UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB/A
Amendment No. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2005
Commission file number 002-90519
APPLIED DNA SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Nevada 59-2262718
----------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9229 West Sunset Blvd., Suite 830 Los Angeles, California 90069
---------------------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
(310) 860-1362
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the last 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes __X___ No _____
The number of shares of Common Stock, $0.001 par value, outstanding on April 26,
2005, was 68,371,025 shares, held by approximately 589 shareholders.
Transitional Small Business Disclosure Format (check one):
Yes ______ No ___X___
APPLIED DNA SCIENCES, INC
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending March 31, 2005
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet:
March 31, 2005 (Unaudited) 3
Condensed Consolidated Statements of Losses:
Three and Six Months Ended March 31, 2005 and 2004 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through March
31, 2005 (Unaudited) 4
Condensed Consolidated Statement of Stockholder's Equity:
For the Period from September 16, 2002 (Date of Inception) Through March
31, 2005 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows:
Six Months Ended March 31, 2005 and 2004 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through March
31, 2005 (Unaudited) 14
Notes to Unaudited Condensed Consolidated Financial Information:
March 31, 2005 15-28
Item 2. Management Discussion and Analysis 29
Item 3. Controls and Procedures 41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3. Defaults Upon Senior Securities 43
Item 4. Submission of Matters to a Vote of Security Holders 43
Item 5. Other Information 44
Item 6. Exhibits 44
Signatures 45
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
March 31, 2005
------------------
Current assets:
Cash and Equivalents $ 2,975,017
------------------
Total Current Assets 2,975,017
Property, Plant and Equipment - Net 22,134
Deposits and Prepaid Expenses 47,500
Patent Filing - Net 26,441
------------------
Total Assets $ 3,071,092
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 1,653,709
Accrued Liabilities Due Related Parties 122,163
Due to Related Parties 91,312
Note Payable 425,000
------------------
Total Current Liabilities 2,292,184
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, par value $.001 per share; 10,000,000 shares authorized;
60,000 issued and outstanding 6
Common Stock, par value $.001 per share; 250,000,000 shares authorized; 66,755,267 shares
issued and outstanding 66,755
Common Stock Subscription (880,000)
Additional Paid-In-Capital 53,453,375
Deficit Accumulated During Development Stage (51,861,227)
------------------
Total Stockholders' Equity 778,909
------------------
Total Liabilities and Stockholders' Equity $ 3,071,092
==================
See accompanying notes to unaudited consolidated financial statements
3
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(Unaudited)
September 16, 2002,
For The Three Months Ended March 31 For The Six Months Ended March 31 (Date of Inception)
through
2005 2004 2005 2004 March 31, 2005
-------------- -------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative $ 9,041,288 $ 1,909,149 $19,834,209 $ 9,316,900 $ 40,894,281
Depreciation and amortization 7,306 351 12,027 703 15,188
-------------- -------------- -------------- -------------- --------------
Total operating expenses 9,048,594 1,909,500 19,846,236 9,317,603 40,909,469
Operating loss (9,048,594) (1,909,500) (19,846,236 (9,317,603) (40,909,469)
Other Income (expense) 3,100 700 3,415 1,385 29,800
Interest (expense) (7,635,563) (527,838) (9,203,372) (662,912) (10,981,558)
Income (taxes) benefit - - - - -
-------------- -------------- -------------- -------------- --------------
Net loss $ (16,681,057) $ (2,436,638) $ (29,046,193) $ (9,979,130) $ (51,861,227)
============== ============== ============== ============== ==============
-
Loss per common share
(basic and assuming dilution) $ (0.31) $ (0.12) $ (0.72 $ (0.51) $ (1.92)
============== ============== ============== ============== ==============
Weighted average shares outstanding 53,044,883 20,700,599 40,082,628 19,575,190 27,017,824
============== ============== ============== ============== ==============
See accompanying notes to unaudited condensed consolidated financial statements
4
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
MARCH 31, 2005 (Unaudited)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common 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) - - - (1,000)
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 - -
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 9 230,625 - - - 230,634
See accompanying notes to unaudited condensed consolidated financial statements
5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
MARCH 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Issuance of common stock in
exchange for consulting
services valued at $
0.065 per share in March 2003 - - 6,000 1 389 - - - 390
Common stock subscribed in
exchange for cash at $1 per
share in March 2003 - - - - 18,000 - - - 18,000
Common stock issued in
exchange for consulting
services at $ 0.065 per
share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900
Common stock issued in
exchange for
cash at $ 1.00 per share
on April 9, 2003 - - 18,000 2 - - - - 2
Common stock issued in
exchange for
consulting services at $
0.065 per
share on April 9, 2003 - - 9,000 1 584 - - - 585
Common stock issued in
exchange for
consulting services at
$ 2.50 per
share on April 23, 2003 - - 5,000 1 12,499 - - - 12,500
Common stock issued in
exchange for
consulting services at
$ 2.50 per
share, on June 12, 2003 - - 10,000 1 24,999 - - - 25,000
Common stock issued in
exchange for
cash at $ 1.00 per share
on June 17, 2003 - - 50,000 5 49,995 - - - 50,000
Common stock subscribed
in exchange
for cash at $ 2.50 per
share pursuant
to private placement
on June 27, 2003 - - - - 24,000 - 24,000
Common stock retired in
exchange for note payable
at $0.0118 per share,
on June 30, 2003 - - (7,500,000) (750) 750 - - - -
Common stock issued in
exchange for
consulting services at
$0.065 per
share, on June 30, 2003 - - 270,000 27 17,523 - - - 17,550
Common stock subscribed
in exchange for cash at
$ 1.00 per share pursuant
to private placement on
June 30, 2003 - - - - - 10,000 - - 10,000
Common stock subscribed
in exchange for cash at
$ 2.50 per share pursuant
to private placement on
June 30, 2003 - - - - - 24,000 - - 24,000
Common stock issued in
exchange for consulting
services at approximately
$2.01 per share, July 2003 - - 213,060 21 428,798 - - - 428,819
See accompanying notes to unaudited condensed consolidated financial statements
6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
MARCH 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock canceled
in July 2003,
previously issued for
services rendered at
$2.50 per share - - (24,000) (2) (59,998) - - - (60,000)
Common stock issued
in exchange for
options exercised at
$1.00 in July 2003 - - 20,000 2 19,998 - - - 20,000
Common stock issued
in exchange for
exercised of options
previously
subscribed at $1.00 in
July 2003 - - 10,000 1 9,999 (10,000) - - -
Common stock issued in
exchange for
consulting services at
approximately
$2.38 per share,
August 2003 - - 172,500 17 410,915 - - - 410,933
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 - - - 95,000
Common stock subscription
receivable reclassification
adjustment - - - - 2,600 - 2,600
Common Stock subscribed to
at $2.50 per share in
September 2003 - - - 300,000 - - 300,000
Net Loss for the year
ended September 30, 2003 - - - - - - - (3,445,164) (3,445,164)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at September 30,
2003 - $ - 17,811,082 $ 1,781 $2,577,568 $300,000 $ - $(3,456,776) $ (577,427)
========= =========== =========== =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
MARCH 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common 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
December 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
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 - - - 19,288
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 - - - 16,344
See accompanying notes to unaudited condensed consolidated financial statements
8
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
MARCH 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued in
exchange for employee
services at $3.15 per
share, Mar 2004 5,769 2,885 15,293 - - - 18,177
Preferred shared
converted to common
shares for consulting
services at $3.00 per
share, Mar 2004 (5000) (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 4,403 22,236 - - - 26,639
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,
Apr 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 (4000) (4) 100,000 50,000 51,250 - - - 101,246
Common stock issued per
subscription May 2004 10,000 5,000 (4,000) - (1,000) - -
Common stock issued in
exchange for consulting
services at $0.86 per
share in May 2004 137,000 68,500 50,913 - - - 119,413
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)
See accompanying notes to unaudited condensed consolidated financial statements
9
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
MARCH 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued in
exchange for consulting
services at $0.67 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 (2000) (2) 50,000 25,000 (5,500) - - - 19,498
See accompanying notes to unaudited condensed consolidated financial statements
10
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
MARCH 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued in
exchange for consulting
services at $0.50 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 (8,787) - - - 37,463
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
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 (4000) (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
Warrants issued to
consultants in the
fourth quarter 2004 2,019,862 2,019,862
Net Loss - - - - - (19,358,259)(19,358,259)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
September 30, 2004 60,000 6 23,981,054 11,990,527 6,118,993 - (1,000)(22,815,034) (4,706,508)
========= =========== =========== =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
11
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
MARCH 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common 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) (107,298) - - - (642,098)
Common stock issued
in exchange for
consulting services at
$0.60 per share in
October 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 by noteholders
at $0.50 per share
in October 2004 - - 532,500 266,250 - - - - 266,250
Common Stock issued
pursuant to subscription
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 by noteholders
at $0.45 per share
in October 2004 - - 315,000 157,500 (15,750) - - - 141,750
Common Stock issued in
exchange for consulting
services at $0.47 share
in November 2004 - - 100,000 50,000 (3,000) - - - 47,000
Common Stock issued in
exchange for consulting
services at $0.80 share
in November 2004 - - 300,000 150,000 90,000 - - - 240,000
Common Stock issued in
exchange for consulting
services at $1.44 share
in November 2004 - - 115,000 57,500 108,100 - - - 165,600
Common Stock issued in
exchange for employee
services at $1.44 share
in November 2004 - - 5,000 2,500 4,700 - - - 7,200
See accompanying notes to unaudited condensed consolidated financial statements
12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
MARCH 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common Stock issued in
exchange for employee
services at $0.60 share
in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000
Beneficial Conversion
discount relating to
Notes Payable - - - - 936,541 - - - 936,541
Beneficial Conversion
Feature relating to
Warrants - - - - 528,459 - - - 528,459
Common stock issued at
$0.016 in exchange for
note payable in December
2004 5,500,000 2,750,000 (2,661,500) 88,500
Common Stock issued in
exchange for consulting
services at $1.44 share
in December 2004 - - 5,796,785 2,898,393 5,418,815 - - - 8,317,207
Common stock issued
pursuant to subscription
at $0.50 per share in
December 2004 - - 2,930,000 1,465,000 - (125,000) - - 1,340,000
Warrants issued to
consultants in
Dec. 2004 - - 394,698 394,698
Net Loss - - - - - - - (12,365,136)(12,365,136)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance as of
December 31, 2004 60,000 6 40,848,239 20,424,120 10,863,008 (879,000) (1,000)(35,180,171) (4,773,037)
Warrants exercised at
$0.10 share during the
three months ended
March 31, 2005 - - 107,500 53,750 (43,000) - - - 10,750
Common Stock issued in
settlement of debt at
$0.33 share during the
three months ended
March 31, 2005 - - 4,998,551 2,499,276 (843,244) - - - 1,656,032
Common Stock issued in
settlement of debt at
$0.86 share during the
three months ended
March 31, 2005 - - 3,000,000 1,500,000 1,065,000 - - - 2,565,000
Common Stock issued in
exchange for consulting
services at $1.01 share
during the three months
ended March 31, 2005 - - 2,758,977 1,379,489 1,404,732 - - 2,784,221
Common stock issued
pursuant to subscription
at $0.50 per share
during the three months
ended March 31, 2005 - - 14,742,000 7,371,000 - - - - 7,371,000
Common Stock issued in
exchange for consulting
services at $1.18 share
during the three months
ended March 31, 2005 - - 200,000 100,000 135,000 - - - 235,000
Warrants exercised at
$0.60 share during the
three months ended
March 31, 2005 - - 100,000 50,000 10,000 - - - 60,000
Adjust common stock par
value from $0.50 to
$0.001 per share, per
amendment of articles
dated March 2005 - - - (33,310,879) 33,310,879 - - - -
Beneficial Conversion
discount relating to
Notes Payable - - - - 4,179,554 - - - 4,179,554
Beneficial Conversion
Feature relating to
Warrants - - - - 3,191,446 - - - 3,191,446
Stock options granted
to employees in exchange
for services rendered,
at exercise price below
fair value of common stock - - - - 180,000 - - - 180,000
Net Loss - - - - - - - (16,681,057)(16,681,057)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance as of March
31, 2005 60,000 $ 6 66,755,267 $ 66,755 $53,453,375 $ (879,000)$ (1,000)$(51,861,227)$ 778,909
========= =========== =========== =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
13
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
For the period
September 16, 2002
(date of inception)
For The Six Months Ended through
March 31, March 31,
2005 2004 2005
------------ ------------ ------------
Cash flows from operating activities:
Net Cash Provided by (Used In) Operating Activities ....................... $(5,312,827) $(1,808,549) $(8,884,666)
Cash Flows From Investing Activities:
Net Cash (Used In) Investing Activities ................................... (28,288) (53,066) (102,705)
Cash Flows From Financing Activities:
Net Cash (Used In)Provided by Financing Activities........................ 8,314,300 1,866,351 11,962,388
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,973,185 4,736 2,975,017
Cash and cash equivalents at beginning of period .......................... 1,832 193,471 --
------------ ------------ ------------
Cash and cash equivalents at the end of period............................ $ 2,975,017 $ 198,207 $ 2,975,017
============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements
14
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended March 31, 2005 is
not necessarily indicative of the results that may be expected for the year
ended September 30, 2005. The unaudited condensed consolidated financial
statements should be read in conjunction with September 30, 2004 financial
statements.
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 March 31, 2005, the Company has accumulated losses of
$51,861,227.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary ProHealth Medical Technologies, Inc. Significant
inter-company transactions have been eliminated in consolidation.
Reclassification
Certain prior period amounts have been reclassified for comparative purposes.
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended September 30, 2003 and for
the subsequent periods.
15
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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 C):
For the Period
September 16,
2002 (Date of
For The Three For The Three Inception)
Months ended Months ended through
March 31, March 31, March 31,
2005 2004 2005
-------------- ------------ -------------
Net loss - as reported $ (16,681,057) $(2,436,638) $ (51,861,227)
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 based method (SFAS No. 123) - - -
-------------- ------------ -------------
Net loss - Pro Forma $ (16,681,057) $(2,436,638) $ (51,861,227)
============== ============ ==============
Net loss attributable to common
stockholders - Pro forma $ (16,681,057) $(2,436,638) $ (51,861,227)
============== ============ ==============
Basic (and assuming dilution) loss
per share - as reported $ (0.31) $ (0.12) $ (1.92)
============== ============ ==============
Basic (and assuming dilution) loss
per share - Pro forma $ (0.31) $ (0.12) $ (1.92)
============== ============ ==============
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact that this statement will have on Company's consolidated
financial statements.
NOTE B - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 250,000,000 shares
of common stock, with a $0.001 par value per share as the result of a
shareholder meeting conducted on February 14, 2005. Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares with a par value of $0.50. In February 2005, the Company passed a
resolution authorizing change in the par value per common shares from $0.50 per
share to $0.001 per share.
16
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
During the period September 16, 2002 through September 30, 2003, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately $1,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc (see Note
B).
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
In October 2002 the Company issued 602,000 shares of common stock in exchange
for services valued at $0.065 per share. In accordance with EITF 96-18 the
measurement date to determine fair value was in October 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
$0.065 per share, which presents the fair value of the services received which
did not differ materially from the value of the stock issued.
In November and December 2002, the Company issued 876,000 shares of common stock
in exchange for subscription at $ 0.065 per share. In accordance with EITF 96-18
the measurement date to determine fair value was in October 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 $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
In January 2003, the Company canceled 836,000 shares of common stock previously
issued in exchange for consulting services.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement . 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 January 2003, the Company issued 586,250 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 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 $0.13 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In February 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 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 $0.065 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
17
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
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 March 2003, the Company issued 91,060 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $2.53
per share, which represents the fair value of the services received which did
not differ materially from the value of the stock issued.
In March 2003, the Company issued 6,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately
$0.065 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued. In March 2003, the
Company received subscription for 18,000 shares of common stock in exchange for
cash at $1 per share.
On April 1, 2003, the Company issued 860,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 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 $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 9, 2003, the Company issued 18,000 shares of common stock in exchange
for previously issued options to purchase the Company's common stock at $1.00
per share.
On April 9, 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 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 $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 23, 2003, the Company issued 5,000 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 12, 2003, the Company issued 10,000 shares common stock in exchange for
consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 17 2003, the Company issued 50,000 shares of common stock in exchange
for cash at $1.00 per share.
18
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
On June 30, 2003, the Company issued 270,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 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 $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On June 30, 2003, the Company received $10,000 as subscription for options to
purchase the Company's common stock at $1.00 per share.
In June, 2003, the Company received $48,000 in connection with a subscription to
purchase the Company's common stock pursuant to a private placement.
In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth granted the Company an option to acquire up to 8,500,000 shares of
the Company's common stock in exchange for $100,000 (see Note B). 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 July 2003 the Company issued 213,060 shares of common stock for consulting
services provided to the Company. The Company valued the shares issued at
approximately $ 2.01 per share, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In July 2003, the Company canceled 24,000 shares of common stock, previously
issued for services valued at $2.50 per share.
In July 2003, the Company received $20,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
In July 2003, the Company issued 10,000 shares of common stock for cash
previously subscribed at $1.00 per share.
In August 2003, the Company issued 172,500 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.38 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued
In August 2003, the Company received $29,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
19
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In September 2003, the Company issued 395,260 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.42 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
In September 2003, the Company issued 6,400 shares of common stock issued in
exchange for cash at $2.50 per share pursuant to private placement.
In September 2003, the Company received $95,000 in exchange for previously
issued options to purchase the Company's common stock at $1.00 per share.
In September 2003, the Company received $2,600 in connection with a subscription
to purchase the Company's common stock pursuant to a private placement.
The Company valued the shares issued for consulting services at the rate which
represents the fair value of the services received which did not differ
materially from the value of the stock issued.
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.
In October 2003, the Company issued 287,439 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$2.85 per share for a total of $820,418, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2003, the Company issued 120,000 shares of common stock for shares
previously subscribed at $2.50 per share in September 2003. In October 2003, the
Company canceled 100,000 shares of common stock previously issued in exchange
for services at $2.50 per share.
In November 2003, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$3.00 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued.
In November 2003, the Company sold 100,000 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
In December 2003, the Company sold 6,400 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
20
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In December 2003, the Company issued 2,125,500 shares of common stock in
exchange for consulting services. . The Company valued the shares issued at
approximately $2.59 per share, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In December 2003, the Company received $104,000 in exchange for a common stock
subscription at $2.50 per share pursuant to private placement.
In January 2004, the Company issued 41,600 shares of common stock at $2.50 share
pursuant to a subscription made on December 2003.
In January 2004, the Company issued 13,040 shares of common stock at $2.95 per
share in exchange for consulting services valued at $38,468.
In January 2004, the Company issued 123,000 shares of common stock at $2.60 per
share in exchange for consulting services valued at $319,800.
In January 2004, the Company issued 1,000 shares of common stock at $3.05 per
share in exchange for consulting services valued at $3,050.
In February 2004, the Company issued 6,283 shares of common stock at $3.07 per
share in exchange for employee services valued at $19,288.
In March 2004, the Company issued 44,740 shares of common stock at $3.04 per
share in exchange for consulting services valued at $136,010.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
In March 2004, the Company issued 5,443 shares of common stock at $3.00 per
share in exchange for employee services valued at $16,344.
In March 2004, the Company issued 5,769 shares of common stock at $3.15 per
share in exchange for employee services valued at $18,177.
In March 2004, the Company converted 5,000 preferred shares into 125,000 shares
of common stock at $3.00 per share in exchange for employee services valued at
$375,000.
In March 2004, the Company issued 8,806 shares of common stock at $3.03 per
share in exchange for employee services valued at $26,639.
In April 2004, the Company issued 22,500 shares of common stock at $0.10 for
subscription of warrants to be exercised.
In April 2004, the Company issued 9,860 shares of common stock at $2.58 per
share in exchange for employee services valued at $25,441.
21
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In April 2004, the Company issued 11,712 shares of common stock at $2.35 per
share in exchange for consulting services valued at $27,523.
In April 2004, the Company issued 367,500 shares of common stock at $1.50 per
share in exchange for consulting services valued at $551,250.
In April 2004, the Company retired 50,000 shares of common stock previously
issued for consulting services at $0.065 per share or $3,250.
In May 2004, the Company converted 4,000 preferred shares into 100,000 shares of
common stock at $1.01 per share in exchange for consulting services valued at
$101,250.
In May 2004, the Company issued 10,000 shares of common stock at $0.10 per share
in a stock subscription for $1,000.
In May 2004, the Company issued 137,000 shares of common stock at $0.86 per
share in exchange for consulting services valued at $119,233.
In May 2004, the Company issued 26,380 shares of common stock at $1.15 per share
in exchange for consulting services valued at $30,337.
In June 2004, the Company retired 5,000 shares of common stock previously issued
for consulting services at $0.065 per share or $325.
In June 2004, the Company issued 270,500 shares of common stock at $0.67 per
share in exchange for consulting services valued at $180,560.
In June 2004, the Company issued 8,000 shares of common stock at $0.89 per share
in exchange for consulting services valued at $7,120.
In June 2004, the Company issued 50,000 shares of common stock at $0.645 per
share in exchange for consulting services valued at $32,250.
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 July 2004, the Company issued 100,000 shares of common stock at $0.54 per
share in exchange for consulting services valued at $54,000.
In July 2004, the Company issued 5,000 shares of common stock at $0.72 per share
in exchange for consulting services valued at $3,600.
In July 2004, the Company issued 100,000 shares of common stock at $0.47 per
share in exchange for consulting services valued at $47,250.
22
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In August 2004, the Company converted 2,000 preferred shares into 50,000 shares
of common stock at $0.39 in exchange for consulting services valued at $19,500.
In August 2004, the Company issued 100,000 shares of common stock at $0.39 in
exchange for consulting services valued at $39,000.
In August 2004, the Company issued 100,000 shares of common stock at $0.50 in
exchange for consulting services valued at $50,250.
In August 2004, the Company issued 200,000 shares of common stock at $0.56 in
exchange for consulting services valued at $112,500.
In August 2004, the Company issued 92,500 shares of common stock at $0.41 in
exchange for consulting services valued at $37,645
In September 2004, the Company issued 1,000,000 shares of common stock at $0.52
in exchange for consulting services valued at $517,500.
In September 2004, the Company issued 45,000 shares of common stock at $0.50 in
exchange for consulting services valued at $22,288.
In September 2004, the Company converted 4,000 preferred shares into 100,000
shares of common stock at $0.54 in exchange for consulting services valued at
$54,000.
In September 2004, the Company issued 60,000 convertible preferred shares at
$25.00, in exchange for consulting services valued at $1,500,000.
In October 2004, the Company issued 200,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.68 per share for a total of $136,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, shareholders returned 1,069,600 shares to treasury issued
earlier in exchange for services valued at $642,098.
In October 2004, the Company issued 82,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.60 per share for a total of $49,500, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.60 per share pursuant to private placement.
In October 2004, the Company issued 532,500 shares of common stock to existing
noteholders. The Company valued the shares issued at approximately $0.50 per
share for a total of $266,250.
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.50 per share pursuant to private placement.
23
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In October 2004, the Company sold 1,000,000 shares of common stock subscribed
for cash at $0.45 per share pursuant to private placement.
In October 2004, the Company issued 315,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.45 per share for a total of $141,750, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.47 per share for a total of $47,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 300,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.80 per share for a total of $240,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 115,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$1.44 per share for a total of $165,600, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 5,000 shares of common stock in exchange
for employee services. The Company valued the shares issued at approximately
$1.44 per share for a total of $7,200, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 60,000 shares of common stock in exchange
for employee services. The Company valued the shares issued at approximately
$0.60 per share for a total of $36,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
In December 2004, the Company issued 5,796,785 shares of common stock in
exchange for consulting services. The Company valued the shares issued at
approximately $1.44 per share for a total of $8,317,207, which represents the
fair value of the services received which did not differ materially from the
value of the stock issued.
In December 2004, the Company issued 2,930,000 shares of common stock subscribed
for cash at $0.50 per share pursuant to the exercise terms of a promissory note
payable.
24
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
During the three months ended March 31, 2005, we issued 107,500 shares of common
stock for warrants exercised at $0.10 share. This issuance is considered exempt
under Regulation D of the Securities Act of 1933 and Rule 506 promulgated
thereunder.
During the three months ended March 31, 2005, we retired $1,656,032 of
convertible notes payable for 4,998,551 shares of common stock. The Notes are
convertible into shares of our common stock at a price of $0.33 per share.
During the three months ended March 31, 2005, we retired $ 2,565,000 of
convertible notes payable for 3,000,000 shares of common stock. The Notes are
convertible into shares of our common stock at a price of $0.86 per share.
During the three months ended March 31, 2005, the Company issued 2,758,977
shares of common stock in exchange for consulting services. The Company valued
the shares issued at approximately $1.01 per share for a total of $ 2,784,221,
which represents the fair value of the services received which did not differ
materially from the value of the stock issued.
During the three months ended March 31, 2005, the Company issued 200,000 shares
of common stock in exchange for consulting services. The Company valued the
shares issued at approximately $1.18 per share for a total of $235,000, which
represents the fair value of the services received which did not differ
materially from the value of the stock issued.
During the three months ended March 31, 2005, the Company issued 14,742,000
shares of common stock subscribed for cash at $0.50 per share for a total of $
7,371,000 pursuant to the exercise terms of a promissory note payable. This
issuance is considered exempt under Regulation D of the Securities Act of 1933
and Rule 506 promulgated thereunder.
In March 2005, the Company issued 100,000 shares of common stock in exchange for
services. The Company valued the shares issued at approximately $0.60 per share
for a total of $ 60,000, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
The Company recognized an imbedded beneficial conversion feature present in the
January/February Offering note ("January/February PPM"). 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
4,179,554 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 Bridge Offering. The debt discount attributed to the beneficial
conversion feature was fully amortized over the fiscal first quarter period as
interest expense.
The Company recognized the value attributable to the warrants in the amount of
$3,191,446 to additional paid in capital and a discount against the
January/February PPM.
During the three months ended March 31, 2005, the Company granted an aggregate
of 300,000 stock options to employees 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 and $0 was
charged to operations during the period ended March 31, 2005 and 2004,
respectively.
25
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In accordance with EITF 96-18 the measurement date to determine fair value was
the date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued for
consulting services at the rate which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
NOTE C - RELATED PARTY TRANSACTIONS
At March 31, 2005, notes payable are as follows:
March 31, 2005
(Unaudited)
-----------
Note payable, unsecured, related party, payable from August 1, 2005,
right to convert to restricted stock in lieu of cash, rate of interest
4%, 160,000 shares prior to October 31, 2005 or 180,000 shares after
that date.
425,000
-----------
425,000
Less; current portiong 425,000
-----------
Note Payable - long-term $ 0
===========
NOTE D - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company. These warrants were granted in lieu of cash
compensation for services performed or financing expenses in connection with the
sale of the Company's common stock.
Warrants Outstanding Exercisable
Remaining Weighted Weighted Weighted
Number Contractual Average Average Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- -------------- -------------- ----------- --------------
$0.10 105,464 4.29 $0.10 105,464 $0.10
$0.50 50,000 4.52 $0.50 50,000 $0.50
$0.60 6,222,750 4.04 $0.60 6,222,750 $0.60
$0.70 750,000 2.34 $0.70 750,000 $0.70
$0.75 17,672,000 4.53 $0.75 17,672,000 $0.75
$1.00 386,000 0.54 $1.00 386,000 $1.00
$3.00 62,503 0.75 $3.00 62,503 $3.00
-------------- --------------
25,248,717 25,248,717
============== ==============
Transactions involving warrants are summarized as follows:
Number of Shares Weighted Average
Price Per Share
Outstanding at September 30, 2004 4,870,253 $ 0.63
Granted 20,708,000 0.73
Exercised (329,536) 0.25
Canceled or expired - -
-------------- --------------
Outstanding at March 31, 2005 25,248,717 $ 0.72
============== ==============
The estimated value of the compensatory warrants granted to non-employees in
exchange for services and financing expenses was determined using the
Black-Scholes pricing model and the following assumptions: contractual term of 2
to 5 years, a risk free interest rate of 4.25%, a dividend yield of 0% and
volatility of 22.9%. The amount of the expense charged to operations for
compensatory warrants granted in exchange for services was $ 394,698 for the six
months ended March 31, 2005.
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to
shareholders at March 31, 2005.
26
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE D - STOCK OPTIONS AND WARRANTS (continued)
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
Exercise Number Remaining Contractual Weighed Average Number Weighted Average
Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
------ ----------- ------------ -------------- ----------- --------------
$ 0.60 300,000 2.00 $ 0.60 300,000 $ 0.60
----------- ----- -------------- ----------- --------------
300,000 2.00 $ 0.60 300,000 $ 0.60
=========== ===== ============== =========== ==============
Transactions involving the Company's options issuance are summarized as follows:
Number of Weighted Average
Shares Price Per Share
----------- -----------
Outstanding at October 1, 2004 - -
Granted 300,000 0.60
Exercised - -
Canceled or expired -- --
----------- -----------
Outstanding at March 31, 2005 300,000 $ 0.60
=========== ===========
During the three months ended March 31, 2005, the Company granted an aggregate
of 300,000 stock options to employees 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 and $0 was
charged to operations during the period ended March 31, 2005 and 2004,
respectively.
On February 14, 2005, the Company established an Employee Stock Ownership Plan
(ESOP), authorizing 16 million shares for the future issuance of incentive stock
options, non-statutory options and S-8 shares. Incentive options and S-8 shares
are issued at fair market value while non-statutory options are issued at 110%
of fair market value. 3.660 million shares were granted as incentive stock
options and vested as follows; 50% or 1.830 million shares vesting on April 1,
2005, 25% vesting on July 1, 2005 and the remaining 25% vesting on October 1,
2005. No ESOP shares were exercised as of March 31, 2005. ESOP grants must be
exercised within seven (7) years.
NOTE E- COMMITMENTS AND CONTINGENCIES
Registration of Securities
In connection with is private placement of convertible debt, the Company was
obligated to file a registration statement with the Securities and Exchange
Commission registering the underlying the Company's shares of common stock on or
before February 15, 2005. In addition, the Company is subject to liquidated
damages, payable at the Company's option in cash or common stock of the Company,
in an amount equal to Three and a Half Percent (3.5%) or an estimated $257,985
per month or part thereof that the registration is not declared effective within
120 days of February 15, 2005
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 the Company terminated the agreement with Giuliani Partners, whereby both
parties agreed to discharge, waive and release one another from all obligations
under the consulting agreement. Total compensation paid to Giuliani Partners
through March 31, 2005 was $1,250,000.
27
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2005
(UNAUDITED)
NOTE E- COMMITMENTS AND CONTINGENCIES (continued)
On March 24, 2005, the Company amended its existing Cooperative Research and
Development Agreement ("CRADA") with Battelle Energy Alliance, LLC, the
Department of Energy's National Laboratory in Idaho Falls, Idaho (the
"Amendment"). The Amendment adds additional joint research projects, including
development of marker applications for textiles, inks, gasoline, and explosive
materials. Per the Amendment and at the Company's discretion, the Company can
spend up to $1,701,216 to further develop and refine selected DNA and related
applications.
Litigation
Stern & Co. v. Applied DNA Sciences, Inc., Case No.: 05 CV 00202
Plaintiff Stern & Co. commenced this action against us in the United States
District Court for the Southern District of New York on or about January 10,
2005. In this action, Stern & Co. alleges that it entered into a contract with
us to perform media and investor relations for a monthly fee of $5,000 and stock
options. Stern & Co. claims that we failed to make certain payments pursuant to
the contract and seeks damages in the amount of $96,042.00. Although our time to
answer the complaint has not expired, we dispute the allegations of the
complaint in its entirety and intend on vigorously defending this matter.
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
Plaintiff Oceanic Consulting, S.A. commenced this action against us in the
Supreme Court of the State of New York, County of New York. Oceanic Consulting,
S.A. asserts a cause of action for breach of contract based upon the allegation
that we failed to make payments pursuant to a consulting agreement. Oceanic
Consulting, S.A.also asserts a causes of action in which it seeks reimbursement
of its expenses and attorneys' fees. Oceanic Consulting, S.A. seeks damages in
the amount of $137,500.00. Oceanic Consulting, S.A. moved for a default
judgment, which we have opposed based upon Oceanic Consulting, S.A.'s failure to
properly serve the complaint as well as our meritorious defenses. We intend on
vigorously defending this matter.
NOTE F- SUBSEQUENT EVENTS
The Company has entered into an agreement as amended with Biowell Technology
Inc., a company formed under the laws of Taiwan ("Biowell"), to acquire from
Biowell certain intellectual property and other assets in exchange for
approximately 36,000,000 shares of the Company's restricted common stock. The
consummation of the transaction is subject to a number of terms and conditions,
including, but not limited to, approval by Biowell shareholders.
Stern & Co. v. Applied DNA Sciences, Inc., Case No.: 05 CV 00202
Plaintiff Stern & Co. commenced this action against us in the United States
District Court for the Southern District of New York on or about January 10,
2005. In this action, Stern & Co. alleges that it entered into a contract with
us to perform media and investor relations for a monthly fee of $5,000 and stock
options. Stern & Co. claims that we failed to make certain payments pursuant to
the contract and seeks damages in the amount of $96,042.00. Although our time to
answer the complaint has not expired, we dispute the allegations of the
complaint in its entirety and intend on vigorously defending this matter.
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
Plaintiff Oceanic Consulting, S.A. commenced this action against us in the
Supreme Court of the State of New York, County of New York. Oceanic Consulting,
S.A. asserts a cause of action for breach of contract based upon the allegation
that we failed to make payments pursuant to a consulting agreement. Oceanic
Consulting, S.A.also asserts a causes of action in which it seeks reimbursement
of its expenses and attorneys' fees. Oceanic Consulting, S.A. seeks damages in
the amount of $137,500.00. Oceanic Consulting, S.A. moved for a default
judgment, which we have opposed based upon Oceanic Consulting, S.A.'s failure to
properly serve the complaint as well as our meritorious defenses. We intend on
vigorously defending this matter.
28
Item 2. Management's Discussion and Analysis
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this report. The quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, including statements using
terminology such as "can", "may", "believe", "designated to", "will", "expect",
"plan", "anticipate", "estimate", "potential" or "continue", or the negative
thereof or other comparable terminology regarding beliefs, plans, expectations
or intentions regarding the future. Forward looking statements involve risks and
uncertainties and actual results could differ materially from those discussed in
forward-looking statements. All forward looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to the Company as of the date thereof, and the Company assumes no
obligations to update any forward-looking statement or risk factor, unless the
Company is required to do so by law.
Plan of Operation
Revenues
From our inception on September 16, 2002, we have not generated revenues
from operations. We believe we will begin generating revenues from operations in
the fiscal year as the Company transitions from a development stage enterprise
to that of an active growth and acquisition stage company.
Costs and Expenses
From our inception through March 31, 2005, we have incurred losses of
$51,861,227. These expenses were associated principally with equity-based
compensation to employees and consultants, product development costs and
professional services.
Liquidity and Capital Resources
From the Company's inception to March 31, 2005 the Company has incurred a
operating cash flow deficit of $8,884,666. Cash flows used in investing
activities was $102,705 during the period September 16, 2002 (date of Company's
inception) through March 31, 2005. We met our cash requirements through the
issuance of capital and other notes payable (net of repayments); private
placement of our common stock and advances from Company shareholders and
officers of $ 11,962,388.
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.
The Company presently does not have any available credit, bank financing or
other external sources of liquidity. Due to its brief history and historical
operating losses, the Company's operations have not been a source of liquidity.
The Company will need to obtain additional capital in order to expand operations
and become profitable. The Company intends to pursue the building of a re-seller
network outside the United States, and if successful, the re-seller agreements
would constitute an additional source of liquidity and capital over time. In
order to obtain capital, the Company may need to sell additional shares of its
common stock or borrow funds from private lenders. There can be no assurance
that the Company will be successful in obtaining additional funding and
execution of re-seller agreements outside the Unites States.
29
From the Company's inception, the Company's priorities were to recruit and
build its team, organize its new infrastructure and to develop a successful
strategy how best to exploit its exclusive Biowell license agreement. No
revenues were generated. Although the management of the Company is of the
opinion that continuing to develop and finance the Company's present business of
providing DNA anti-counterfeit technology may ultimately be successful,
management nevertheless expects that the Company will need substantial
additional capital before the Company's operations can be fully implemented.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet our current
and projected cash flow deficits from operations and development. We are seeking
financing in the form of equity through a Private Placement Memorandum in order
to provide the necessary working capital. We currently have no commitments for
financing. There is no guarantee that we will be successful in raising the funds
required.
The effect of inflation on the Company's operating results was not
significant. The Company's operations are located in North America and there are
no seasonal aspects that would have a material effect on the Company's financial
condition or results of operations.
The Company's independent certified public accountant has stated in their
report included in the Company's September 30, 2004 Form 10-KSB, that the
Company has incurred operating losses from its inception, and that the Company
is dependent upon management's ability to develop profitable operations. These
factors among others may raise substantial doubt about the Company's ability to
continue as a going concern.
To obtain funding for our ongoing operations, we conducted a private
placement offering in January and February 2005, in which we sold $7,371,000 of
10% Secured Convertible Promissory Notes to 61 investors. The 10% Secured
Convertible Promissory Notes automatically converted into shares of our common
stock, at a price of $0.50 per share, upon the filing of the registration
statement on February 15, 2005. In connection with the private placement
offering, we have issued 14,742,000 warrants. The warrants are exercisable until
five years from the date of issuance at a purchase price of $0.75 per share.
Since the conversion price will be less than the market price of the common
stock at the time the secured convertible notes are issued, we are recognizing a
charge relating to the beneficial conversion feature of the secured convertible
notes during the quarter in which they are issued, including this quarter when
$7,371,000 of secured convertible notes were issued
We will still need additional investments in order to continue operations
to cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
30
Product Research and Development
As a result of the recent financings, the Company anticipates expending
$555,000 of available cash towards research and development activities during
the next twelve (12) months. The anticipated development programs consist of
Petro Chemical Marker, Ink/Substraits and Hologram projects with planned
spending of $250,000, $150,000 and $155,000, respectively.
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the sale of any material property, plant or equipment
during the next 12 months. We do not anticipate the acquisition of any material
property, plant or equipment during the next 12 months.
Number of Employees
From our inception through the period ended March 31, 2005, we have relied
on the services of outside consultants for services and have no employees. In
order for us to attract and retain quality personnel, we anticipate we will have
to offer competitive salaries to future employees. We anticipate that it may
become desirable to add additional full and or part time employees to discharge
certain critical functions during the next 12 months. This projected increase in
personnel is dependent upon our ability to generate revenues and obtain sources
of financing. There is no guarantee that we will be successful in raising the
funds required or generating revenues sufficient to fund the projected increase
in the number of employees. As we continue to expand, we will incur additional
cost for personnel.
Going Concern
The financial statements included in this filing have been prepared in
conformity with generally accepted accounting principles that contemplate the
continuance of the Company as a going concern. The Company's cash position may
be inadequate to pay all of the costs associated with testing, production and
marketing of products. Management intends to use borrowings and security sales
to mitigate the effects of its cash position, however no assurance can be given
that debt or equity financing, if and when required will be available. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification of
liabilities that might be necessary should the Company be unable to continue
existence.
Trends, Risks and Uncertainties
We have sought to identify what we believe to be the most significant risks
to our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to the Company's
Common Stock.
RISK FACTORS
Much of the information included in this quarterly report includes or is
based upon estimates, projections or other "forward-looking statements". Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
31
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined below. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative. Prospective investors should
consider carefully the risk factors set out below.
We Have a History Of Losses Which May Continue, Which May Negatively Impact Our
Ability to Achieve Our Business Objectives.
We incurred net losses of $19,358,259 for the year ended September 30, 2004
and $3,445,164 for the year ended September 30, 2003. For the six months ended
March 31, 2005, we incurred a net loss of $29,046,193.. 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
$555,000 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 January 11, 2005, our independent auditors stated
that our financial statements for the year ended September 30, 2004 were
prepared assuming that we would continue as a going concern. Our ability to
continue as a going concern is an issue raised due to our incurring net losses
of $22,815,035 during the period September 16, 2002 through September 30, 2004.
We continue to experience net operating losses. Our ability to continue as a
going concern is subject to our ability to generate a profit and/or obtain
necessary funding from outside sources, including obtaining additional funding
from the sale of our securities, generating sales or obtaining loans and grants
from various financial institutions where possible. Our continued net operating
losses increases the difficulty in meeting such goals and there can be no
assurances that such methods will prove successful.
32
Our Research and Development Efforts for New Products May be Unsuccessful.
We will incur significant research and development expenses to develop new
products and technologies. There can be no assurance that any of these products
or technologies will be successfully developed or that if developed they will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and this may materially and adversely affect our business
operations, which would result in loss of revenues and greater operating
expenses.
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
commercialization, 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.
We Rely on Our License Agreement With Biowell Technology for the Development of
Our Products, and the Termination of the License Would Have a Material Adverse
Impact on Our Business.
We have executed a licensing agreement with Biowell Technology and we
intend to focus our business on the products developed under this licensing
agreement. We will rely upon Biowell Technology to develop, test and produce
products under this licensing agreement. As a result of the license agreement,
we will not incur expenses with developing products for sale, however, we will
be responsible for marketing the product and building brand recognition in our
licensed territories. Our license could terminate if we fail to perform any
material term or covenant under the license agreement. The termination of our
license agreement would have a material adverse impact on our business, such as
the loss of products and services, which would reduce or eliminate most of our
potential revenue source.
33
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 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
34
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.
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.
35
If We Are Unable to Retain the Services of Messrs. Hutchison, Brocklesby, Botash
or Klemm, or If We Are Unable to Successfully Recruit Qualified Managerial and
Sales Personnel Having Experience in Business, We May Not Be Able to Continue
Our Operations.
Our success depends to a significant extent upon the continued service of
Mr. Rob Hutchison, our Chief Executive Officer, Mr. Peter Brocklesby, our
President, Mr. Adrian Botash, our Chief Marketing Officer and Ms. Karin Klemm,
our Chief Operating Officer and Interim Chief Financial Officer. We do not have
employment agreements with Messrs. Hutchison, Brocklesby, Botash or Klemm. Loss
of the services of Messrs. Hutchison, Brocklesby, Botash or Klemm could have a
material adverse effect on our growth, revenues, and prospective business. We do
not maintain key-man insurance on the life of Messrs. Hutchison, Brocklesby,
Botash or Klemm. Besides Mr. Hutchison's desire to retire within the next few
months, we are not aware of any other named executive officer or director who
has plans to leave us or retire. In addition, in order to successfully implement
and manage our business plan, we will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business. Competition for qualified individuals is intense. There
can be no assurance that we will be able to find, attract and retain existing
employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
Failure to Attract and Retain Qualified Scientific or Production Personnel Could
Have a Material Adverse Effect On Us.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining a qualified personnel base.
Although we believe we have been and will be able to attract and retain these
personnel, there is no assurance that we will be able to continue to
successfully attract qualified personnel. In addition, our anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, government approvals, production, and marketing will require
the addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to attract and retain
these personnel or, alternatively, to develop this expertise internally would
adversely affect our business as our ability to conduct research and development
will be reduced or eliminated, resulting in fewer or no products for sale and
lower revenues. We generally do not enter into employment agreements requiring
these employees to continue in our employment for any period of time.
We Need to Expand Our Sales and Support Organizations to Increase Market
Acceptance of Our Products.
We currently have a small customer service and support organization and
will need to increase our staff to support new customers and the expanding needs
of existing customers. The employment market for sales personnel, and customer
service and support personnel in this industry is very competitive, and we may
not be able to hire the kind and number of sales personnel, customer service and
support personnel we are targeting. Our inability to hire qualified sales,
customer service and support personnel may materially adversely affect our
business, operating results and financial condition.
The Biomedical Research Products Industry is Very Competitive, and We may be
Unable to Continue to Compete Effectively in this Industry in the Future.
We are engaged in a segment of the biomedical research products industry
that is highly competitive. We compete with many other suppliers and new
competitors continue to enter the market. Many of our competitors, both in the
United States and elsewhere, are major pharmaceutical, chemical and
biotechnology companies, and many of them have substantially greater capital
resources, marketing experience, research and development staff, and facilities
36
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. Also, it is also
impossible to determine market size and market data information because
companies are secretive about what security methods they utilize and how much
they spend on such measures. 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.
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.
37
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.
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
38
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.
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 April 26, 2005, we had 68,371,025 shares of common stock issued and
outstanding and outstanding warrants to purchase 25,248,717 shares of common
stock. All of the shares issuable upon exercise of our warrants may be sold
without restriction. The sale of these shares may adversely affect the market
price of our common stock. The issuance of shares upon exercise of warrants will
cause immediate and substantial dilution to the interests of other stockholders
since the selling stockholders may convert and sell the full amount issuable on
exercise.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Prior to May 2001 and new management, we were delinquent in our reporting
requirements, having failed to file our quarterly and annual reports for the
years ended 1998 - 2000 (except the quarterly reports for the first two quarters
of 1999). We have been current in our reporting requirements for the last three
years, however, there can be no assurance that in the future we will always be
current in our reporting requirements.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
39
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.
40
Item 3. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. As of March 31, 2005, the
Company's management carried out an evaluation, under the supervision of
the Company's Chief Executive Officer and the 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
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.
b) Changes in internal controls. There were no changes in internal controls
over financial reporting, known to the Chief Executive Officer or Chief
Financial Officer that occurred during the period covered by this report
that has materially affected, or is likely to materially effect, the
Company's internal control over financial reporting.
41
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
described below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
Stern & Co. v. Applied DNA Sciences, Inc., Case No.: 05 CV 00202
Plaintiff Stern & Co. commenced this action against us in the United States
District Court for the Southern District of New York on or about January 10,
2005. In this action, Stern & Co. alleges that it entered into a contract with
us to perform media and investor relations for a monthly fee of $5,000 and stock
options. Stern & Co. claims that we failed to make certain payments pursuant to
the contract and seeks damages in the amount of $96,042.00. Although our time to
answer the complaint has not expired, we dispute the allegations of the
complaint in its entirety and intend on vigorously defending this matter.
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
Plaintiff Oceanic Consulting, S.A. commenced this action against us in the
Supreme Court of the State of New York, County of New York. Oceanic Consulting,
S.A. asserts a cause of action for breach of contract based upon the allegation
that we failed to make payments pursuant to a consulting agreement. Oceanic
Consulting, S.A.also asserts a causes of action in which it seeks reimbursement
of its expenses and attorneys' fees. Oceanic Consulting, S.A. seeks damages in
the amount of $137,500.00. Oceanic Consulting, S.A. moved for a default
judgment, which we have opposed based upon Oceanic Consulting, S.A.'s failure to
properly serve the complaint as well as our meritorious defenses. We intend on
vigorously defending this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 4, 2005 we issued 25,000 shares related to warrant exercises for
which we received $2,500. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On January 10, 2005, we issued 1,628,789 shares in exchange for debt valued at
$537,500. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
On January 10, 2005, we issued 17,500 shares related to warrant exercises for
which we received $1,750. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On January 21, 2005, we issued 2,399,012 shares in exchange for debt valued at
$791,674. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
On January 21, 2005, we issued 315,636 shares in exchange for legal services
valued at $410,327. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On February 1, 2005, we issued 75,757 shares in exchange for debt valued at
$25,000. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
On February 3, 2005 we issued 20,000 shares related to warrant exercises for
which we received $2,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
42
On February 4, 2005, we issued 606,060 shares in exchange for debt valued at
$200,000. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
On February 4, 2005 we issued 45,000 shares related to warrant exercises for
which we received $4,500. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On February 4, 2005, we issued 1,500,000 shares in exchange for debt valued at
$1,965,000. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
On February 10, 2005, we issued 278,433 shares in exchange for debt valued
at$91,883. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
On February 10, 2005, we issued 17,236 shares in exchange for financial advisory
services valued at $20,166. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On February 10, 2005, we issued 300,000 shares related to the January/February
PPM subscription for which we received $150,000. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On February 22, 2005, we issued 716,500 shares in exchange for financial
advisory services valued at $680,675. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On February 22, 2005, we issued 10,500 shares related to the repricing of a
previous financing valued at $9,975. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On March 1, 2005, we issued 13,202,000 shares related to the January/February
PPM subscription for which we received $6,601,000. Such issuances were
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
On March 3, 2005, we issued 185,000 shares in exchange for employee services
valued at $220,150. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On March 8, 2005 we issued 100,000 shares related to warrant exercises for which
we received $60,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On March 14, 2005, we issued 1,675,272 shares in exchange for financial advisory
services valued at $1,641,767. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On March 18, 2005, we issued 24,333 shares in exchange for legal services valued
at $22,386. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
On March 29, 2005, we issued 15,000 shares in exchange for employee services
valued at $14,850. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On March 31, 2005, we issued 1,240,000 shares related to the January/February
PPM subscription for which we received $620,000. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On March 31, 2005, we issued 1,500,000 shares related to the January/February
PPM subscription for which we received $600,000. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On March 31, 2005, we issued 10,000 shares in exchange for financial advisory
services valued at $8,900. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Pursuant to a written consent of a majority of stockholders dated February
15, 2005 in lieu of a special meeting of the stockholders, the majority of
stockholders approved the following actions:
43
1. To Amend the Company's Articles of Incorporation, as amended, to
increase the number of authorized shares of common stock, par value $.50 per
share (the "Common Stock"), of the Company from 100,000,000 shares to
250,000,000 shares;
2. To Amend the Company's Articles of Incorporation, as amended, to the par
value of the Common Stock of the Company from $.50 per share to $.001 per share;
3. To ratify the selection of Russell Bedford Stefanou Mirchandani as
independent registered public accounting firm of the Company for the year ending
September 30, 2005;
4. To elect five directors to the Company's Board of Directors, to hold
office until their successors are elected and qualified or until their earlier
resignation or removal; and
5. To adopt the Company's 2005 Incentive Stock Plan.
Item 5. Other Information
None.
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and
Rule 15d-14(a), promulgated under the Securities and Exchange Act of
1934, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and
Rule 15d 14(a), promulgated under the Securities and Exchange Act of
1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED DNA SCIENCES, INC.
Date: August 3, 2005 By: /s/ PETER BROCKLESBY
------------------
Peter Brocklesby
President
(Principal Executive Officer)
Date: August 3, 2005 By: /s/ KARIN KLEMM
----------------
Karin Klemm
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
45