For the Year Ended (Date Of Inception)
September 30, September 30, through September 30,
2005 2005
RESTATED 2004 RESTATED
--------------------- ---------------------- --------------------------
Operating expenses:
General and administrative $ 50,714,017 $ $17,341,563 $ 71,535,604
Research and Development 638,873 238,535 877,408
Depreciation and Amortization 356,266 3,161 359,427
--------------------- ---------------------- ---------------------
Total expenses 51,709,156 17,583,259 72,772,439
--------------------- ---------------------- ---------------------
Loss from operations (51,709,156) (17,583,259) (72,772,439)
--------------------- ---------------------- ---------------------
Net gain/(loss) on revaluation of warrant liability 16,700,990 - 16,700,990
Other income(expense) 4,957 1,385 31,342
Interest (expense) (32,106,310) (1,776,385) (33,884,446)
Income (taxes) benefit - - -
--------------------- ---------------------- ---------------------
Net loss $ (67,109,519) $ (19,358,259) $ (89,924,553)
===================== ====================== =====================
Basic and diluted loss per common share (Note I) $ (1.05) $ (0.93) (2.53)
===================== ====================== =====================
Weighted average common shares outstanding 63,917,009 20,819,700 35,590,871
===================== ====================== =====================
See the accompanying notes to the financial statements
F-3
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
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 the financial statements
F-4
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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 the financial statements
F-5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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 the financial statements
F-6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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 the financial statements
F-7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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 the financial statements
F-8
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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 the financial statements
F-9
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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 September 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 the financial statements
F-10
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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 the financial statements
F-11
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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
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
Fair value of warrant liability
reclassed due to registration
rights granted in February 2005 - - - - (3,108,851) - - - (3,108,851)
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
Fair value of warrants issued to
consultants for services rendered
at $1.31 per warrant in
February 2005 - - - - 72,017 - - - 72,017
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 the financial statements
F-12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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
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 the financial statements
F-13
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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 cancelled 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 the financial statements
F-14
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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)
Common Stock issued in
exchange for consulting services
at $0.60 per share in July 2005 - - 157,000 157 94,043 - - - 94,200
Common Stock issued in
exchange for intellectual property
at $0.67 per share in July 2005 - - 36,000,000 36,000 24,084,000 - - - 24,120,000
Common Stock issued in
exchange for consulting
services at $0.60 per share
in July 2005 - - 640,000 640 383,360 - - - 384,000
Common Stock issued in
exchange for employee services
at $0.48 per share in July 2005 - - 8,000,000 8,000 3,832,000 - - - 3,840,000
See accompanying notes to the financial statements
F-15
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(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 $0.94 per share
in July 2005 - - 121,985 121 168,217 - - - 168,338
Common Stock issued in
exchange for consulting
services at $0.48 per share
in August 2005 - - 250,000 250 119,750 - - - 120,000
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.62 per share
in September 2005 - - 814,158 814 501,858 - - - 502,672
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.70 per share
in September 2005 - - 391,224 391 273,466 - - - 273,857
Common Stock issued in
exchange for consulting
services at $0.94 per share
in September 2005 - - 185,000 185 173,715 - - - 173,900
Common Stock returned in
September 2005, previously
issued for services rendered at
$0.40 per share - - (740,000) (740) (453,232) 56,000 1,000 - (396,972)
Net Loss - - - - - - - (67,109,519) (67,109,519)
------ ----- ----------- -------- ----------- -------- --------- ------------ -----------
Balance as of September
30, 2005 60,000 $ 6 112,230,392 $112,230 $82,320,715 $ 20,000 $ - $(89,924,553) $(7,471,602)
====== ===== =========== ======== =========== ======== ========= ============ ===========
See accompanying notes to the financial statements
F-16
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
September 16, 2002
(Date of
For the Year Ended For the Year Ended Inception)
September 30, September 30, through September
2005 2004 30, 2005
RESTATED RESTATED
---------------------------------------------------------------
Cash Flows from operating activities:
Net loss $ (67,109,519) $ (19,358,259) $ (89,924,553)
Adjustments to reconcile net loss to net cash (used
in) operating activities:
Depreciation and amortization 350,107 3,161 353,268
Organizational expenses -- -- 88,500
Preferred shares issued in exchange for services -- 1,500,000 1,500,000
Warrants issued in exchange for services rendered 7,358,568 2,019,862 9,378,430
Income attributable to re-pricing of warrants (16,700,991) (16,700,991)
Financing costs attributable to issuance of warrants 23,148,214 23,148,214
Amortization of beneficial conversion feature 8,836,000 1,625,000 10,461,000
Debt in exchange for common stock at fair market
price 1,365,000 1,365,000
Common stock issued: in exchange for services
rendered 18,176,641 10,105,382 30,574,373
Common stock issued: in exchange for intellectual
property 14,689,100 -- 14,689,100
Common stock issued in connection with penalties
pursuant to registration 776,529 -- 776,529
Common stock canceled--previously issued for services
rendered (578,270) (285,575) (863,845)
Changes in assets and liabilities:
Increase in Accounts Receivable (12,429) -- (12,429)
Security Deposits 9,297 (23,559) (14,262)
Increase in--Other Assets -- -- (13,890)
Increase (decrease) in: --
Increase in due related parties (111,943) 20,000 40,753
Accounts payable and accrued liabilities 663,748 1,301,710 2,419,457
---------------------------------------------------------------
Net cash (used in) operating activities (9,139,948) (3,092,278) (12,735,346)
Cash flows from investing activities:
Acquisition (disposal) of property and equipment, net 16,757 (29,507) (12,750)
Payments for Patent Filing (4,347) (21,351) (25,698)
---------------------------------------------------------------
Net cash provided by (used in) investing activities 12,410 (74,417) (38,448)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost -- -- 432,000
Proceeds from issuance of convertible debt 9,079,000 124,000 9,204,000
Proceeds from sale of options 102,750 87,000 343,750
Repayment of debt (24,854) (24,854)
See the accompanying notes to the financial statements.
F-17
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Period
September 16, 2002
(Date of
For the Year Ended For the Year Ended Inception)
September 30, September 30, through September
2005 2004 30, 2005
RESTATED RESTATED
----------------------------------------------------------------
Net advances from (to)shareholders -- (9,504) 100,088
Proceeds from loans -- 2,750,000 2,750,000
----------------------------------------------------------------
Net cash provided by financing activities 9,156,896 2,951,496 12,804,984
----------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 29,358 (191,640) 31,190
Cash and cash equivalents, beginning of year 1,832 193,471 --
----------------------------------------------------------------
Cash and cash equivalents, end of year $ 31,190 $ 1,832 $ 31,190
================================================================
Supplemental Information:
Cash paid during the period for interest $ -- $ -- $ --
Cash paid during the year for taxes -- -- --
Non--cash disclosures:
Common stock issued for services $ 18,176,641 $ 10,105,382 $ 30,574,373
Common stock issued in exchange for intellectual
property $ 9,430,900 $ -- $ 9,430,900
Common stock issued in exchange for
previously incurred debt $ 3,109,533 $ -- $ 3,109,533
================================================================
Common stock issued for ESOP shares $ 3,960,000 $ -- $ 3,960,000
================================================================
Common stock penalty shares issued pursuant to
Pending SB--2 registration $ 776,529 $ -- $ 776,529
================================================================
Amortization of beneficial conversion feature $ 8,836,000 $ 1,625,000 $ 10,461,000
Common stock canceled--previously issued for
services rendered $ (478,270) $ (285,575) $ (763,845)
================================================================
Preferred shares issued in exchange for
service at $25 per share in September 2004 $ -- $ 1,500,000 $ 1,500,000
================================================================
Fair value of warrants issued to consultants
for services $ 7,358,568 $ 2,019,862 $ 9,378,430
================================================================
Acquisition:
Common stock retained $ -- $ 1,015
Assets acquired -- (135)
----------------------------------------
Total consideration paid $ -- $ 880
========================================
Organization expenses-- note issued in
exchange of shares retired $ -- $ 88,500
========================================
See the accompanying notes to the financial statements
F-18
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
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 September 30, 2005, the Company has accumulated losses of
$89,924,553.
Estimates
The preparation of the financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
requires that four basic criteria must be met before revenue can be recognized
:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred;
(3) the selling price is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the selling prices of the
products delivered and the collectibility of those amounts. Provisions for
discounts and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
On December 17, 2003, the SEC staff released Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. The staff updated and revised the existing revenue
recognition in Topic 13, Revenue Recognition, to make its interpretive guidance
consistent with current accounting guidance, principally EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." Also, SAB 104 incorporates
portions of the Revenue Recognition in Financial Statements - Frequently Asked
Questions and Answers document that the SEC staff considered relevant and
rescinds the remainder. The company's revenue recognition policies are
consistent with this guidance; therefore, this guidance will not have an
immediate impact on the company's consolidated financial statements.
Cash Equivalents
For the purpose of the accompanying financial statements, all highly liquid
investments with a maturity of three months or less are considered to be cash
equivalents.
F-19
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Income Taxes
The Company has adopted Financial Accounting Standard No. 109 (SFAS 109) which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Temporary differences between
taxable income reported for financial reporting purposes and income tax purposes
are insignificant.
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 September 30,
2005 property and equipment consist of:
September
30, 2005
------------
Furniture $ 12,750
Accumulated depreciation 4,686
------------
Net $ 8,064
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted undercounted cash flows. Should impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset. SFAS No. 144 also requires assets to be disposed of be reported at
the lower of the carrying amount or the fair value less costs to sell.
Comprehensive Income
The Company does not have any items of comprehensive income in any of the
periods presented.
F-20
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," specifying the computation, presentation and disclosure
requirements of earnings per share information. Basic earnings per share has
been calculated based upon the weighted average number of common shares
outstanding. Stock options and warrants have been excluded as common stock
equivalents in the diluted earnings per share because they are either
antidilutive, or their effect is not material. Fully diluted shares outstanding
were 112,230,392 and 23,981,054 for the years ended September 30, 2005 and 2004,
respectively.
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 3employee 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, 2005 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 G):
F-21
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
For the Period
September, 16
2002 (Date of
For The Year For The Year Inception
ended Sept 30 ended Sept 30 through
2005 2004 Sept 30,2005
---------------- ---------------- ----------------
Net loss - as reported $ (67,109,519) $ (19,358,259) $ (89,924,553)
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)
---------------- ---------------- ----------------
Net loss - Pro Forma $ (68,515,869) $ (19,358,259) $ (91,330,908)
================ ================ ================
Net loss attributable to common
stockholders - Pro Forma $ (68,515,869) $ (19,258,259) $ (91,330,908)
================ ================ ================
Basic (and assuming dilution) loss
per share - as reported $ (1.05) $ (0.93) $ (2.53)
================ ================ ================
Basic (and assuming dilution) loss
per share - Pro Forma $ (1.08) $ (0.93) $ (2.57)
================ ================ ================
Liquidity
As shown in the accompanying financial statements, the Company incurred a net
loss of $89,924,553 during the period September 16, 2002 (date of inception)
through September 30, 2005. The Company's current liabilities exceeded its
current assets by $2,936,929 as of September 30, 2005.
Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company
to concentrations of credit risk, consist primarily of cash, cash equivalents
and trade receivables. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such investments
may be in excess of the FDIC insurance limit.
F-22
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Research and Development
The Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs.
Under SFAS 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and developments costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. The Company incurred
research and development expenses of $638,873, $238,535 and $877,408 for the
years ended September 30, 2005, September 30, 2004 and from September 16, 2002
(date of inception) through September 30, 2005, respectively. On July 12, 2005,
the Company exchanged 36 million shares of stock with a value of $24,120,000 for
intellectual property acquired from Biowell Technology, Inc.(see Note B). The
Company capitalized $9,430,900 as an intangible asset and expensed $14,689,100
to acquisition costs in the year ended September 30, 2005
Reclassifications
Certain reclassifications have been made in prior year's financial statements to
conform to classifications used in the current year.
Intangible Assets
The Company amortized its intangible assets using the straight-line method over
their estimated period of benefit. The estimated useful for patents is five
years while intellectual property uses a seven year useful life. We periodically
evaluate the recoverability of intangible assets and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that an impairment exists. All of our intangible assets are subject to
amortization.
New Accounting Pronouncements
SFAS 123R. On March 31, 2004 the Financial Accounting Standards Board ("FASB")
issued its exposure draft, "Share-Based Payments", which is a proposed amendment
to SFAS 123. The exposure draft would require all share-based payments to
employees, including grants of employee stock options and purchases under
employee stock purchase plans, to be recognized in the statement of operations
based on their fair value. The FASB issued the final standard in December 2004
that is effective for small business issuers for annual periods beginning after
December 15, 2005. The Company has not yet assessed the impact of adopting this
new standard.
F-23
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
SFAS 151. In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This
Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company does not anticipate that
the implementation of this standard will have a material impact on its financial
position, results of operations or cash flows.
SFAS 152. In December 2004, the FASB issued SFAS No.152, "Accounting for Real
Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67"
("SFAS 152) The amendments made by Statement 152 This Statement amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to real
estate time-sharing transactions. The accounting for those operations and costs
is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. with
earlier application encouraged. The Company does not anticipate that the
implementation of this standard will have a material impact on its financial
position, results of operations or cash flows.
SFAS 153. On December 16, 2004, FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions (" SFAS 153"). This statement
amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. Under SFAS 153, if
a nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
NOTE B - ACQUISITION OF INTANGIBLE ASSETS
The Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets,
whereby the Company periodically test its intangible assets for impairment. On
an annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.
Biowell Technology, Inc.
On July 12, 2005, the Company acquired certain intellectual properties from
Biowell Technology, Inc. ("Biowell") through an Asset Purchase Agreement
("Agreement") in exchange for 36 million shares of the Company's restricted
common stock having an aggregate fair value at the date of issuance of
$24,120,000. The intangible assets acquired consist of proprietary DNA
anti-counterfeit trade secrets created by Biowell that are intended to protect
intellectual property from counterfeiting, fraud, piracy, product diversion and
unauthorized intrusion.
F-24
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE B - ACQUISITION OF INTANGIBLE ASSETS (continued)
The purchase price has been allocated as follows:
Amortizable intangible assets acquired is comprised of :
Developed core technologies $ 2,260,900
Developed product technologies 7,170,000
---------
Total amortizable intangible assets $ 9,430,900
Transaction costs 14,869,100
----------
Total purchase price $24,120,000
===========
In Process Research & Development
The Company concluded as of the date of acquisition, the acquired intangible
assets, consisting of developed core and product technologies had reached full
development and that it was not the intention of the Company's management to
utilize the asset in specific research and development activities as defined in
SFAS No. 2 Accounting for Research & Development Costs, As a result, the Company
determined there was no in-process research and development ("IPR& D") projects
in place related to the technology acquired , nor any future research and
development activities planned. Accordingly, there is no charge to operations
during the year ended September 30, 2005 for IPR&D in connection with the
acquisition of the assets.
Transaction costs
The amount of the purchase price that could not be allocated to acquired
identifiable intangible assets or IPR & D was $14,689,100 and was charged to
operations as a cost of the transaction during the year ended September 30,
2005.
The identifiable intangible assets acquired and their carrying value at
September 30, 2005 are:
Weighted
Gross Average
Carrying Accumulated Residual Amortization
Amount Amortization Net Value Period
(Years)
Amortizable
Intangible
Assets:
Trade secrets and
developed
technologies $ 9,430,900 $ 336,818 $ 9,094,082 - 7
Patents 34,237 11,764 22,493 - 5
----------- --------- ----------- -------- -------
Total
Amortized
Identifiable
Intangible Assets $9,465,137 $348,582 $9,116,575 - 6.99
F-25
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE B - ACQUISITION OF INTANGIBLE ASSETS
Total amortization expense charged to operations for the year ended September
30, 2005 and 2004 were $ 346,825 and $1,756 respectively.
Estimated amortization expense as of September 30, 2005 is as follows:
2006 $ 1,357,279
2007 1,357,279
2008 1,349,748
2009 1,349,271
2010 and after 3,704,998
-----------
Total $ 9,116,575
===========
NOTE C - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30, 2005 are as follows:
Accounts payable $ 345,849
Accrued consulting fees 1,202,795
Accrued taxes 260,523
Other accrued expenses (see Note E) 760,952
----------
Total $2,570,119
==========
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, along with 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.
$ 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.
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 in February, 2005.
F-26
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
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 February, 2005, the debt discount
attributed to the beneficial conversion feature of $1,465,000 was charged to
interest expense in its entirety during the year ended September 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 $3,845,039 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
148.66%, (3) risk-free interest rate of 3.21%, and (4) expected life of 3 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:
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 warrants as derivative
liabilities and mark then 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.
F-27
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
$ 7,371,000 Convertible Notes
In January and February, 2005, the Company sold a 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 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.
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 year ended September 30,
2005.
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
$19,303,175 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 September 30, 2005 using the Black-Scholes option pricing model
(see Note G). Assumptions regarding the life, the expected dividend yield and
volatility were left unchanged but the Company did apply a risk free interest
rate of 4.18%, a volatility of 155.91% and a deemed fair value of common stock
of $0.57, which was the closing price of the Company's common stock on September
30, 2005. The difference of $16,700,991 between the fair value of the warrants
as of September 30, 2005 and the previous valuation as of February , 2005 has
been recorded as a gain on revaluation of warrant liability, and included in the
accompanying consolidated financial statements.
F-28
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE E - RELATED PARTY TRANSACTIONS
At September 30, 2005, notes payable are as follows:
Note payable, unsecured, related party, payable from August 1, 2005, $410,429
right to convert to restricted stock in lieu of cash, rate of interest
2%, 160,000 shares prior to October 31, 2005 or 180,000 shares after
that date. Since September 2005, the Company has made no payments and
---------
is now in default.
Less: current portion 410,429
---------
410,429
---------
Note payable - long-term $ --
On October 18, 2005, Maureen Huppe, a Company shareholder obtained a judgment in
Los Angeles County, California against Lawrence Lee, director of the Company,
for short swing profits as a result of trading Company shares. Per the judgment,
Mr. Lee is obligated to reimburse the Company $245,911 in damages plus legal
fees. In addition, the Company owes Mr. Lee $35,162 in outstanding accrued
liabilities. In offsetting the outstanding liability against the pending
reimbursement, the Company is seeking approximately $211,000 from Mr. Lee. The
Company will recognize the reimbursement upon receipt of the funds from Mr. Lee.
In February, 2005, 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 current and former officers and shareholders 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
September 30, 2005 was $52,662 and is included in accounts payable and accrued
expenses (see Note C).
NOTE F - 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.
The preferred stock is convertible at the option of the holder into common stock
at the rate of twenty-five (25) shares of common for every one share of
preferred at the option of the holder .
F-29
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE F - CAPITAL STOCK (continued)
Preferred and Common Stock Transactions During the Year Ended September 30, 2003
During the period September 16, 2002 through September 30, 2002, 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 2002, 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 J). 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. 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.
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.
F-30
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE F - CAPITAL STOCK (continued)
Preferred and Common Stock Transactions During the Year Ended September 30, 2004
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.
Preferred and Common Stock Transactions During the Year Ended September 30, 2005
During the fiscal year ended September 30, 2005, the Company issued 11,040,647
shares of common stock, net of cancellation of 2,329,600 shares, in exchange for
consulting and employee services. The Company valued the shares issued at
$13,008,371, net of cancellation of $1,328,269, 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, 2005, the Company issued 1,500,000
shares of common stock for shares previously subscribed at approximately $.54
per share.
During the fiscal year ended September 30, 2005, the Company issued 267,500
shares of common stock for warrants and options exercised at approximately $0.39
per share
In October 2004, the Company issued 500,000 shares of common stock in exchange
for debt at $0.50 per share.
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.
F-31
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE F - CAPITAL STOCK (continued)
In February 2005, the Company in exchange for a related party note in the
outstanding principal amount of $600,000 and as settlement for certain claims
related thereto issued 1,500,000 shares of common stock using a price of $1.31
per share. (See note E)
In July 2005, the Company issued 36 million shares in exchange for intellectual
property at approximately $0.67 per share for a total of $24,120,000. The value
of the acquired intangible assets was established at $9,430,900, with the
balance of the purchase price, or $14,689,100, charged to operations as a cost
of the transaction. (See Note B)
During the year ended September 30, 2005, the Company issued 8,550,000 shares of
its common stock without restriction to employees in exchange for services
rendered. The Company valued the shares issued at market value and charged
operations in the period the shares were issued. The Company is investigating
the circumstances surrounding the issuance of the shares and the possible
subsequent resale of certain of the shares on the open market and the
possibility of violations of securities laws (see Note J).
Until the Company successfully completes its pending registration statement on
SEC Form SB-2, the Company is subject to liquidated damages (see Note D). In
connection with the $1,465,000 and $7,371,000 million convertible debt
financing, the Company was obligated to deliver registered shares underlying the
convertible notes and warrants by July 2005. Since the registration was not
effective by July 2005, the Company has been accruing the charging to operations
the stipulated liquidated dames in shares of Company's common stock accruing at
the rate of 3.5% per month on the face value of the previously issued
convertible notes. During the year ended September 30, 2005, the Company has
paid and charged to operations penalties of $776,529 in the form of 605,382
unregistered shares of its common stock to the former note holders.
NOTE G - STOCK OPTIONS AND WARRANTS
Warrants
The Company issued options and warrants during the years ended September 30,
2005 and 2004 for consulting and employee services, fees in connection with
obtaining financing and various other services. The following table summarizes
the changes in options and warrants outstanding and the related prices for the
shares of the Company's common stock issued to shareholders 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.
F-32
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
Warrants
Warrants Outstanding Exercisable
Weighted Average Weighed Weighted
Number Remaining Contractual Average Number Average
Exercise Exercise Exercise
Prices Outstanding Life (Years) Price Exercisable Price
------------- -------------- ------------------------- ----------- -------------- -------------
$0.10 105,464 3.79 $ 0.10 105,464 $ 0.10
$0.20 5,000 3.13 $ 0.20 5,000 $ 0.20
$0.50 50,000 4.02 $ 0.50 50,000 $ 0.50
$0.55 9,000,000 2.72 $ 0.55 9,000,000 $ 0.55
$0.60 9,132,000 3.63 $ 0.60 9,132,000 $ 0.60
$0.70 750,000 1.84 $ 0.70 750,000 $ 0.70
$0.75 17,727,000 4.00 $ 0.75 17,727,000 $ 0.75
$1.00 100,000 1.04 $ 1.00 100,000 $ 1.00
---------- ----------
36,869,464 36,869,464
Transactions involving warrants are summarized as follows:
Weighted Average Price
Number of Shares Per Share
Balance, September 30, 2003 383,500 $ 1.38
------------------ -----------------
Granted 4,574,753 0.58
Exercised (88,000) 1.00
Canceled or expired -- --
------------------ -----------------
Balance, September 30, 2004 4,870,253 $ 0.63
------------------ -----------------
Granted 32,873,000 0.67
Exercised (142,500) 0.10
Canceled or expired (731,289) 0.60
------------------ -----------------
Balance, September 30, 2005 36,869,464 $ 0.67
------------------ -----------------
In July 2005, the Company consummated an agreement with Trilogy Capital
Partners, Inc. and Joff Pollon ("Trilogy" and "Pollon") 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, the Company agreed to pay Trilogy a monthly fee of $12,500. The
Company also issued to Trilogy and Pollon warrants purchasing an aggregate of
9,000,000 shares of common stock at $0.55 per share, exercisable for a period of
three years from issuance. 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 of $4,117,500 and charged to operations as consulting fees.
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 155.3%, (3)
risk-free interest rate of 3.82%, and (4) expected life of 3 years.
F-33
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company revalued the warrants as of September 30, 2005 using
the Black-Scholes option pricing model. The difference between the fair value of
the warrants as of September 30, 2005 and the previous valuation as of July,
2005 has been recorded as a gain on revaluation of warrant liability, and
included in the accompanying consolidated financial statements.
During the quarter ended December 31, 2004, the Company granted 6,063,500
warrants to non employees in exchange for services and financing expenses. The
estimated fair value of the compensatory warrants granted to the 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 $3,169,052 for the quarter ended December 31, 2004.
During the quarter ended March 31, 2005, the Company granted 55,000 warrants to
non employees in exchange for services. The estimated fair value of the
compensatory warrants granted to the non employees in exchange for services was
determined using the Black-Scholes pricing model with the following assumptions:
contractual term of 5 years, a risk free interest rate of 3.67%, a dividend
yield of 0% and volatility of 152.59%. The amount of the expense charged to
operations for compensatory warrants granted in exchange for services was
$72,017 for the quarter ended March 31, 2005
During the year ended September 30, 2004, the Company granted 2,841,000 warrants
to non-employees and consultants in exchange for the services. The estimated
fair value of the compensatory warrants granted to the non-employees in exchange
for services was determined using the Black-Scholes pricing model with the
following assumptions: contractural term of 2-5 years, a risk free rate of 3.0%
to 3.4%, a dividend yield of 0% and volatility of 65.7% to 74.78%. The amount of
expenses charged to operations in exchange for services was $2,019,862 for the
year ended September 30, 2004.
The aggregate amounts of the expense charged to operations for compensatory
warrants granted in exchange for services and financing expenses was $7,358,569
and $2,019,862, respectively, for the years ended September 30, 2005 and 2004.
Employee Stock 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 employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
$ 0.68 3,660,000 4.75 $ 0.68 2,745,000 $ 0.68
F-34
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
Transactions involving stock options issued to employees are summarized as
follows:
Number of Weighted Average Exercise
Shares Price Per Share
Outstanding at October 1, 2004 - $ -
Granted 3,660,000 0.68
Exercised - -
Cancelled or expired - -
---------- --------
Outstanding at September 30, 2005 3,660,000 $ 0.68
The weighted-average fair value of stock options granted to employees during the
year ended September 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 3.5% N/A
date
Expected stock price volatility 85% N/A
Expected dividend payout -- --
Expected option life (in years) 5 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 $68,515,869 and $(1.08), respectively,
for the year ended September 30, 2005. There were no options issued in 2004.
During the quarter 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.
NOTE H - INCOME TAXES
The Company has adopted Financial Accounting Standard No. 109 which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statement or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant.
At September 30, 2005, the Company has available for federal income tax purposes
a net operating loss carryforward of approximately $72,000,000, expiring in the
year 2023, that may be used to offset future taxable income. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, since in the opinion of management based upon the earnings history of
the Company; it is more likely than not that the benefits will not be realized.
Due to significant changes in the Company's ownership, the future use of its
existing net operating losses may be limited. Components of deferred tax assets
as of September 30, 2005 are as follows:
F-35
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE H - INCOME TAXES (continued)
Non current:
Net operating loss carryforward $24,400,000
------------
Valuation allowance (24,400,000)
------------
Net deferred tax asset $ --
------------
NOTE I-LOSS PER SHARE
The following table presents the computation of basic and diluted losses per
share:
RESTATED
For the Year Ended For the Year Ended
September 30, 2005 September 30, 2004
-------------------- ------------------
Loss available for common shareholders $ ($67,109,519) $ (19,358,259)
-------------------- ------------------
Basic and fully diluted loss per share $ ($1.05) $ (0.93)
-------------------- ------------------
Weighted average common shares outstanding 63,917,009 20,819,700
Net loss per share is based upon the weighted average of shares of common stock
outstanding
NOTE J- 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 September 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, and 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. In November 2005, the agreement was terminated.
F-36
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE J- COMMITMENTS AND CONTINGENCIES (continued)
Litigation
In January, 2005, Stern & Co. commenced this action against the Company in the
United States District Court for the Southern District of New York. 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. 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. 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.
In November, 2004, Oceanic Consulting, S.A. commenced this action against the
Company 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. 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.
In April, 2005, Crystal Research Associates, LLC obtained a default judgment
against the Company for $13,000 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.
The Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity.
Franchising and Distribution Agreements
In connection with the acquisition of certain intellectual properties from
Biowell (see Note B) , the Company terminated the October 2002 license agreement
with Biowell, replacing it with a new license agreement granting Biowell 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. Under this
agreement, the Company recognized $3,129 in revenues in this year ended
September 30, 2005.
The Company has entered into a Distribution and Franchising Agreement
("Franchise Agreement") in July 2003. Under the terms of the Franchise
Agreement, the franchisee is obligated to pay the Company $3,000,000 payable
$25,000 upon execution of the Franchise Agreement and the balance of $2,975,000
payable over five (5) years with interest accruing at 8% per annum. Payments
under the Franchise Agreement are subject to franchisee's net profits, as
defined, under the Franchise Agreement. During the year ended September 30, 2005
and 2004 the Company has received the initial $0 and $25,000, as installment and
has recognized the receipt as other income in the accompanying financial
statements.
F-37
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE J- COMMITMENTS AND CONTINGENCIES (continued)
Operating Lease Commitments
The Company leases office space under operating lease in Los Angeles, California
for its corporate use from an entity controlled by significant former
shareholder, expiring in November 2006. In November 2005, the Company vacated
the Los Angeles facility to relocate to the new Stony Brook New York address
(see Note K). Total lease rental expenses for the years ended on September 30,
2005 and 2004, was $138,661 and $120,804, respectively.
Commitments for minimum rentals under non-cancelable lease at September 30, 2005
are as follows:
Year ended September 30, 2006 $ 51,562
2007 4,687
-----------
$ 56,249
Employment and Consulting Agreements
The Company has employment agreements with some of the Company's officers and
certain employees. These employment agreements provide for salaries and
benefits, including stock options. In June of 2005, an Addendum was made to
several employment agreements providing defined commitments should the Company
terminate the employee with or without cause. It is the Company's position that
the form of Addendum was not approved by the Board of Directors, and is
therefore null and void.
The Company has consulting agreements with two outside contractors to provide
marketing and financial advisory services. The Agreements are generally for a
term of 12 months from inception and renewable automatically from year to year
unless either the Company or consultant terminates such engagement by written
notice.
As part of the Biowell acquisition (see Note B), 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.
Matters Voluntarily Reported to the SEC and Securities Act Violations
We previously disclosed that we were investigating the circumstances surrounding
certain issuances of 8,550,000 shares to employees and consultants in July 2005
(see Note F), and have engaged our new outside counsel to conduct this
investigation. We have voluntarily reported our current findings from the
investigation to the SEC, and we have agreed to provide the SEC with further
information arising from the investigation. We believe that the issuance of
8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of the Board of Directors. These former officers received a total of
3,000,000 of these shares. In addition, it appears that the 8,000,000 shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance with the Securities Act of 1933, as amended. Our investigation is
continuing. The members of our management who effectuated the stock issuances
that are being examined in the investigation no longer work for us. We believe
that we may incur significant costs and expenses in continuing this
investigation. In the event that any of the exemptions from registration with
respect to the issuance of the Company's common stock under federal and
applicable state securities laws were not available, the Company may be subject
to claims by federal and state regulators
F-38
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE J- COMMITMENTS AND CONTINGENCIES (continued)
for any such violations. In addition, if any purchaser of the Company's common
stock were to prevail in a suit resulting from a violation of federal or
applicable state securities laws, the Company could be liable to return the
amount paid for such securities with interest thereon, less the amount of any
income received thereon, upon tender of such securities, or for damages if the
purchaser no longer owns the securities. As of the date of these financial
statements, the Company is not aware of any alleged specific violation or the
likelihood of any claim. There can be no assurance that litigation asserting
such claims will not be initiated, or that the Company would prevail in any such
litigation.
The Company is unable to predict the extent of its ultimate liability with
respect to any and all future securities matters. The costs and other effects of
any future litigation, government investigations, legal and administrative cases
and proceedings, settlements, judgments and investigations, claims and changes
in this matter could have a material adverse effect on the Company's financial
condition and operating results
NOTE K- SUBSEQUENT EVENTS
In November 2005, the Company closed its Los Angeles facility and relocated to
Stony Brook, New York. As part of the relocation, the Company terminated many of
its Los Angeles based employees, sold excess office furnishings and terminated
its facility lease. In anticipation of future expenses related to the
relocation, the Company established a reserve , which was charged to operations
during the year ended September 30, 2005, for severed employees, lease
termination and new office relocation expenses in the amount of $451,000 (see
Note J).
In October 2005, the Company received a Notice of Termination from the Idaho
National Laboratory. The Notice gives APDN 90-day advance notice of termination.
The effective Termination date is January 23, 2006. We are exploring a
settlement and mutual release with the Idaho National Laboratory.
NOTE L - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements during the period September 16, 2002 through September 30,
2005, the Company incurred a loss of $89,924,553. These factors among others may
indicate that the Company will be unable to continue as a going concern for a
reasonable period of time.
The Company's existence is dependent upon management's ability to develop
profitable operations. Management is devoting substantially all of its efforts
to developing DNA embedded biotechnology security solutions in the United States
and there can be no assurance that the Company's efforts will be successful.
However, the planned principal operations have not commenced and no assurance
can be given that management's actions will result in profitable operations or
the resolution of its liquidity problems. The accompanying statements do not
include any adjustments that might result should the Company be unable to
continue as a going concern.
In order to improve the Company's liquidity, the Company's management is
actively pursing additional equity financing through discussions with investment
bankers and private investors. There can be no assurance the Company will be
successful in its effort to secure additional equity financing
F-39
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE M - RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its financial statements for the year ended September
30, 2005 and the period September 16, 2002 (date of inception) through September
30, 2005 to correct the following errors in the financial statements previously
filed:
o The Company did not record as a current period expense, warrants
issued to consultants and non-employees having a fair value of
$7,358,568 (see Note G)
o The Company erroneously recorded the value of shares issued to a
former Director in exchange for previously incurred debt of $1,365,000
(see Note E)
o The Company did record the fair value of warrants issued to note
holders and consultants having registration rights aggregating
$23,148,214 as a charge of operations and a liability in accordance
with EITF 00-21 (see Note D)
o The Company did not record the gain of $16,700,991 on revaluation fo
the warrant liability as of September 30, 2005 (see Note D)
The net effect of the correction of these errors was to:
o Increase the Company's reported net loss for the year ended September
30, 2005 by $14,499,139 from $52,610,380 to $67,109,529.
o Increase the Company's current liabilities as of September 30, 2005 by
$384,651 from $2,595,897 to $2,980,548
o Increase the Company's other liabilities, representing warranty
liabilities, as of September 30, 2005 by $13,673,574 from $0 to $13,
673,574
Following are reconciliations of the Company's restatement of the Consolidated
Balance Sheet as of September 30, 2005:
As of September 30, 2005
---------------------------------
(As Restated) (As Reported)
------------- -------------
ASSETS $ 9,182,520 $ 9,182,520
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Total Current Liabilities 2,980,548 2,595,897
Warrant Liability 13,673,574 -
Deficiency in Stockholders' Equity:
Preferred Stock 6 6
Common Stock 112,230 112,230
Common Stock Subscription 20,000 20,000
Additional Paid-In-Capital 82,320,715 81,879,801
Deficit Accumulated During Development Stage (89,924,553) (75,425,414)
------------- -------------
Total Stockholders' Equity (deficit) (7,471,602) 6,586,623
------------- -------------
Total Liabilities and Deficiency in Stockholders'
Equity $ 9,182,520 $ 9,182,250
F-40
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE M - RESTATEMENT OF FINANCIAL STATEMENTS (continued)
Following are reconciliations of the Company's restatement of the Consolidated
Statement of Losses for the year ended September 30, 2005 and the period
September 16, 2002 (date of inception) through September 30, 2005
For the Period September 16, 2002 (Date of
For the Year Ended September 30, 2005 Inception) Through September 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
---------------- --------------- -------------- -----------------
Operating Expenses:
Selling general and
administrative $ 50,714,017 $ 42,662,152 $ 71,535,604 $ 63,483,689
Research and development 638,873 638,873 877,408 877,408
Depreciation and
amortization 356,266 356,266 359,427 359,427
---------------- --------------- -------------- -----------------
Total Operating Expenses 51,709,156 43,657,291 72,772,439 64,720,524
---------------- --------------- -------------- -----------------
Operating Loss (51,709,156) (43,657,291) (72,772,439) (64,720,524)
Net gain/(loss) on
revaluation of warrant
liability 16,700,990 - 16,700,990 -
Other income (expense) 4,957 4,957 31,342 31,342
Interest income (expense) (32,106,310) (8,958,046) (33,884,446) (10,736,232)
---------------- --------------- -------------- -----------------
Net Income (Loss) $ (67,109,519) $ (52,610,380) $ (89,924,553) $ (75,425,414)
================ =============== ============== =================
Gain (Loss) per common
share $ (1.05) $ (0.82) $ (2.53) $ (2.12)
================ =============== ============== =================
(basic and assuming
dilution) Weighted
average shares
outstanding 63,917,009 63,905,259 35,590,559 35,570,871
================ =============== ============== =================
The result of the Cash Flow restatement is:
o increase the net loss by $14,499,139
o adjust the net loss to cash used in operations for the fair value of
warrants issued in connection with financing ($23,148,214); fair value
of warrants issued for services ($7,358,568); and income attributable
to warrant re-pricing ($16,700,991).
F-41
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE M - RESTATEMENT OF FINANCIAL STATEMENTS (continued)
Following are reconciliations of the Company's restatement of the Consolidated
Statement of Cash Flows for the year ended September 30, 2005 and the period
September 16, 2002 (date of inception) through September 30, 2005.
For the Period September 16, 2002
(Date of Inception) Through September
For the Year Ended September 30, 2005 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
--------------- --------------- --------------- ---------------
Cash Flows from operating
activities:
Net loss $ (67,109,519) $ (52,610,380) $ (89,924,553) $ (75,425,414)
Summary of adjustments to
reconcile net loss to net cash
(used in) operating activities:
Change in fair value of
warrant liabilities, net
of warrant re-pricing 6,447,223 - 6,447,223 -
Fair value of warrants issued
in exchange for services 7,358,568 - 9,378,530 -
Other operating activities -
see Cash Flow statement for
full details 44,163,780 43,494,335 61,363,454 62,684,464
Net cash (used in) operating
activities (9,139,948) (9,116,045) (12,735,346) (12,740,950)
Cash flows from investing
activities:
- see Cash Flow statement for
full details
Net cash (used in) investing
activities 12,410 (4,347) (38,448) (25,698)
Cash flows from financing
activities:
- see Cash Flow statement for
full details
Net cash provided by financing
activities 9,156,896 9,149,750 12,804,984 12,797,838
Increase (decrease) in cash
and cash
equivalents 29,358 29,358 31,190 31,190
Cash and cash equivalents,
beginning of year 1,832 1,832 - -
Cash and cash equivalents, end
of year $ 31,190 31,190 $ 31,190 31,190
F-42
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements between the Company and its accountants as to
matters which require disclosure.
Item 8A -- Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of September 30, 2005, the
Company's management carried out an evaluation, under the supervision of the
Company's Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of the Company's 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 upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were not effective, as of the date of their
evaluation, for the purposes of recording, processing, summarizing and timely
reporting material information required to be disclosed in reports filed by the
Company under the Securities Exchange Act of 1934. Please see the subsection
"Significant Deficiencies In Disclosure Controls And Procedures Or Internal
Controls" below.
Changes in internal controls. Except as described below, 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.
SIGNIFICANT DEFICIENCIES IN DISCLOSURE CONTROLS AND PROCEDURES OR INTERNAL
CONTROLS
On July 11, 2005, the Company 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. Upon this determination,
management and the board of directors were alerted to the facts and
circumstances regarding the errors in valuation. Authorized officers of the
Company discussed this matter with the Company's independent public accounting
firm who agreed that the Company's quarterly financials could not be relied upon
and needed to be restated. On August 3, 2005, the Company filed an amended
10-QSB for the quarter ended March 31, 2005 with the SEC which included the
amended financials.
The Company is looking to take corrective action to resolve these weaknesses and
deficiencies. The Company has recently reduced personnel in order to control
costs and expenses and has recently moved from California to New York, which
resulted in the resignation of the Company's Chief Financial Officer. The
Company is currently searching for a qualified, full-time Chief Financial
Officer as well as a full-time bookkeeper. The Company believes that these
actions will correct the material deficiencies and significant weaknesses in its
controls and procedures and it anticipates that the appropriate personnel will
be hired and the material deficiencies and weaknesses will be fully corrected
before the end of the March 31, 2006 quarter.
Item 8B -- Other Information
None.
33
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Directors and Executive Officers
Names: Ages Titles: Board of Directors
Jun-Jei Sheu 39 Chairman Director
James Hayward 52 Chief Executive Officer
Peter Brocklesby 52 President Director
Lawrence Lee 44 Director
Ming-Hwa Benjamin Liang 42 Secretary
Directors are elected to serve until the next annual meeting of stockholders and
until their successors are elected and qualified. Currently there are three
seats on our board of directors.
Currently, our Directors are not compensated for their services. Officers are
elected by the Board of Directors and serve until their successors are appointed
by the Board of Directors. Biographical resumes of each officer and director are
set forth below.
Chairman of the Board -- Jun-Jei Sheu
On July 15, 2005, Dr. Jun-Jei Sheu was appointed as a director and elected
Chairman by the board of directors. Since November 2000, Dr. Sheu has been the
Chairman of Biowell Technology Inc. Between November 2000 and August 2005, Dr.
Sheu was the CEO of Biowell Technology Inc. Dr. Sheu received his Bachelors
degree in Biology from Fu-Jen Catholic University in 1988, his Masters degree in
Biology from Fu-Jen Catholic University in 1990, his Ph.D in Life Sciences from
Intermural of Academia Sinica & National Defense Medical Center in 1996 and his
MBA from South Australia University in 2000. Dr. Sheu is also a director of
Biowell Technology (S) Pte Ltd., a Singapore company, Biotechcard International
Pte (S) Ltd. a Singapore company, Yan Zhan Life Technology & Marketing Inc., a
Taiwanese company and Biowell Technology (Suzhou) Co. Ltd., a Chinese company,
all of which are biotechnology companies.
Chief Executive Officer -- James Hayward
On October 5, 2005, the board of directors appointed Dr. James Hayward as our
Acting Chief Executive Officer. Since June 2004, Dr. Hayward has been the
Chairman of Evotope Biosciences, Inc., a drug development company based in Stony
Brook, New York. Since 2001, Dr. Hayward has been a director of Q-RNA, Inc., a
biotech company based in New York, New York. Since 2000, Dr. Hayward has been a
General Partner of Double D Venture Fund, a venture capital firm based in New
York, New York. Between 1990 and July 2004, Dr. Hayward was the Chairman,
President and CEO of The Collaborative Group, Ltd., a biotech and consumer
product company based in Stony Brook, New York. Dr. Hayward received his
Bachelors degree in Biology and Chemistry from the State University of New York
at Oneonta in 1976 and his Ph.D. in Molecular Biology from the State University
of New York at Stony Brook in 1983.
President and Director -- Peter Brocklesby
Mr. Brocklesby became our President and a Director in May 2004. Between 2000 and
January 2003, Mr. Brocklesby was the Vice President for Business Development at
Boss Industrial Design Company, a communications and electronic product design
company based in Newport Beach, California. Between January 2003 and May 2004,
Mr. Brocklesby served as a Project Development Consultant to Professor Alfred
Wong, A.W. Technologies at the University of California at Los Angeles. In March
2003, Mr. Brocklesby co-founded Cool Grip, Inc., a golf accessory company, based
in Newport Beach, California, and served as the Vice President of Business
Development through May 2004.
34
Mr. Brocklesby graduated from Leeds University, UK with a BA Honors degree in
History in 1970. He attended the Royal Air Force College, UK and was
commissioned in the RAF. In 1977, after 7 years service in the UK Armed Forces,
Mr. Brocklesby left to become Director of Logistics for Air Asia (Air America),
a US defense contractor providing support for the US military and for other
governments in Asia.
Following acquisition of Air Asia by E-Systems, Inc., a multi-billion dollar
defense contractor, and now part of Raytheon, Mr. Brocklesby was appointed VP
Marketing. E-Systems specialized in the development and integration of advanced
airborne and land-based military and government communications systems,
electronic warfare equipment, electronic surveillance and airborne intelligence
gathering systems.
Director -- Larry Lee
Larry Lee has served as a Director since September 2002. Between 1994 and 2001,
Mr. Lee was a senior scientist and manager for GM Hughes Electronics, a Los
Angeles, California based electronics, space and defense company. Between
January 2000 and September 2002, Mr. Lee was a manager and senior staff
scientist for Boeing, a space and defense company, in their Los Angeles,
California location. Between September 2002 and March 2004, Mr. Lee served as
our President and Chief Executive Officer. Since August 2004, Mr. Lee has been a
senior staff scientist with Boeing.
Mr. Lee currently serves on the board of advisors and/or partners for several
U.S. and international companies including: Dery Resources Inc.; IMC, and VO
Management, LLC.
Mr. Lee has a Master of Science in Computer/Electronic Engineering from
California State University and a Bachelor of Science in Mechanical/Biomedical
Engineering from Virginia Tech. He has also received advanced training in
Business Executive Management and Finance from University of California, Los
Angeles and the Hughes Education Center.
SECRETARY AND STRATEGIC TECHNOLOGY DEVELOPMENT OFFICER -- MING-HWA BENJAMIN
LIANG
Ming-Hwa Bejamin Liang has been our Secretary and Strategic Technology
Development Officer since October 2005. Between May 1999 and September 2005,
Mr. Liang has been the director of research and development for Biowell
Technology Inc. Mr. Liang received his bachelors degree in Bio-Agriculture
from Colorado State University in 1989, his Masters in Horticulture from the
University of Missouri at Columbia in 1991, his Ph.D. in Plant Science from the
University of Missouri at Columbia in 1991 and his LL. M. in Intellectual
Property Law from Shih Hsin University, Taiwan in 2004.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Since we are governed under Section 15(d) of the Exchange Act, we are not
required to file reports of executive officers and directors and persons who own
more than 10% of a registered class of the Company's equity securities pursuant
to Section 16(a) of the Exchange Act.
35
ITEM 10. EXECUTIVE COMPENSATION.
We may elect to award a cash bonus to key employees, directors, officers and
consultants based on meeting individual and corporate planned objectives. We
currently have no written employment agreements with any of our officers,
however, the following shows the annual salaries, bonuses and stock options for
our executive officers:
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ----------- -----------
Other Securities
Name and Fiscal Annual Annual Annual Restricted Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Stock Awards Options/SARs Payouts Compensation
($) ($) ($) ($) (#) ($) ($)
Peter Brocklesby, 2005 162,750 0 83,719 480,000 0 0 0
President 2004 0 0 0 31,903 0 0 0
2003 0 0 0 0 0 0 0
Rob Hutchison, 2005 0 0 138,453 0 0 0 0
CEO 2004 159,400 0 0 39,000 0 0 0
2003 0 0 0 0 0 0 0
Lawrence C. Lee, 2005 0 0 202,000 0 0 0 0
CEO 2004 150,000 0 0 2,017,500 0 0 0
2003 300,000 0 0 0 0 0 0
John Barnett, 2005 152,000 100,000 0 599,000 0 0 0
Vice President of 2004 87,908 0 6,478 18,899 0 0 0
Sales 2003 0 0 0 328,180 0 0 0
Jaime Cardona, 2005 101,750 100,000 0 675,900 0 0 0
Employee 2004 78,608 0 7,258 139,849 0 0 0
2003 0 0 0 31,250 0 0 0
Adrian Butash, 2005 131,250 0 108,808 480,000 0 0 0
Executive Vice 2004 0 0 21,200 0 0 0 0
President of 2003 0 0 0 0 0 0 0
Marketing
Karin Klemm, 2005 0 0 187,884 480,000 0 0 0
COO & CFO 2004 0 0 112,500 0 0 0 0
2003 0 0 0 0 0 0 0
Paul Reep, Chief 2005 165,750 0 4,000 480,000 0 0 0
Technology Officer 2004 71,753 0 17,736 95,011 0 0 0
2003 0 0 0 39,900 0 0 0
Michael Hill, 2005 0 0 230,000 0 0 0 0
Director 2004 0 0 0 112,200 0 0 0
2003 0 0 0 0 0 0 0
36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 5, 2005:
o by each person who is known by us to beneficially own more than 5% of
our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
Name and Address of Beneficial Owner Title of Class Number of Shares Owned(1) Percentage Of
Class (2)
Jun-Jei Sheu Common Stock 8,616,747(3) 7.67%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
James Hayward Common Stock 0 0%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
Peter Brocklesby Common Stock 2,000,000(4) 1.28%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
Lawrence Lee Common Stock 4,260,000(5) 3.79%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
Bejamin Liang Common Stock 230,000(6) *
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
All Officers and Directors Common Stock 15,106,747(7) 13.44%
As a Group (5 persons)
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of December 5, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based upon 112,380,392 shares issued and outstanding on December 5, 2005.
(3) Includes 315,859 shares owned by his wife and 254,354 shares owned by his
minor children. Also includes 7,003,052 shares owned by Biowell Technology,
Inc., of which Dr. Sheu is deemed a beneficial owner.
(4) Includes 1,000,000 shares underlying currently exercisable options.
(5) Includes 600,000 shares underlying currently exercisable options.
(6) Includes 120,000 shares owned by his wife.
(7) Includes 1,600,000 shares underlying currently exercisable options.
37
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
In November of 2002, we created a special compensation plan to pay the founders,
consultants and professionals that had been contributing valuable services to us
during the previous nine months. The plan is called the
Professional/Employee/Consultant Compensation Plan. Share and option issuances
from the Compensation Plan were to be staggered over the following six to eight
months, and consultants that were to continue providing services thereafter
either became employees or received renewed contracts from us in July of 2003,
which contracts contained a more traditional cash compensation component. The
Compensation Plan was designed by the Board to meet our important team building
objectives in our early stages, and to be temporary. As of December 31, 2005, a
total of 1,440,003 shares have been issued from the Compensation Plan and
560,000 options, 264,000 of which were exercised as of as of December 31, 2005.
Each qualified and eligible recipient of shares and/or options under the
Compensation Plan received securities in lieu of cash payment for services. Each
recipient agreed, in his or her respective consulting contract with us, to sell
a limited number of shares monthly. We feel that this carefully designed
Compensation Plan was successful in attracting and retaining a strong team at a
time when we had no established revenue stream and limited or no outside
financing.
In our financial statements, shares that were issued from November 2002 through
June 30, 2003 that were valued at $0.065 per share were shares issued from this
Compensation Plan created in November of 2002 on the basis of contracts executed
at that time for previously rendered services. Common Stock disclosed as being
issued in exchange for cash at $1.00 per share represents options that were
exercised under this Plan. In December of 2004, we adjusted the exercise price
to $0.60 per share.
Any other unrestricted shares that were issued either before or after July 1,
2003 were valued at the fair market value.
Number of Securities to be
Issued Upon Exercise of Weighted Average Exercise Number of Securities
Outstanding Options, Price of Outstanding Options, Remaining Available
Plan Category Warrants and Rights Warrants and Rights for Future Issuance
----------------------- ---------------------- --------------------------- ----------------------
(a) (b) (c)
Professional/Consultant/
Employee Stock and Stock
Option Compensation Plan 2,000,000 $177,600 -0-
Total 2,000,000 $177,600 -0-
As of December 31, 2005, a total of 1,440,000 shares have been issued from the
Compensation Plan and 560,000 options have been issued, 264,000 of which were
exercised as of that date.
On January 26, 2005, the majority stockholders approved the 2005 Stock Incentive
Plan and authorized 16,000,000 shares of Common Stock for issuance of stock
awards and stock options thereunder. As of December 31, 2005, a total of
9,000,000 shares have been issued from the Compensation Plan.
38
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue up to 250,000,000 shares of common stock, par value
$.001. As of December 5, 2005, there were 112,380,392 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged American Stock Transfer & Trust Company, located in Brooklyn,
New York, as independent transfer agent or registrar.
Preferred Stock
We are authorized to issue up to 10,000,000 shares of Preferred Stock, par value
$.001. The 10,000,000 shares of Preferred Stock authorized are undesignated as
to preferences, privileges and restrictions. As the shares are issued, the Board
of Directors must establish a "series" of the shares to be issued and designate
the preferences, privileges and restrictions applicable to that series. To date,
the Board has designated a Founders' Series of Convertible Preferred Stock,
which, in six months from the date of issuance, shall be convertible at the
option of the holder and upon our reaching certain financial objectives, into
shares of our restricted Common Stock. Each share, when eligible, is convertible
into 25 fully paid and non-assessable shares of our Common Stock, subject to a
leak out agreement that extends the Rule 144 period to two years. Holders will
be permitted to sell, after a one year holding period through a three year
holding period, 1% of the issued and outstanding shares of our common stock
every 90 days. This series has been authorized by the Board of Directors. On or
about February 1, 2005, the Founders' Series of Preferred Stock was converted
into 1,500,000 shares of our common stock. As of December 5, 2005, there were no
shares of preferred stock issued and outstanding.
Options
There are currently options outstanding that have been issued to our officers,
directors and employees to purchase 3,660,000 shares of our common stock
pursuant to our Professional/Employee/Consultant Compensation Plan and
employment agreements.
Warrants
In connection with the sale of convertible promissory notes in December 2004, we
issued 2,930,000 warrants to purchase shares of common stock. The warrants are
exercisable until three years from the date of issuance at a purchase price of
$0.75 per share.
In addition, in connection with a private placement offering in January and
February of 2005, 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 also have outstanding 105,464 warrants exercisable at $0.10 per share, 5,000
warrants exercisable at $0.20 per share, 50,000 warrants exercisable at $0.50
per share, 9,000,000 warrants at $0.55 per share, 9,182,000 warrants exercisable
at $0.60 per share, 750,000 warrants exercisable at $0.70 per share, 55,000
warrants exercisable at $0.75 per share and 100,000 warrants exercisable at
$1.00 per share.
39
CONVERTIBLE SECURITIES
To obtain funding for our ongoing operations, we sold $1,465,000 in convertible
promissory notes to 13 investors in December 2004. Each promissory note was
automatically convertible into shares of our common stock, at a price of $0.50
per share, upon the closing of a private placement for $1 million or more. On
January 28, 2005, we closed upon a private placement transaction in excess of $1
million, and on February 2, 2005, the promissory notes were converted into an
aggregate of 2,930,000 shares of common stock.
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 convert into shares of our common
stock, at a price of $0.50 per share, upon the filing of this registration
statement.
In connection with the private placement, we granted the investors registration
rights. Pursuant to the registration rights agreement, if we did not file the
registration statement by February 15, 2005, or if we did not have the
registration statement 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 closing
market prices of $0.66, $0.58, $0.70, $0.49 and $0.32 for our common stock on
July 15, 2005, August 15, 2005, September 15, 2005, October 17, 2005 and
November 15, 2005, respectively, we issued approximately 390,887, 444,802,
368,550, 526,500 and 806,204 shares of common stock per month, respectively, in
liquidated damages.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In September of 2004, Larry Lee entered into a private transaction with Mr.
Chaim Stern, selling a total of 2,500,000 shares to him, after which he loaned
all proceeds of $600,000 to us. On November 3, 2004, we issued a promissory note
to Larry Lee for the loan of the $600,000. The note bore interest at 6% per
annum, and was payable upon demand any time following 120 days after we complete
a financing of at least $5 million. We had the right to repay the note, plus all
accrued interest, at any time, in whole or in part, without premium or penalty.
Upon the repayment of $125,000, we had the right to repay the remainder due
under the note by the issuance of shares of common stock and founders' preferred
stock. We repaid the note in full by paying Mr. Lee $125,000 and issued him
500,000 shares of common stock and 60,000 shares of founders' preferred stock.
On July 15, 2005, we entered into a licensing agreement with Biowell Technology
for the license of our intellectual property. Dr. Sheu, our Chairman of the
Board of Directors, is the CEO of Biowell Technology.
On July 15, 2005, we entered into a consulting agreement with Timpix
International Limited for the consulting services of three employees, including
Dr. Sheu, our Chairman of the Board of Directors. 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 us.
Such consulting agreement shall automatically renew for one year periods until
terminated. Pursuant to the consulting agreement, we shall pay $47,000 per
month, of which $20,000 is apportioned per month for Dr. Sheu.
40
On October 18, 2005, Maureen Huppe, a shareholder, obtained a judgment in United
States District Court, Los Angeles, California, against Lawrence Lee, one of our
directors, for short swing profits as a result of trading shares of our stock.
Per the judgment, Mr. Lee is obligated to reimburse us $245,911 in damages plus
legal fees. In addition, we owe Mr. Lee $35,162 in outstanding accrued
liabilities. In offsetting the outstanding liability against the pending
reimbursement, we anticipate proceeds of approximately $211,000 from Mr. Lee.
We have no policy regarding entering into transactions with affiliated parties.
Item 13. Exhibits.
Exhibit Description
2.1 Articles of Merger of Foreign and Domestic Corporations, filed
December 19, 1998 with the Nevada Secretary of State, filed as an
exhibit to the annual report on Form 10-KSB filed with the
Commission on December 29, 2003 and incorporated herein by
reference.
3.1 Articles of Incorporation of DCC Acquisition Corporation, filed
April 20, 1998 with the Nevada Secretary of State, filed as an
exhibit to the annual report on Form 10-KSB filed with the
Commission on December 29, 2003 and incorporated herein by
reference.
3.2 Articles of Amendment of Articles of Incorporation of DCC
Acquisition Corp. changing corporation name to ProHealth Medical
Technologies, Inc.
3.3 Certificate of Designations, Powers, preferences and Rights of the
Founders' Series of Convertible Preferred Stock, filed as an exhibit
to the annual report on Form 10-KSB filed with the Commission on
December 29, 2003 and incorporated herein by reference.
3.4 Articles of Amendment of Articles of Incorporation of Applied DNA
Sciences, Inc. increasing the par value of the company's common
stock, filed on December 3, 2003 with the Nevada Secretary of State,
filed as an exhibit to the annual report on Form 10-KSB filed with
the Commission on December 29, 2003 and incorporated herein by
reference.
3.5 By-Laws of Applied DNA Sciences, Inc., filed as an exhibit to the
annual report on Form 10-KSB filed with the Commission on December
29, 2003 and incorporated herein by reference.
4.1 Form of Subscription Agreement, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 28, 2005 and
incorporated herein by reference.
4.2 Form of 10% Secured Convertible Promissory Note, filed as an exhibit
to the current report on Form 8-K filed with the Commission on
January 28, 2005 and incorporated herein by reference.
4.3 Form of Warrant Agreement, filed as an exhibit to the current report
on Form 8-K filed with the Commission on January 28, 2005 and
incorporated herein by reference.
4.4 Registration Rights Agreement, dated January 28, 2005, between the
Company and Vertical Capital Partners, Inc., on behalf of the
investors, filed as an exhibit to the current report on Form 8-K
filed with the Commission on January 28, 2005 and incorporated
herein by reference.
4.5 Security Agreement, dated January 28, 2005, between the Company and
Vertical Capital Partners, Inc., on behalf of the investors, filed
as an exhibit to the current report on Form 8-K filed with the
Commission on January 28, 2005 and incorporated herein by reference.
10.1 Exclusive License Agreement between Biowell Technology Corp. and
Applied DNA Sciences, Inc. executed on October 8, 2002, filed
as an exhibit to the registration statement on Form SB-2 filed with
the Commission on February 15, 2005 and incorporated herein by
reference.
41
10.2 Sub-License Agreement with G. A. Corporate Finance Ltd. Applied DNA
Sciences, Inc., executed on July 29, 2003, as amended, filed as an
exhibit to the current report on Form 8-K filed with the Commission
on September 29, 2003 and incorporated herein by reference.
10.3 Indemnification Agreement with Larry Lee, filed as an exhibit to the
registration statement on Form SB-2 filed with the Commission on
February 15, 2005 and incorporated herein by reference.
10.4 Indemnification Agreement with Robin Hutchison, filed as an exhibit
to the registration statement on Form SB-2 filed with the Commission
on February 15, 2005 and incorporated herein by reference.
10.5 Indemnification Agreement with Peter Brocklesby, filed as an exhibit
to the registration statement on Form SB-2 filed with the Commission
on February 15, 2005 and incorporated herein by reference.
10.6 Indemnification Agreement with Adrian Botash, filed as an exhibit to
the registration statement on Form SB-2 filed with the Commission on
February 15, 2005 and incorporated herein by reference.
10.7 Stock Purchase Agreement, dated as of January 28, 2005, by and
between Applied DNA Sciences, Inc. and Biowell Technology, Inc.,
filed as an exhibit to the current report on Form 8-K filed with the
Commission on February 2, 2005 and incorporated herein by reference.
10.8 Investment Advisory Agreement, dated as of February 14, 2005, by and
between Applied DNA Sciences, Inc. and First London Finance, Ltd.,
filed as an exhibit to the registration statement on Form SB-2 filed
with the Commission on February 15, 2005 and incorporated herein by
reference.
10.9 Amendment to the License Agreement, dated as of November 2, 2004, by
and between Applied DNA Sciences, Inc. and Biowell Technology Inc.,
filed as an exhibit to the registration statement on Form SB-2 filed
with the Commission on June 16, 2005 and incorporated herein by
reference.
10.10 Joint Product Development and Marketing Agreement, dated as of
November 10, 2004, by and between Applied DNA Sciences, Inc. and
Hologrammas S.A. de C.V., filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on October 28, 2005
and incorporated herein by reference.
10.11 Cooperative Research and Development Agreement, dated as of
September 2, 2004, by and between Applied DNA Sciences, Inc. and
Bechtel BWXT Idaho, LLC, filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on October 28, 2005
and incorporated herein by reference.
10.12 Amendment to the Cooperative Research and Development Agreement,
dated as of March 24, 2005, by and between Applied DNA Sciences,
Inc. and Battelle Energy Alliance, LLC, filed as an exhibit to the
current report on Form 8-K filed with the Commission on May 10, 2005
and incorporated herein by reference.
10.13 Stock Purchase Amendment Agreement, dated as of July 12, 2005, by
and between Applied DNA Sciences, Inc. and Biowell Technology, Inc.,
filed as an exhibit to the current report on Form 8-K filed with the
Commission on July 21, 2005 and incorporated herein by reference.
10.14 License Agreement, dated as of July 12, 2005, by and between Applied
DNA Sciences, Inc. and Biowell Technology, Inc., filed as an exhibit
to the current report on Form 8-K filed with the Commission on July
21, 2005 and incorporated herein by reference.
42
10.15 Amendment to the License Agreement, dated as of October 10, 2005, by
and between Applied DNA Sciences, Inc. and Biowell Technology, Inc.,
filed as an exhibit to the registration statement on Form SB-2 filed
with the Commission on October 28, 2005 and incorporated herein by
reference.
10.16 Consulting Agreement, dated as of July 12, 2005, by and between
Applied DNA Sciences, Inc. and Timpix International Limited, filed
as an exhibit to the current report on Form 8-K filed with the
Commission on July 21, 2005 and incorporated herein by reference.
10.17 Letter of Engagement, dated as of June 20, 2005, by and between
Applied DNA Sciences, Inc. and Trilogy Capital Partners, Inc., filed
as an exhibit to the current report on Form 8-K filed with the
Commission on July 21, 2005 and incorporated herein by reference.
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)
43
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees.
The aggregate fees billed by our auditors, for professional services rendered
for the audit of our annual financial statements for the years ended September
30, 2005 and 2004, and for the reviews of the financial statements included in
our Quarterly Reports on Form 10-QSB during that fiscal year were $134,341, and
$120,433, respectively.
Tax Fees
Russell Bedford Stefanou Mirchandani LLP did not bill us for tax related work
during fiscal years 2005 or 2004.
All Other Fees
Russell Bedford Stefanou Mirchandani LLP did not bill us for any other services
during fiscal 2005 or 2004.
The Board of Directors has considered whether the provision of non-audit
services is compatible with maintaining the principal accountant's independence.
44
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
APPLIED DNA SCIENCES, INC.
Date: October 10, 2006 /s/JAMES HAYWARD
---------------------------------
James Hayward
Chief Executive Officer
(Principal Executive Officer)
and Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Position Date
---------------------- ----------------------- ------------------
/s/ JAMES A. HAYWARD Chief Executive Officer October 10, 2006
---------------------- (Principal Executive
James A. Hayward Officer) and Chief
Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
and Director
/s/ JUN-JEI SHEU Chairman of the October 10, 2006
---------------------- Board of Directors
Jun-Jei Sheu
/s/ YACOV SHAMASH Director October 10, 2006
----------------------
Yacov Shamash
/s/ SANFORD R. SIMON Director October 10, 2006
----------------------
Sanford R. Simon
45