UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/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, 2006
Commissions file number 002-90519
APPLIED DNA SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Nevada 59-2262718
--------------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Health Sciences Drive, Suite 113, Stony Brook, New York 11790
-------------------------------------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
(631) 444-6862
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the last 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
The number of shares of Common Stock, $0.001 par value, outstanding on March 31,
2006, was 118,582,385 shares, held by approximately 1,380 shareholders.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
EXPLANATORY NOTE
This Amendment No. 2 to Form 10-QSB/A ("Amendment No. 2") amends the amended
Quarterly Report of Applied DNA Sciences, Inc. (the "Company") on Form 10-QSB/A
for the quarter ended March 31, 2006, as filed with the Securities and Exchange
Commission on May 23, 2006 (the "Original Filing"). This Amendment No. 2 is
being filed for the purpose of correcting errors in accounting for and
disclosing the issuance by the Company of warrants to acquire the Company's
common stock. In addition the Company is correcting certain errors in accounting
for the exchange of its common stock for previously incurred debt with a Company
Director.
We have not updated the information contained herein for events occurring
subsequent to May 23, 2006, the filing date of the Original Filing.
APPLIED DNA SCIENCES, INC
Quarterly Report on Form 10-QSB/A for the
Quarterly Period Ending March 31, 2006
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet:
March 31, 2006 (Unaudited) 3
Condensed Consolidated Statements of Losses:
Three and Six Months Ended March 31, 2006 and 2005 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through March
31, 2006 (Unaudited) 4
Condensed Consolidated Statement of Deficiency in Stockholder's Equity:
For the Period from September 16, 2002 (Date of Inception) Through March
31, 2006 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows:
Six Months Ended March 31, 2006 and 2005 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through March
31, 2006 (Unaudited) 19
Notes to Unaudited Condensed Consolidated Financial Information:
March 31, 2006 21-41
Item 2. Management Discussion and Analysis 42
Item 3. Controls and Procedures 55
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 56
Item 3. Defaults Upon Senior Securities 56
1
Item 4. Submission of Matters to a Vote of Security Holders 56
Item 5. Other Information 56
Item 6. Exhibits 57
Signatures 58
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
RESTATED
(Unaudited)
ASSETS
March 31, 2006
-------------------
Current assets:
Cash and Equivalents $ 77,715
Advances and other receivables 3,128
------------
Total Current Assets 80,843
Property and Equipment - Net of accumulated depreciation
of $6,265 42,337
Capitalized financing costs 390,000
Deposits and prepaid expenses 23,382
Patents, net of accumulated amortization of $15,168 (Note B) 19,089
Intellectual property, net of accumulated amortization of
$1,010,454 (Note B) 8,420,446
------------
Total Assets $ 8,976,097
============
============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 3,318,451
Accrued Liabilities Due Related Parties (Note D) 2,496
Note payable-related party (Note C ) 510,429
------------
Total Current Liabilities 3,831,376
Warrant Liability (Note G) 7,631,128
Convertible note payable, net of unamortized discount (Note D) 676,790
Commitments and contingencies (Note F)
Deficiency in Stockholders' Equity:
Preferred Stock, par value $.001 per share; 10,000,000 shares
authorized; 60,000 issued and outstanding 6
Common Stock, par value $.001 per share; 250,000,000 shares
authorized; 118,582,385 shares issued and outstanding 118,582
Common Stock Subscription (200,000)
Additional Paid-In-Capital 81,997,006
Deficit Accumulated During Development Stage (85,078,791)
-------------
Total Stockholders' Equity (3,163,197)
-------------
Total Liabilities and Deficiency in Stockholders' Equity $ 8,976,097
=============
See accompanying notes to unaudited consolidated financial statements
3
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
September 16,
For The Three Months Ended March 31 For The Six Months Ended March 31 2002, (Date of
Inception) through
2006 2005 2006 2005 March 31, 2006
-------------------- ----------------- --------------- -------------- ------------------
RESTATED RESTATED RESTATED RESTATED RESTATED
Operating expenses:
Selling, general and administrative $ 949,634 $ 17,205,512 $ 2,794,311 $ 22,580,580 $ 74,329,915
Research & Development 75,033 91,303 968,711
Depreciation and amortization 341,676 7,306 684,375 12,027 1,043,802
------------------- ----------------- --------------- ------------ -----------------
Total operating expenses 1,366,343 17,212,818 3,569,989 22,592,607 76,342,428
Loss from operations (1,366,343) (17,212,818) (3,569,989) (22,592,607) (76,342,428)
Net gain/(loss) on revaluation of
warrant liability 3,967,870 10,775,753 10,756,660 10,775,753 27,457,650
Other Income (expense) 3,520 3,100 9,493 3,415 40,835
Interest (expense) (571,696) (30,783,777) (2,350,402) (32,351,586) (36,234,848)
Income (taxes) benefit -- -- -- -- --
------------------- ---------------- --------------- --------------- ------------------
Net income (loss) $ 2,033,351 $ (37,217,742) $ 4,845,762 $ (44,165,025) $ (85,078,791)
=================== ================ =============== =============== =================
Loss per common share
basic $ 0.02 $ (0.71) $ 0.04 $ (1.11) $ (1.81)
=================== ================ =============== =============== =================
Diluted $ 0.02 $ 0.04
=================== ===============
Weighted average shares
outstanding -Basic 116,483,044 53,002,278 114,487,589 40,061,781 47,011,055
Weighted average shares
outstanding -fully
diluted 116,533,352 114,550,086
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, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share - - 100,000 $ 10 $ 990 $ - $ - $ - $ 1,000
Net Loss - - - - - - - (11,612) (11,612)
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ---------
Balance at September 30, 2002 - $ - 100,000 $ 10 $ 990 $ - $ - $ (11,612) $(10,612)
========= ========= ========== =========== =========== ========== ============ =========== =========
Issuance of common stock in
connection with merger with
Prohealth Medical Technologies,
Inc on October 1, 2002 - - 10,178,352 1,015 - - - - 1,015
Cancellation of Common stock
in connection with merger with
Prohealth Medical
Technologies, Inc on October
21, 2002 - - (100,000) (10) (1,000) - - - (1,010)
Issuance of common stock in
exchange for services in
October 2002 at $ 0.65 per
share - - 602,000 60 39,070 - - - 39,130
Issuance of common stock in
exchange for subscription in
November and December 2002
at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - -
Cancellation of common stock
in January 2003 previously
issued in exchange for
consulting services - - (836,000) (84) (54,264) - 54,340 - (8)
Issuance of common stock in
exchange for licensing services
valued at $ 0.065 per share in
January 2003 - - 1,500,000 150 97,350 - - - 97,500
Issuance of common stock in
exchange for consulting
services valued at $ 0.13 per
share in January 2003 - - 586,250 58 76,155 - - - 76,213
Issuance of common stock in
exchange for consulting
services at $ 0.065 per share
in February 2003 - - 9,000 1 584 - - - 585
Issuance of common stock to
Founders in exchange for
services valued at $0.0001 per
share in March 2003 - - 10,140,000 1,014 - - - - 1,014
Issuance of common stock in
exchange for consulting
services valued at $2.50 per
share in March 2003 - - 91,060 10 230,624 - - - 230,634
See accompanying notes to the financial statements
5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Issuance of common stock in
exchange for consulting services
valued at $ 0.065 per share in
March 2003 - - 6,000 1 389 - - - 390
Common stock subscribed in
exchange for cash at $1 per
share in March 2003 - - - - 18,000 - - - 18,000
Common stock issued in
exchange for consulting
services at $ 0.065 per
share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900
Common stock issued in
exchange for cash at $ 1.00 per
share on April 9, 2003 - - 18,000 2 - - - - 2
Common stock issued in
exchange for consulting services
at $ 0.065 per share on April 9,
2003 - - 9,000 1 584 - - - 585
Common stock issued in
exchange for consulting services
at $ 2.50 per share on April 23,
2003 - - 5,000 1 12,499 - - - 12,500
Common stock issued in
exchange for consulting services
at $ 2.50 per share, on June 12,
2003 - - 10,000 1 24,999 - - - 25,000
Common stock issued in
exchange for cash at $ 1.00 per
share on June 17, 2003 - - 50,000 5 49,995 - - - 50,000
Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 27, 2003 - - - - - 24,000 - - 24,000
Common stock retired in
exchange for note payable
at $0.0118 per share,
on June 30, 2003 - - (7,500,000) (750) 750 - - - -
Common stock issued in
exchange for consulting services
at $0.065 per share, on June 30,
2003 - - 270,000 27 17,523 - - - 17,550
Common stock subscribed in
exchange for cash at $ 1.00 per
share pursuant to private
placement on June 30, 2003 - - - - - 10,000 - - 10,000
Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 30, 2003 - - - - - 24,000 - - 24,000
Common stock issued in
exchange for consulting services
at approximately $2.01 per
share, July 2003 - - 213,060 21 428,798 - - - 428,819
See accompanying notes to the financial statements
6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock canceled in July
2003, previously issued for
services rendered at $2.50 per
share - - (24,000) (2) (59,998) - - - (60,000)
Common stock issued in
exchange for options exercised
at $1.00 in July 2003 - - 20,000 2 19,998 - - - 20,000
Common stock issued in
exchange for exercised of
options previously subscribed at
$1.00 in July 2003 - - 10,000 1 9,999 (10,000) - - -
Common stock issued in
exchange for consulting services
at approximately $2.38 per
share, August 2003 - - 172,500 17 410,915 - - - 410,932
Common stock issued in
exchange for options exercised
at $1.00 in August 2003 - - 29,000 3 28,997 - - - 29,000
Common stock issued in
exchange for consulting services
at approximately $2.42 per
share, September 2003 - - 395,260 40 952,957 - - - 952,997
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable-September 2003 - - 19,200 2 47,998 (48,000) - - -
Common stock issued in
exchange for cash at $2.50 per
share pursuant to private
placement September 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for options exercised
at $1.00 in September 2003 - - 95,000 10 94,991 - - - 95,001
Common stock subscription
receivable reclassification
adjustment - - - - - - 2,600 - 2,600
Common Stock subscribed to
at $2.50 per share in September
2003 - - - - - 300,000 - - 300,000
Net Loss for the year
ended September 30, 2003 - - - - - - - (3,445,164) (3,445,164)
--------- --------- ---------- ----------- ----------- ---------- ----------- ----------- ----------
Balance at September 30, 2003 - $ - 17,811,082 $ 1,781 $ 2,577,568 $ 300,000 $ - $(3,456,776) $(577,427)
========= ========= ========== =========== =========== ========== =========== =========== ==========
See accompanying notes to the financial statements
7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Preferred shares issues in
exchange for services at $25.00
per share, October 2003 15,000 15 - - - - - - 15
Common stock issued in
exchange for consulting services
at approximately $2.85 per
share, October 2003 - - 287,439 29 820,389 - - - 820,418
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable-October 2003 - - 120,000 12 299,988 (300,000) - - -
Common stock canceled in
October 2003, previously issued
for services rendered at $2.50
per share - - (100,000) (10) (249,990) - - - (250,000)
Common stock issued in
exchange for consulting services
at approximately $3 per share,
November 2003 - - 100,000 10 299,990 - - - 300,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, November, 2003 - - 100,000 10 249,990 - - - 250,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, December, 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for consulting services
at approximately $2.59 per
share, December 2003 - - 2,125,500 213 5,504,737 - - - 5,504,950
Common Stock subscribed to
at $2.50 per share in Dec 2003 - - - - - 104,000 - - 104,000
Beneficial conversion feature
relating to notes payable - - - - 1,168,474 - - - 1,168,474
Beneficial conversion feature
relating to warrants - - - - 206,526 - - - 206,526
Adjust common stock par value
from $0.0001 to $0.50 per share,
per amendment of articles dated
Dec 2003 - - - 10,223,166 (10,223,166) - - - -
Common Stock issued pursuant
to subscription at $2.50 share in
Jan 2004 - - 41,600 20,800 83,200 (104,000) - - -
Common stock issued in
exchange for consulting services
at $2.95 per share, Jan 2004 - - 13,040 6,520 31,948 - - - 38,468
Common stock issued in
exchange for consulting services
at $2.60 per share, Jan 2004 - - 123,000 61,500 258,300 - - - 319,800
See accompanying notes to the financial statements
8
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting services
at $3.05 per share, Jan 2004 - - 1,000 500 2,550 - - - 3,050
Common stock issued in
exchange for employee services
at $3.07 per share, Feb 2004 - - 6,283 3,142 16,147 - - - 19,289
Common stock issued in
exchange for consulting services
at $3.04 per share, Mar 2004 - - 44,740 22,370 113,640 - - - 136,010
Common Stock issued for
options exercised at $1.00 per
share in Mar 2004 - - 55,000 27,500 27,500 - - - 55,000
Common stock issued in
exchange for employee services
at $3.00 per share, Mar 2004 - - 5,443 2,722 13,623 - - - 16,345
Common stock issued in
exchange for employee services
at $3.15 per share, Mar 2004 - - 5,769 2,885 15,292 - - - 18,177
Preferred shared converted to
common shares for consulting
services at $3.00 per share,
Mar 2004 (5,000) (5) 125,000 62,500 312,500 - - - 374,995
Common stock issued in
exchange for employee services
at $3.03 per share, Mar 2004 - - 8,806 4,400 22,238 - - - 26,638
Common Stock issued pursuant
to subscription at $2.50 per
share in Mar. 2004 - - 22,500 11,250 (9,000) - - - 2,250
Beneficial Conversion Feature
relating to Notes Payable - - 122,362 - - - 122,362
Beneficial Conversion Feature - -
relating to Warrants - - 177,638 - - - 177,638
Common stock issued in
exchange for consulting services
at $2.58 per share, Apr 2004 - - 9,860 4,930 20,511 - - - 25,441
Common stock issued in
exchange for consulting services
at $2.35 per share, Apr 2004 - - 11,712 5,856 21,667 - - - 27,523
Common stock issued in
exchange for consulting services
at $1.50 per share, Apr 2004 - - 367,500 183,750 367,500 - - - 551,250
Common stock returned to
treasury at $0.065 per share,
April 2004 - - (50,000) (25,000) 21,750 - - - (3,250)
Preferred stock converted to
common stock for consulting
services at $1.01 per share in
May 2004 (4,000) (4) 100,000 50,000 51,250 - - - 101,246
Common stock issued per
subscription May 2004 - - 10,000 5,000 (4,000) - (1,000) - -
See accompanying notes to the financial statements
9
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting
services at $0.86 per
share in May 2004 - - 137,000 68,500 50,730 - - - 119,230
Common stock issued in
exchange for consulting
services at $1.15 per
share in May 2004 - - 26,380 13,190 17,147 - - - 30,337
Common stock returned to
treasury at $0.065 per
share, Jun 2004 - - (5,000) (2,500) 2,175 - - - (325)
Common stock issued in
exchange for consulting
services at $0.67 per
share in June 2004 - - 270,500 135,250 45,310 - - - 180,560
Common stock issued in
exchange for consulting services
at $0.89 per share in June 2004 - - 8,000 4,000 3,120 - - - 7,120
Common stock issued in
exchange for consulting services
at $0.65 per share in June 2004 - - 50,000 25,000 7,250 - - - 32,250
Common stock issued pursuant
to private placement at $1.00
per share in June 2004 - - 250,000 125,000 125,000 - - - 250,000
Common stock issued in
exchange for consulting services
at $0.54 per share in July 2004 - - 100,000 50,000 4,000 - - - 54,000
Common stock issued in
exchange for consulting services
at $0.72 per share in July 2004 - - 5,000 2,500 1,100 - - - 3,600
Common stock issued in
exchange for consulting services
at $0.47 per share in July 2004 - - 100,000 50,000 (2,749) - - - 47,251
Common stock issued in
exchange for consulting
services at $0.39 per
share in August 2004 - - 100,000 50,000 (11,000) - - - 39,000
Preferred stock converted
to common stock for
consulting services at
$0.39 per share in August 2004 (2,000) (2) 50,000 25,000 (5,500) - - - 19,498
Common stock issued in
exchange for consulting
services at $0.50 per
share in August 2004 - - 100,000 50,000 250 - - - 50,250
Common stock issued in
exchange for consulting
services at $0.56 per
share in August 2004 - - 200,000 100,000 12,500 - - - 112,500
Common stock issued in
exchange for consulting
services at $0.41 per
share in August 2004 - - 92,500 46,250 (8,605) - - - 37,645
Common stock issued in
exchange for consulting
services at $0.52 per
share in September 2004 - - 1,000,000 500,000 17,500 - - - 517,500
See accompanying notes to the financial statements
10
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting
services at $0.46 per
share in September 2004 - - 5,000 2,500 (212) - - - 2,288
Common stock issued pursuant
to subscription at $0.50 per
share in September 2004 - - 40,000 20,000 - - - - 20,000
Preferred shares converted to
common stock for consulting
services at $0.41 per share in
September 2004 (4,000) (4) 100,000 50,000 4,000 - - - 53,996
Preferred shares issued in
exchange for service at $25 per
share in September 2004 60,000 6 - - 1,499,994 - - - 1,500,000
Fair value of 2,841,000 warrants
issued to non-employees and
consultants for services rendered
at approximately $.71 per warrant
in September 2004 - - - - 2,019,862 - - - 2,019,862
Net Loss - - - - - - - (19,358,258) (19,358,258)
--------- --------- ---------- ----------- ----------- --------- --------- ------------ -----------
Balance at September 30, 2004 60,000 $ 6 23,981,054 $11,990,527 $ 6,118,993 $ - $ (1,000) $(22,815,034) $(4,706,508)
========= ========= ========== =========== =========== ========= ========= ============ ===========
See accompanying notes to the financial statements
11
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting services
at $0.68 per share in October
2004 - - 200,000 100,000 36,000 - - - 136,000
Common stock returned
to treasury at $0.60
per share, Oct 2004 - - (1,069,600) (534,800) (107,297) - - - (642,097)
Common stock issued in
exchange for consulting services
at $0.60 per share in Oct 2004 - - 82,500 41,250 8,250 - - - 49,500
Common Stock issued pursuant
to subscription at $0.60 share in
October 2004 - - 500,000 250,000 50,000 (300,000) - - -
Common stock issued in
exchange for consulting services
at $0.50 per share in October 2004 - - 532,500 266,250 - - - - 266,250
Common Stock issued in
exchange for debt at $0.50 share
in October 2004 - - 500,000 250,000 - - - - 250,000
Common Stock issued pursuant
to subscription at $0.45 share in
October 2004 - - 1,000,000 500,000 (50,000) (450,000) - - -
Common stock issued in
exchange for consulting services
at $0.45 per share in October 2004 - - 315,000 157,500 (15,750) - - - 141,750
Common Stock issued in
exchange for consulting
services at $0.47 share
in November 2004 - - 100,000 50,000 (3,000) - - - 47,000
Common Stock issued in
exchange for consulting
services at $0.80 share
in November 2004 - - 300,000 150,000 90,000 - - - 240,000
Common Stock issued in
exchange for consulting
services at $1.44 per share
in November 2004 - - 115,000 57,500 108,100 - - - 165,600
Common Stock issued in
exchange for employee
services at $1.44 per share
in November 2004 - - 5,000 2,500 4,700 - - - 7,200
See accompanying notes to the financial statements
12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Warrants exercised
at $0.60 per share
in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000
Beneficial Conversion discount
relating to Notes Payable - - - - 1,465,000 - - - 1,465,000
Common stock issued at $0.016
in exchange for note payable in
December 2004 - - 5,500,000 2,750,000 (2,661,500) - - - 88,500
Common stock issued in
settlement of debt at $0.50 per
share in December 2004 - - 2,930,000 1,465,000 - (125,000) - - 1,340,000
Fair value of 6,063,500 warrants
issued to non employees and
consultants for services rendered
at $.52 per warrant in
October and December 2004 - - - - 3,169,052 - - - 3,169,052
Warrants exercised at $0.10 per
share in January 2005 - - 25,000 12,500 (10,000) - - - 2,500
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 1,628,789 814,395 (276,895) - - - 537,500
Fair value of warant liability
reclassed due to registration
rights granted in January 2005 - - - - (3,108,851) - - - (3,108,851)
Warrants exercised at $0.10 per
share in January 2005 - - 17,500 8,750 (7,000) - - - 1,750
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 2,399,012 1,199,504 (407,830) - - - 791,674
Common Stock issued in
exchange for consulting
services at $1.30 per share - - 315,636 157,818 252,508 - - - 410,326
in January 2005
Common Stock issued in
exchange for consulting
services at $1.44 per share
in February 2005 - - 5,796,785 2,898,393 5,418,814 - - - 8,317,207
Fair value of 55,000 warrants
issued to consultants for
services at $1.31 per warrant in
February 2005 - - - - 72,017 - - - 72,017
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 75,757 37,879 (12,879) - - - 25,000
See accompanying notes to the financial statements
13
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Warrants exercised at $0.10 per
share in February 2005 - - 20,000 10,000 (8,000) - - - 2,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 606,060 303,030 (103,030) - - - 200,000
Warrants exercised at $0.10 per
share in February 2005 - - 45,000 22,500 (18,000) - - - 4,500
Common Stock issued in
exchange for related party debt
at $1.31 per share in February
2005 - - 1,500,000 750,000 1,215,000 - - - 1,965,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 278,433 139,217 (47,334) - - - 91,883
Common Stock issued in
exchange for consulting services
at $1.17 per share in February
2005 - - 17,236 8,618 11,548 - - - 20,166
Common stock issued in
exchange for debt at $0.50 per
share in February 2005 - - 300,000 150,000 - - - - 150,000
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 716,500 358,250 322,425 - - - 680,675
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 10,500 5,250 4,725 - - - 9,975
Common stock issued in
exchange for debt at $0.50 per
share in March 2005 - - 13,202,000 6,601,000 - - - - 6,601,000
Common Stock issued in
exchange for consulting
services at $1.19 per share
in March 2005 - - 185,000 92,500 127,650 - - - 220,150
Options exercised at $0.60 per
share in March 2005 - - 100,000 50,000 10,000 - - - 60,000
Common Stock issued in
exchange for consulting
services at $0.98 per share
in March 2005 - - 1,675,272 837,636 804,131 - - - 1,641,767
See accompanying notes to the financial statements
14
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting
services at $0.92 per share
in March 2005 - - 24,333 12,167 10,219 - - - 22,386
Common Stock issued in
exchange for consulting
services at $0.99 per share
in March 2005 - - 15,000 7,500 7,350 - - - 14,850
Common stock issued in exchange
for debt at $0.50 per share
in March 2005 - - 1,240,000 620,000 - - - - 620,000
Common stock canceled for
shares issued in exchange of
debt in March 2005 - - (500,000) (250,000) - - - - (250,000)
Common stock subscribed
Canceled in March 2005 - - - - - 750,000 - - 750,000
Common Stock issued in
exchange for consulting
services at $0.89 per share
in March 2005 - - 10,000 5,000 3,900 - - - 8,900
Adjust common stock par value
from $0.50 to $0.001 per share,
per amendment of articles dated
March 2005 - - - (32,312,879) 32,312,879 - - - -
Beneficial Conversion discount
relating to Notes Payable in
March 2005 - - - - 7,371,000 - - - 7,371,000
Stock options granted to
employees in exchange for
services rendered, at exercise
price below fair value of common
stock in March 2005 - - - - 180,000 - - - 180,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 160,000 160 127,840 - - - 128,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 40,000 40 31,960 - - - 32,000
See accompanying notes to the financial statements
15
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting services
at $0.75 per share in April 2005 - - 850,000 850 636,650 - - - 637,500
Common Stock issued in
exchange for consulting services
at $0.33 per share in April 2005 - - 500,000 500 164,500 - - - 165,000
Common Stock canceled during
April 2005, previously issued for
services rendered at $3.42 per
share - - (10,000) (10) (34,190) - - - (34,200)
Common Stock issued in
settlement of debt at $0.33 per
share in April 2005 - - 75,758 77 24,923 (25,000) - - -
Common Stock issued in
exchange for consulting services
at $0.68 per share in April 2005 - - 50,000 50 33,950 - - - 34,000
Proceeds received against
subscription Payable in June
2005 - - - - - 118,000 - - 118,000
Common Stock canceled in
June 2005, previously issued for
services rendered at $0.50 per
share - - (10,000) (10) (4,990) - - - (5,000)
Cancellation of previously
granted stock options granted
to employees for services
rendered, at exercise price
below fair value of common stock - - - - (180,000) - - - (180,000)
Common Stock issued in
exchange for consulting services
at $0.60 per share in July 2005 - - 157,000 157 94,043 - - - 94,200
Common Stock issued in
exchange for intellectual property
at $0.67 per share in July 2005 - - 36,000,000 36,000 24,084,000 - - - 24,120,000
Common Stock issued in
exchange for consulting
services at $0.60 per share
in July 2005 - - 640,000 640 383,360 - - - 384,000
Common Stock issued in
exchange for employee services
at $0.48 per share in July 2005 - - 8,000,000 8,000 3,832,000 - - - 3,840,000
See accompanying notes to the financial statements
16
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting
services at $0.94 per share
in July 2005 - - 121,985 121 168,217 - - - 168,338
Common Stock issued in
exchange for consulting
services at $0.48 per share
in August 2005 - - 250,000 250 119,750 - - - 120,000
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.62 per share in
September 2005 - - 814,158 814 501,858 - - - 502,672
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.70 per share in
September 2005 - - 391,224 391 273,466 - - - 273,857
Common Stock issued in
exchange for consulting
services at $0.94 per share
in September 2005 - - 185,000 185 173,715 - - - 173,900
Common Stock returned in
September 2005, previously
issued for services rendered at
$0.40 per share - - (740,000) (740) (453,232) 56,000 1,000 - (396,972)
Net Loss (67,109,519) (67,109,519)
--------- --------- ---------- ----------- ----------- ---------- --------- ------------ -----------
Balance as of September
30, 2005 60,000 $ 6 112,230,392 $ 112,230 82,320,715 $ 20,000 $ - $(89,924,553) $(7,471,602)
========= ======== =========== =========== =========== ========== ========= ============ ===========
See accompanying notes to the financial statements
17
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued pursuant
to subscription at $0.50 per
share in October 2005 - - 400,000 400 199,600 (200,000) - - -
Common Stock issued in
exchange for consulting
services at $0.75 per share
in October 2005 - - 100,000 100 74,900 - - - 75,000
Common Stock returned in
October 2005, previously
issued for services
rendered at $0.60 per share - - (350,000) (350) (209,650) - - - (210,000)
Common stock issued pursuant
to subscription at $0.50 per
share in December 2005 - - 40,000 40 19,960 (20,000) - - -
Common Stock issued to investors
pursuant to registration rights
agreement at $0.51 per share in
December 2005 - - 505,854 506 257,480 - - - 257,986
Common Stock returned in
January 2006, previously issued
for services rendered at $0.60
per share - - (250,000) (250) (149,750) - - - (150,000)
Common Stock issued to investors
pursuant to registration rights
agreement at $0.32 per share
in January 2006 - - 806,212 806 257,182 - - - 257,988
Common Stock issued to investors
pursuant to registration rights
agreement at $0.20 per share
in January 2006 - - 1,289,927 1,290 256,695 - - - 257,985
Fair value of 200,000 warrants
issued to consultants for
services at $.21 per warrant in
January 2006 - - - - 43,098 - - - 43,098
Common Stock issued in
exchange for consulting services
at $0.17 share in February 2006 - - 160,000 160 27,040 - - - 27,200
Common Stock issued in
exchange for consulting services
at $0.16 share in February 2006 - - 3,800,000 3,800 604,200 - - - 608,000
Previously issued warrants
reclassed to warrant liability - - - - (1,584,614) - - - (1,584,614)
Common Stock returned in
March 2006, previously issued
for services rendered at $0.80
per share - - (150,000) (150) (119,850) - - - (120,000)
Net Income - - - - - - - 4,845,762 4,845,762
--------- --------- ----------- --------- ----------- ---------- ----------- ----------- ----------
Balance as of March 31, 2006 60,000 6 118,582,385 118,582 81,997,006 (200,000) - (85,078,791) (3,163,197)
========= ========= =========== ========= =========== ========== =========== =========== ==========
See accompanying notes to unaudited condensed consolidated financial statements
18
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Period
September 16,
2002
(Date of
For the Six Month Ended Inception)
March 31, March 31, through March 31
2006 2005 2006
-----------------------------------------
RESTATED RESTATED RESTATED
Cash Flows (used in) operating activities:
Net income (loss) $ 4,845,762 $(44,165,025) $(85,078,791)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 684,375 12,027 1,031,887
Organizational expenses -- -- 88,500
Preferred shares issued in exchange for services -- -- 1,500,000
Warrants issued to in exchange for services 43,100 3,241,069 9,421,530
Income attributable to re-pricing of warrants (10,756,660) (10,775,753) (27,457,651)
Financing costs attributable to the issuance of warrants 2,271,000 23,148,214 25,418,674
Amortization of beneficial conversion feature -- 8,836,000 10,461,000
Amortization of debt discount attributable to convertible debentures 35,390 35,390
Fair value of common stock issued to related party in excess of previously incurred debt -- 1,365,000 1,365,000
Common stock issued in connection with penalty shares pursuant to pending SB-2 registration 773,958 -- 1,550,487
Common stock issued in exchange for services 710,200 12,399,702 31,284,573
Common stock issued in exchange for intellectual property in connection with costs
acquiring intangible assets -- -- 14,689,100
Common stock canceled--previously issued for services rendered (480,000) (142,098) (1,343,845)
Increase (decrease) in assets and liabilities:
Other current receivable 9,301 233
Other Assets (9,120) (23,941) (26,743)
Due related parties, net 2,496 (20,631) 55,158
Accounts payable and accrued liabilities 742,575 (140,782) 3,142,529
----------- ------------ ------------
Net cash (used in) operating activities (1,127,623) (6,086,218) (13,862,969)
Cash flows from investing activities:
Acquisition of property and equipment (35,852) -- (48,602)
Payment of patent filing fees -- (4,347) (25,698)
----------- ------------ ------------
Net cash (used in) investing activities (35,852) (4,347) (74,300)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost -- -- 432,000
Proceeds from issuance of convertible debt 1,210,000 8,961,000 10,414,000
Proceeds from exercise of options and warrants -- 102,750 343,750
Payment of debt (24,854)
Net advances from shareholders -- -- 100,088
See accompanying notes to unaudited condensed consolidated financial statements
19
For the Period
September 16,
2002
(Date of
For the Six Month Ended Inception)
March 31, March 31, through March 31
2006 2005 2006
-----------------------------------------
RESTATED RESTATED RESTATED
Proceeds from loans -- -- 2,750,000
----------- ------------ ------------
Net cash provided by financing activities 1,210,000 9,063,750 14,014,984
Increase (decrease) in cash and cash equivalents 46,525 2,973,185 77,715
Cash and cash equivalents, beginning of period 31,190 1,832 --
----------- ------------ ------------
Cash and cash equivalents, end of period $ 77,715 $ 2,975,017 $ 77,715
=========== ============ ============
Supplemental Information:
Cash paid during the period for interest -- -- --
Cash paid during the year for taxes -- -- --
Non--cash disclosures:
Common stock issued for services 710,200 12,399,702 31,284,573
Common stock issued in exchange for previously incurred debt -- 2,313,500 2,313,500
Amortization of beneficial conversion feature attributed to convertible notes -- 8,836,000 10,461,000
Warrants issued in exchange for financing costs 2,271,000 23,148,214 25,418,674
Common stock canceled--previously issued for services rendered (480,000) (142,098) (1,343,845)
Preferred shares issued in exchange for services -- -- 1,500,000
Warrants issued to consultants 43,100 3,241,069 9,421,530
Acquisition:
Common stock retained -- 1,015
Assets acquired -- (135)
------------
Total consideration paid -- 880
============
Organization expenses-- note issued in exchange of shares retired -- 88,500
See accompanying notes to unaudited condensed consolidated financial statements
20
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB/A, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended March 31, 2006 are
not necessarily indicative of the results that may be expected for the fiscal
year ended September 30, 2006. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated September 30,
2005 financial statements and footnotes thereto included in the Company's SEC
Form 10-KSB, as amended.
Business and Basis of Presentation
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of Nevada. The Company is in the
development stage, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA
embedded biotechnology security solutions in the United States. To date, the
Company has generated nominal sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
inception through March 31, 2006, the Company has accumulated losses of
$85,078,791.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary ProHealth Medical Technologies, Inc. Significant
inter-company transactions have been eliminated in consolidation.
Reclassification
Certain prior period amounts have been reclassified for comparative purposes.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives of 3 to 5 years using the straight line method. At March 31, 2006
property and equipment consist of:
Computer equipment $ 15,328
Furniture 33,274
Accumulated depreciation (6,265)
--------
Net $ 42,337
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.
21
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
The Company did not grant any stock options to employees during the six month
period ended March 31, 2006. 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:
For the Period
September, 16
For Three For Three 2002 (Date of
Three Three For The Six For The Six Inception
Months ended Months ended Months ended Months ended through
March 31, March 31, March 31, March 31, March 31,
2006 2005 2006 2005 2006
Net income (loss) - as
reported $2,033,351 $(37,217,742) $4,845,762 $(44,165,025) $(85,078,791)
Add: Total stock based
employee compensation
expense as reported under
intrinsic value method
(APB No. 25) -- -- -- -- --
Deduct: Total stock based
employee compensation
expense as reported under
fair value method (APB No.
123) (1,406,350) (1,406,350) (1,406,350)
---------- ------------ ---------- ------------ ------------
Net income (loss) - Pro
Forma $2,033,351 $(38,624,092) $4,845,762 $(45,571,375) $(86,485,141)
========== ============ ========== ============ ============
Net income (loss)
attributable to common
stockholders - Pro Forma $2,033,351 $(38,624,092) $4,845,762 $(45,571,375) $(86,485,141)
========== ============ ========== ============ ============
Basic income (loss) per
share - as reported $ (0.02) $ (0.71) $ 0.04 $ (1.11)
========== ============ ========== ============
Basic income (loss) per
share - Pro Forma $ (0.02) $ (0,73) $ 0.04 $ (1.14)
========== ============ ========== ============
Fully diluted income per
share - as reported $ 0.02 N/A $ 0.04 N/A N/A
Fully diluted income per
share - Pro Forma $ 0.02 N/A $ 0.04 N/A N/A
22
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
Concentrations of Credit Risk
Financial instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit. The Company periodically reviews its trade receivables
in determining its allowance for doubtful accounts. At March 31, 2006, allowance
for doubtful receivable was $0.
Derivative Financial Instruments
The Company's derivative financial instruments consist of embedded derivatives
related to the 10% Secured Convertible Promissory Notes (the "Serial Notes")
entered into on March 7, 2006 (see Note D). These embedded derivatives include
certain conversion features, variable interest features, call options and
default provisions. The accounting treatment of derivative financial instruments
requires that the Company record the derivatives and related warrants at their
fair values as of the inception date of the Note Agreement (estimated at
$858,160) and at fair value as of each subsequent balance sheet date. In
addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the Notes, the Company is
required to classify all other non-employee stock options and warrants as
derivative liabilities and mark them to market at each reporting date. The fair
value of such options and warrants that were reclassified as liabilities from
additional paid-in capital in the six months ended March 31, 2006 totaled
$1,584,614. Any change in fair value will be recorded as non-operating, non-cash
income or expense at each reporting date. If the fair value of the derivatives
is higher at the subsequent balance sheet date, the Company will record a
non-operating, non-cash charge. If the fair value of the derivatives is lower at
the subsequent balance sheet date, the Company will record non-operating,
non-cash income. Conversion-related derivatives were valued using the Binomial
Option Pricing Model with the following assumptions: dividend yield of 0%;
annual volatility of 157.55%; and risk free interest rate of 4.82% as well as
probability analysis related to trading volume restrictions. The remaining
derivatives were valued using discounted cash flows and probability analysis.
The derivatives are classified as long-term liabilities (see Note F).
New Accounting Pronouncements
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
adopted this interpretation from January 1, 2006. The adoption of this
Interpretation did not have a material impact on its consolidated financial
position, results of operations or cash flows.
23
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company adopted of this SFAS with its restatements
included within.
On February 16, 2006 the Financial Accounting Standards Board (FASB) issued SFAS
155, "Accounting for Certain Hybrid Instruments," which amends SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS 155 allows financial instruments that have embedded
derivatives to be accounted for as a whole (eliminating the need to bifurcate
the derivative from its host) if the holder elects to account for the whole
instrument on a fair value basis. SFAS 155 also clarifies and amends certain
other provisions of SFAS 133 and SFAS 140. This statement is effective for all
financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. The Company does not expect its adoption of this new
standard to have a material impact on its financial position, results of
operations or cash flows.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing
of Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The Company does not expect its
adoption of this new standard to have a material impact on its financial
position, results of operations or cash flows.
NOTE B - ACQUISITION OF INTANGIBLE ASSETS
The Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets,
whereby the Company periodically test its intangible assets for impairment. On
an annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.
Biowell Technology, Inc.
On July 12, 2005, the Company acquired certain intellectual properties from
Biowell Technology, Inc. ("Biowell") through an Asset Purchase Agreement
("Agreement") in exchange for 36 million shares of the Company's restricted
common stock having an aggregate fair value at the date of issuance of
$24,120,000. The intangible assets acquired consist of proprietary DNA
anti-counterfeit trade secrets created by Biowell that are intended to protect
intellectual property from counterfeiting, fraud, piracy, product diversion and
unauthorized intrusion.
24
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE B - ACQUISITION OF INTANGIBLE ASSETS (continued)
The purchase price has been allocated as follows:
Amortizable intangible assets acquired are comprised of:
Developed core technologies $ 2,260,900
Developed product technologies 7,170,000
-----------
Total amortizable intangible assets 9,430,900
Transaction costs 14,869,100
=----------
Total purchase price $24,120,000
===========
In Process Research & Development
The Company concluded as of the date of acquisition, the acquired intangible
assets, consisting of developed core and product technologies had reached full
development and that it was not the intention of the Company's management to
utilize the asset in specific research and development activities as defined in
SFAS No. 2 Accounting for Research & Development Costs, As a result, the Company
determined there was no in-process research and development ("IPR& D") projects
in place related to the technology acquired , nor any future research and
development activities planned. Accordingly, there is no charge to operations
during the year ended September 30, 2005 for IPR&D in connection with the
acquisition of the assets.
Transaction costs
The amount of the purchase price that could not be allocated to acquired
identifiable intangible assets or IPR & D was $14,689,100 and was charged to
operations as a cost of the transaction during the year ended September 30,
2005.
The identifiable intangible assets acquired and their carrying value at March
31, 2006 are:
Weighted
Gross Carrying Average
Amount Accumulated Residual Amortization
Amortization Net Value Period
(Years)
Amortizable
Intangible
Assets:
Trade secrets and
developed technologies
$9,430,900 $1,010,454 $8,420,446 - 7
Patents 34,237 15,148 19,089 - 5
---------- ----------- ---------- -------- -------
Total
Amortized
Identifiable
Intangible Assets $9,465,137 $1,025,602 $8,439,535 - 6.99
25
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE B - ACQUISITION OF INTANGIBLE ASSETS (continued)
Total amortization expense charged to operations for the six months ended March
31, 2006 and 2005 were $677,040 and $7,306 respectively.
Estimated amortization expense as of March 31, 2006 is as follows:
2006 $ 1,357,279
2007 1,357,279
2008 1,349,748
2009 1,349,271
2010 and after 3,704,998
-----------
Total $ 9,116,575
===========
NOTE C- RELATED PARTY TRANSACTIONS
At March 31, 2006, related party notes payable is as follows:
4% Convertible Note Payable, unsecured, to related party and due August 1,
2005; currently in default. Note holder has the option to covert unpaid
principal together with any accrued and unpaid interest to 180,000 shares of
the Company's common stock. $ 410,429
7.5% note payable to BioCogent, Ltd, an entity controlled by the Company's
President and CEO; unsecured and repayment of principal and accrued and unpaid
interest due upon the earlier of the (i) receipt by the Company of $250,000 in
debt or equity or other infusion of capital or (ii) by June 30, 2006 100,000
----------
510,429
Less: Current portion (510,429)
----------
$ -0-
----------
In February, 2005 the Company issued 1,500,000 shares of its restricted common
stock to a Company officer and Director in exchange for $600,000 of previously
incurred debt. The debt was in the form of a promissory note.
The Company valued the shares at $1.31 per share for a total of $1,965,000,
which represents the fair value of the common stock on the date of the exchange.
The difference between the fair value of the common stock of $1,965,000 and the
face value of the debt of $600,000 or $1,365,000 has been charged to current
period interest expense.
The Company's officers have advanced funds to the Company for travel related and
working capital purposes. No formal repayment terms or arrangements exist. There
was $2,496 in advances due at March 31, 2006.
26
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE C- RELATED PARTY TRANSACTIONS (continued)
On July 15, 2005, the Company entered into a consulting agreement with Timpix
International Limited ("Timpix") for the consulting services of three former
Biowell employees, Drs. Jun-Jei Sheu, Ben Liang and Johnson Chen. The consulting
agreement is for the shorter of two years, or until all of the consultants have
obtained a visa to work in the United States and execute employment agreements
with the Company. The consulting agreement shall automatically renew for one
year periods until terminated. Pursuant to the consulting agreement, the Company
is obligated to pay $47,000 per month, which is apportioned at $20,000 per month
for Mr. Sheu, $15,000 per month for Mr. Liang and $12,000 per month for Mr.
Chen. In the event that either of Messrs. Sheu, Liang or Chen becomes employed
by us, the monthly consulting fee shall be reduced accordingly. We have
negotiated an agreement in principle to restructure the Consulting Agreement,
whereby, fees owed to Timpix from July 2005 through December 2005 will be
waived, and salaries for each of the three consultants will be reduced starting
January 1, 2006.
In July 2005, the Company entered into a license agreement with Biowell, whereby
the Company granted Biowell an exclusive license to sell, market, and
sub-license the Company's products in selected Asian countries. The exclusive
license for such selected territories is for an initial period of until December
31, 2010, and if Biowell meets its performance goals, the license agreement will
extend for an additional five year term. The license agreement gives Biowell the
initial rights to future anti-fraud biotechnologies developed by the Company and
also new applications for the existing technology that may be developed for the
marketplace as long as the license agreement remains in effect. In the event
that Biowell shall sub-license the products within its territories, Biowell
shall pay the Company 50% of all fees, payments or consideration or any kind
received in connection with the grant of the sublicense. Biowell is required to
pay a royalty of 10% on all net sales made and is required to meet certain
minimum annual net sales in its various territories. Cumulative royalties earned
from the period July 2005 through March 31, 2006 totaled $20,532.
On March 29, 2006, the Company borrowed $100,000 in the aggregate, at a rate of
7.5% per annum, from BioCogent, Ltd., ("BioCogent"), an entity controlled by the
Company's President and Chief Executive Officer. These loans are due and payable
upon the earlier to occur of (1) the close of business on June 30, 2006, or (2)
the closing of the issuance and sale by the Company of its securities for gross
proceeds of at least $250,000.
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES
10% Secured Convertible Promissory Notes dated March 8, 2006
On March 8, 2006, in connection with a private placement, the Company issued 10%
Secured Convertible Promissory Notes in the aggregate principal amount of
$1,500,000 (the "Serial Notes") and warrants to purchase 3,000,000 shares of the
Company's common stock to accredited investors. The Serial Notes bear interest
at 10%, mature on September 7, 2007 and are convertible into the Company's
common stock, at the holder's option, at fifty cents ($.50) per share during the
period from the date of issuance (March 8, 2006) through March 7, 2007. Should
the holder of the Serial Note elect not to convert to the Company's common stock
on or before March 7, 2007, the outstanding principal, along with accrued and
unpaid interest automatically converts to the Company's common stock at an
amount equal to 80% of the average bid price of the Company's common stock on
the Over-The-Counter Bulletin Board for a period equal to ten (10) days prior to
conversion on the maturity date of September 7, 2007. The full principal amount
of the Serial Notes is due upon a default under the terms of the Note Agreement.
In addition, the Company granted the Investors a security interest in all of its
assets (see Note B). The Company agreed to file a registration statement with
the SEC to effect the registration of the shares of its common stock underlying
the Serial Notes and the warrants within 30 days of the effective date of the
Company's pending Registration Statement being declared effective. The Company
also agreed to use its reasonable best efforts to cause the registration
statement to be declared effective no later than 180 days after its filing. If
the registration statement is not filed and declared effective as described
above, the Company will be required to pay liquidated damages in the form of
cash to the holders of the Serial Notes, in an amount equal to 2% of the unpaid
principal balance per month if the above deadlines are not met. In the event of
a default on the Serial Notes, the Serial Notes will bear interest at twelve
percent (12%) per annum until paid.
27
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
The warrants are exercisable until five years from March 8, 2006 until March 7,
2011 at a price of $0.50 per share. The Company has the right, but not the
obligation, to call these warrants for $1.25 per share at the earlier of (i) one
year from issuance or (ii) the date that shares of common stock issuable upon
conversion of the Serial Notes and exercise of the warrants are registered for
resale and the Company's common stock trades at or above $1.25 per share for
twenty (20) consecutive trading days. The Notes include certain features that
are considered embedded derivative financial instruments, such as a variety of
conversion options, a variable interest rate feature, events of default and a
variable liquidated damages clause.
The initial relative fair value assigned to the embedded derivatives was
$346,500.
In conjunction with the Notes, the Company issued warrants to purchase 3,000,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values as of the
inception date of the debt issuance, which totaled $512,100.
The Company recorded the fair value of the derivatives ($346,500) and warrants
($ 512,100) to debt discount, aggregating $858,600, which will be amortized to
interest expense over the term of the Notes. Amortization of $35,390 was
recorded for the six months ended March 31, 2006.
Balance of convertible note as of March 31, 2006, net of
unamortized discount: $676,790
--------------------------------------------------------------- ========
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the Serial
Notes into shares of the Company's common stock. The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the principal and interest payments
then due on the Notes.
$ 1,675,000 Convertible Notes
Convertible notes payable ("Bridge Unit Offering") in quarterly installments of
interest only at 10% per annum, secured by all assets of the Company and due on
the earlier of the 9 month anniversary date of the initial closing of the
offering or the completion of any equity financing of $3,000,000 or more; the
Company, at its sole discretion may prepay principal at any time without
penalty. The Bridge Unit Offering Notes unpaid principal and accrued and unpaid
interest were converted to an aggregate of 4,988,051 shares of the Company's
common shares at a price equal to approximately $. 33 per share during the
quarter ended March 31, 2005.
$ 1,465,000 Convertible Notes
Beginning in December, 2004, the Company sold a 10% convertible debenture in the
aggregate amount of $ 1,465,000 in a private placement and exempt offerings to
sophisticated investors, net of costs and fees.
The Convertible Note's terms called for the debt to automatically convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 2,930,000 shares of the
Company's common stock.
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 2,930,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants were issued in February, 2005 and lapse if unexercised by
February, 2010. A registration rights agreement was executed in December 2004
and consummated in February, 2005 requiring the Company to register the shares
of its common stock underlying the Convertible Notes and warrants so as to
permit the public resale thereof. The registration rights agreement provided for
the payment of liquidated damages of 3.5% of the aggregate Convertible Note
financing per month if the stipulated registration deadlines were not met. The
liquidated damages, which approximate $ 51,275 per month, may be paid, at the
Company's option, in cash or unregistered shares of the Company's common stock.
28
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $1,465,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in December 2004, the debt discount
attributed to the beneficial conversion feature of $1,465,000 was charged to
interest expense in its entirety during the six months ended March 31, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued a warrant in February, 2005 that has registration rights
for the underlying shares. As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet $23,148,214 and charged to operations as interest
expense. Upon the registration statement being declared effective, the fair
value of the warrant on that date will be reclassified to equity. The Company
initially valued the warrants using the Black-Scholes pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of
152.59%, (3) risk-free interest rate of 3.67%, and (4) expected life of 5 years.
In connection with the placement of the $1,465,000 of convertible notes as
described above, the Company agreed to registered shares of the Company's common
stock underlying certain previously issued and outstanding warrants that were
not subject to a registration rights agreement at the time the warrants were
issued. These warrants consist of following:
o 105,464 warrants entitling the holder to purchase 105,464 shares of the
Company's common stock at the price of $ .10 per share. These warrants
were issued in July, 2004 and lapse if unexercised by July, 2009.
o 1,602,500 warrants entitling the holder to purchase 1,602,500 shares of
the Company's common stock at the price of $ .60 per share. These
warrants were issued in October, 2003 and lapse if unexercised by
October, 2008.
As a result, the Company is required to classify the warrants as derivative
liabilities and mark then to market at each reporting date. The fair value of
the warrants that were subject to registration reclassified as liabilities from
additional paid in capital at March 31, 2005 totaled $3,108,851. Upon the
registration statement being declared effective, the fair value of the warrants
on that date will be reclassified to equity. The Company initially valued the
warrants using the Black-Scholes pricing model with the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 148.66%, (3) risk-free
interest rate of 3.21%, and (4) expected life of 3 years.
$ 7,371,000 Convertible Notes
In January and February, 2005, the Company sold an 10% convertible debenture in
the aggregate amount of $7,371,000 in a private placement and exempt offerings
to sophisticated investors, net of costs and fees.
The Convertible Note's terms called for the debt to automatically convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 14,742,000 shares of the
Company's common stock.
29
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 14,742,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants lapse if unexercised by February, 2010. A registration rights
agreement was executed and consummated in January, 2005 requiring the Company to
register the shares of its common stock underlying the Convertible Notes and
warrants so as to permit the public resale thereof. The registration rights
agreement provided for the payment of liquidated damages of 3.5% of the
aggregate Convertible Note financing per month if the stipulated registration
deadlines were not met. The liquidated damages, which approximate $ 257,985 per
month, may be paid, at the Company's option, in cash or unregistered shares of
the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $ 7,731,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in February, 2005, 2005, the debt
discount attributed to the beneficial conversion feature of $ 7,371,000 was
charged to interest expense in its entirety during the six months ended March
31, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued warrants that have registration rights for the underlying
shares. As the contract must be settled by the delivery of registered shares and
the delivery of the registered shares is not controlled by the Company, pursuant
to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the net value of the warrants at
the date of issuance was recorded as a warrant liability on the balance sheet
$23,148,214 and charged to operations as interest expense. Upon the registration
statement being declared effective, the fair value of the warrant on that date
will be reclassified to equity. The Company initially valued the warrants using
the Black-Scholes pricing model with the following assumptions: (1) dividend
yield of 0%; (2) expected volatility of 152.59%, (3) risk-free interest rate of
3.67%, and (4) expected life of 5 years.
NOTE E - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company. These warrants were granted in lieu of cash
compensation for services performed or financing expenses in connection with the
sale of the Company's common stock.
Warrants Outstanding
Remaining Weighted Weighted Exercisable
Number Contractual Average Average Weighted
Exercise Exercise Average
Prices Outstanding Life (Years) Price Exercisable Exercise Price
================ =============== ======================= =============== ============== =================
$0.10 105,464 3.29 $0.10 105,464 $0.10
$0.20 5,000 2.64 $0.20 5,000 $0.20
$0.50 8,850,000 4.72 $0.50 8,550,000 $0.50
$0.55 9,000,000 2.22 $0.55 9,000,000 $0.55
$0.60 9,132,000 3.13 $0.60 9,132,000 $0.60
$0.70 950,000 1.64 $0.70 950,000 $0.70
$0.75 17,727,000 3.50 $0.75 17,727,000 $0.75
$1.00 100,000 .55 $1.00 100,000 $1.00
--------------- --------------
45,569,464 45,569,464
=============== ==============
30
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE E - STOCK OPTIONS AND WARRANTS (continued)
Transactions involving warrants are summarized as follows:
Number of Weighted
Shares Average
Price Per
Share
Balance, September 30, 2003 383,500 $1.38
Granted 4,574,753 0.58
Exercised (88,000) 1.00
Canceled or expired - -
---------------- -----------------
Balance, September 30, 2004 4,870,253 $0.63
Granted 32,873,000 0.71
Exercised (142,500) .0.34
Canceled or expired (731,289) 0.65
---------------- -----------------
Balance, September 30, 2005 36,869,464 0.67
Granted 8,700,000 0.51
Exercised - -
Canceled or expired - -
---------------- -----------------
Outstanding at March 31, 2006 45,569,464 $0.63
================ =================
In December 2005, in connection with debt financing, the Company issued
5,500,000 warrants to non-employees to purchase the Company's common stock at an
exercise price of $0.50 per share. As the contract must be settled by the
delivery of registered shares and the delivery of the registered shares is not
controlled by the Company, pursuant to EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock", the fair value of the warrants at the date of issuance was recorded as a
warrant liability of $1,758,900 and charged to operations as interest expense.
Upon the registration statement being declared effective, the fair value of the
warrants on that date will be reclassified to equity. The Company initially
valued the warrants using the Black-Scholes pricing model with the following
assumptions: (1) dividends yield of 0%; (2) expected volatility of 156.19%, (3)
risk-free interest rate of 4.35%, and (4) expected life of 5 years.
During the six months ended March 31, 2006, and in connection with debt
financing, the Company issued 200,000 warrants to purchase the Company's common
stock at an exercise price of $0.70, expiring in five years. The fair value
attributable to the warrants of $43,098 was charged to current period
operations.
In the six months ended March 31, 2006, the Company granted 3,000,000 warrants
to holders of the Company's convertible notes (See Note D). The warrants have an
exercise price of $0.50 per with a five year life. Under certain conditions, as
described in Note D, the Company as the option to redeem these warrants.
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company revalued the warrants as of March 31, 2006 using the
Black-Scholes option pricing model. The difference between the fair value of the
warrants as of March 31. 2006 and the previous valuation as of July, 2005 has
been recorded as a gain on revaluation of warrant liability, and included in the
accompanying consolidated financial statements (see Note F)
Employee Stock Options
On February 15, 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 shares of common stock. Incentive options and
shares of common stock 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 option to
purchase 1.830 million shares of common stock 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 June 30, 2005. ESOP grants must be exercised
within five (5) years. Had the Company charged these warrants to operations, the
resulting expense would have totaled $1,406,350.
31
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE E - STOCK OPTIONS AND WARRANTS (continued)
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
$ 0.68 3,660,000 3.50 $ 0.68 3,660,000 $ 0.68
Transactions involving stock options issued to employees are summarized as
follows:
Weighted
Average
Exercise
Number of Price Per
Shares Share
Outstanding at October 1, 2004 - $ -
Granted 3,660,000 0.68
Exercised - -
Cancelled or expired - -
-------------
Outstanding at September 30, 2005 3,660,000 $ 0.68
Granted - -
Exercised - -
Canceled or expired - -
-------------
Outstanding at March 31, 2006 3,660,000 $ 0.68
Employee options outstanding and options exercisable at March 31, 2006 had no
intrinsic value. Aggregate intrinsic value represents the difference between the
Company's closing stock price on the last trading day of the fiscal period,
which was $ .19 as of March 31, 2006, and the exercise price multiplied by the
number of options outstanding. Total intrinsic value of options exercised was $
0 for the three months ended March 31, 2006. There was no unrecognized
stock-based compensation expense related to non-vested stock options during the
three months ended March 31, 2006.
NOTE F - DEBT DERIVATIVE AND WARRANT LIABILITY
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities and EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock", the Company
accounted for identified embedded derivatives and warrants to purchase its
common stock that provide for the payment of liquidated damages if the
stipulated registration deadlines were not met as liabilities.
As of the date of this filing, the registration statement has not yet been
declared effective by the SEC. The Company determined the fair value of the
embedded derivatives and valued the warrants using the Black-Scholes option
pricing model. Assumptions regarding the life were one to five years, expected
dividend yield of 0%, a risk free rate of 4.55%, and a volatility of 42.8%. The
determined value of both the warrants and the underlying embedded derivatives as
of March 31, 2006 was $7,631,129. The net change in the fair value of the
derivative and warrant liability values from December 31, 2005 has been recorded
as a gain from change in debt derivative and warrant liabilities in the
consolidated condensed statement of operations.
32
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE G - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 250,000,000 shares
of common stock, with a $0.001 par value per share as the result of a
shareholder meeting conducted on February 14, 2005. Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares with a par value of $0.50. In February 2005, the Company passed a
resolution authorizing change in the par value per common shares from $0.50 per
share to $0.001 per share.
During the period September 16, 2002 through September 30, 2003, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately $1,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc.
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
During the fiscal year ended September 30, 2003, the Company issued 2,369,130
shares of common stock, net of cancellation of 860,000 shares in exchange for
consulting services. The Company valued the shares issued at $2,191,227, net of
cancellation of $60,008, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In November 2003, the Company issued 876,000 shares of common stock in exchange
for subscription at approximately $ 0.065 per share.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement (see Note I). The Company valued the shares issued at
approximately $ .065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth granted the Company an option to acquire up to 8,500,000 shares of
the Company's common stock in exchange for $100,000 (see Note C). The option
expired 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 had an option through December 10, 2004 to acquire the remaining
1,000,000 shares from the former controlling owner in exchange for $11,500. On
June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant
to the option agreement.
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
During the fiscal year ended September 30, 2003, the Company issued 154,000
shares of common stock in exchange for previously issued options to purchase the
Company's common stock at $1.00 per share.
During the fiscal year ended September 30, 2003, the Company issued 74,400
shares of common stock in exchange for cash at approximately $0.89 per share.
In October 2003, the Company issued 15,000 shares of convertible preferred stock
in exchange for services. The Company valued the shares issued at the $15 par
value and recorded the value for services when the shares were converted into
common shares as identified below.
During the fiscal year ended September 30, 2004, the Company issued 5,149,472
shares of common stock, net of cancellation of 155,000 shares, in exchange for
consulting services. The Company valued the shares issued at $8,787,315, net of
cancellation of $408,575, which represents the fair value of the services
received which did not differ materially from the value of the stock issued
33
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE G - CAPITAL STOCK (continued)
During the fiscal year ended September 30, 2004, the Company issued 340,500
shares of common stock for shares previously subscribed at approximately $2.04
per share.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
During the fiscal year ended September 30 2004, the Company converted 15,000
preferred shares into 375,000 shares of common stock at $1.47 per share in
exchange for employee services valued at $549,750.
In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share
for total proceeds of $250,000 pursuant to private placement.
In September 2004, the Company issued 60,000 convertible preferred shares at
$25.00, in exchange for consulting services valued at $1,500,000.
During the fiscal year ended September 30, 2005, the Company issued 11,040,647
shares of common stock, net of cancellation of 2,329,600 shares, in exchange for
consulting and employee services. The Company valued the shares issued at
$13,008,371, net of cancellation of $1,328,269, which represents the fair value
of the services received which did not differ materially from the value of the
stock issued
During the fiscal year ended September 30, 2005, the Company issued 1,500,000
shares of common stock for shares previously subscribed at approximately $.54
per share.
During the fiscal year ended September 30, 2005, the Company issued 267,500
shares of common stock for warrants and options exercised at approximately $0.39
per share
During the fiscal year ended September 30, 2005, the Company retired $1,796,057
of convertible notes payable for 5,363,809 shares of common stock. The Notes are
convertible into shares of common stock at a price of $0.34 per share.
During the fiscal year ended September 30, 2005, the Company issued 14,442,000
shares of common stock at $0.50 per share pursuant to the exercise terms of
notes payable. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
In October 2004, the Company issued 500,000 shares of common stock in exchange
for debt at $0.50 per share.
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
In February 2005, the Company in exchange for a related party note in the
outstanding principal amount of $600,000 and as settlement for certain claims
related thereto issued 1,500,000 shares of common stock using a price of $1.31
per share. (See note D)
In March, 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.
In June 2005, the Company cancelled 300,000 stock options previously granted
valued at $180,000. In accordance with EITF 96-18 the measurement date to
determine fair value was the date at which a commitment for performance by the
counter party to earn the equity instrument was reached. The Company valued the
shares issued for consulting services at the rate which represents the fair
value of the services received which did not differ materially from the value of
the stock issued.
In July 2005, the Company issued 36 million shares in exchange for intellectual
property at approximately $0.67 per share for a total of $24,120,000. The value
of the acquired intangible assets was established at $9,430,900, with the
balance of the purchase price, or $14,689,100, charged to operations as a cost
of the transaction. (See Note B)
34
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE G - CAPITAL STOCK (continued)
In 2005, the Company issued 8,550,000 shares of its common stock without
restriction to employees in exchange for services rendered. The Company valued
the shares issued at market value and charged operations in the period the
shares were issued. The Company is investigating the circumstances surrounding
the issuance of the shares and the possible subsequent resale of certain of the
shares on the open market and the possibility of violations of securities laws
(see Note H).
In September 2005, the Company issued 814,158 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of July and August 2005. The
Company valued the shares issued at approximately $0.62 per share for a total of
$502,672.
In September 2005, the Company issued 391,224 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of September 2005. The
Company valued the shares issued at approximately $0.70 per share for a total of
$273,857.
In October, 2005, the Company issued 400,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $200,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
In October 2005, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.75 per share for a total of $75,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2005, the Company cancelled 350,000 shares previously issued for
services valued at $210,000.
In December, 2005, the Company issued 40,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $20,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
For the fiscal year ended September 30, 2005, the Company issued a total of
2,096,139 penalty shares pursuant to the pending SB-2 registration terms. In
connection with the 7,371,000 million convertible debt financing in the quarter
ended March 31, 2005, the Company was obligated to complete a stock registration
by July 2005. Since the registration was not effective by July 2005, the Company
paid the required $773,959 of liquidated damages in shares of Company stock
accruing at the rate of 3.5% per month on the face value of the Notes for the
month of September 2005. The Company valued the shares issued at approximately
$0.30 per share for a total of $773,959. The Company continues to accrue the
penalties relating to the pending SB-2 registration.
In December 2005, in connection with debt financing, the Company issued
5,500,000 warrants to purchase the Company's common stock at an exercise price
of $0.50 for five years. The fair value attributable to the warrants of $563,750
was recorded as to current period operations with an offsetting adjustment to
additional paid in capital.
In January, 2006, the Company cancelled 250,000 shares previously issued for
services valued at $150,000.
In January 2006, the Company issued 2,096,139 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 31, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of November and December
2005. The Company valued the shares issued at approximately $0.25 per share for
a total of $515,973. The Company continues to accrue the penalties relating to
the pending SB-2 registration.
35
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE G - CAPITAL STOCK (continued)
In February 2006, the Company issued 160,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.17 per share for a total of $27,200, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued
In February 2006, the Company issued 3,800,000 shares of common stock in
exchange for consulting services. The Company valued the shares issued at
approximately $0.16 per share for a total of $608,000, which represents the fair
value of the services received which did not differ materially from the value of
the stock issued
In March, 2006, the Company cancelled 150,000 shares previously issued for
services valued at $120,000.
NOTE H - COMMITMENTS AND CONTINGENCIES
Employment and Consulting Agreements
The Company has consulting agreements with outside contractors, certain of whom
are also Company stockholders. The Agreements are generally month to month.
On July 15, 2005, we entered into a consulting agreement with Timpix for the
consulting services of three former Biowell employees, Drs. Jun-Jei Sheu, Ben
Liang and Johnson Chen. The consulting agreement is for the shorter of two
years, or until all of the consultants have obtained a visa to work in the
United States and execute employment agreements with us. Such consulting
agreement shall automatically renew for one year periods until terminated.
Pursuant to the consulting agreement, we shall pay $47,000 per month, which is
apportioned at $20,000 per month for Mr. Sheu, $15,000 per month for Mr. Liang
and $12,000 per month for Mr. Chen. In the event that either of Messrs. Sheu,
Liang or Chen becomes employed by us, the monthly consulting fee shall be
reduced accordingly. We have negotiated an agreement in principle to restructure
the Consulting Agreement, whereby, fees owed to Timpix from July 2005 through
December 2005 will be waived, and salaries for each of the three consultants
will be reduced starting January 1, 2006.
Litigation
On or about November 24, 2004, Oceanic Consulting, S.A. filed a complaint
against the Company in the Superior Court of the State of New York. The
Complaint alleges a breach of contract. The Company and the Plaintiff settled
the dispute subsequent to the date of the financial statements.
On or about January 10, 2005, Stern & Co. filed a complaint against the Company
in the United States District Court for the Southern District of New York. The
Complaint alleges a breach of contract. Subsequent to the date of the financial
statements, the Company and the Plaintiff settled the dispute.
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us for $13,000 in the Superior Court of New Jersey, Middlesex County.
The Company settled this matter subsequent to the date of the financial
statements.
On or about January 12, 2006, James Paul Brown, a former consultant to the
Company filed a complaint against the Company in the Superior Court of the State
of California. The Complaint alleges a breach of contract. Subsequent to the
date of the financial statements, the Company and the Plaintiff settled the
dispute.
In January 2006, a former employee of the Company filed a complaint alleging
wrongful termination against the Company. The former employee is seeking
$230,000 in damages. The Company believes that it has meritorious defenses to
the plaintiff's claims and intends to vigorously defend itself against the
Plaintiff's claims. Management believes the ultimate outcome of this matter will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
36
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE H - COMMITMENTS AND CONTINGENCIES (continued)
On or about April 4, 2006, the Company filed a complaint against Paul Reep,
Adrian Butash, John Barnett, Chanty Cheang, Jaime Cardona (former Company
employees and officers), and Angela Wiggins ( a former consultant to the
Company) in the United States District Court for the Central District of
California . The Company has asked the court to make a judicial determination
that an agreement, which the Company did not authorize and which is the basis of
previously disclosed litigation against the Company by Paul Reep, a former
employee of the Company, and a new action filed by former employees of the
Company as set forth in the subsequent paragraph, is invalid and unenforceable.
This matter is in its early stages.
On or about April 17, 2006, former employees of the Company filed a complaint
against the Company and certain of its current officers and Directors in Los
Angeles County Superior Court. The Complaint alleges a breach of contract,
violations of California Labor Code and wrongful termination and is seeking
$950,000 in specified damages, plus fees and costs. The complaint alleges a
breach of contract. The Company believes that it has meritorious defenses to the
plaintiff's claims and intends to vigorously defend itself against the
Plaintiff's claims. Management believes the ultimate outcome of this matter will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity.
Operating Lease Commitment
The Company leases office space under operating lease in Los Angeles, California
for its corporate use from an entity controlled by significant former
shareholder, expiring in November 2006. In November 2005, the Company closed its
Los Angeles facility and relocated to Stony Brook, New York.
Registration of Company's Shares of Common Stock
Until the Company successfully completes its pending registration statement on
SEC Form SB-2, the Company is subject to liquidated damages (see Note E). In
connection with the $ 1,465,000 and $ 7,371,000 million convertible debt
financing during the quarters ended December 31, 2004 and March 31, 2005,
respectively (see Note D), the Company was obligated to file and cause a
registration with respect to the shares underlying the convertible notes and
warrants to be declared effective by July 2005. Since the registration statement
was not effective by July 2005, the Company has been accruing and charging to
operations the stipulated liquidated damages in shares of Company stock accruing
at the rate of 3.5% per month on the face value of the previously issued
convertible notes. During the three months ended March 31, 2006, the Company has
paid and charged to operations penalties of $515,973 in the form of unregistered
shares of its common stock to the former noteholders, and has accrued and
charged to operations an additional $329,700 representing unpaid penalties as of
March 31, 2006.
37
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE H - COMMITMENTS AND CONTINGENCIES (continued)
Matters Voluntarily Reported to the SEC and Securities Act Violations
We previously disclosed that we were investigating the circumstances surrounding
certain issuances of 8,550,000 shares to employees and consultants in July 2005
(see Note G), and have engaged our new outside counsel to conduct this
investigation. We have voluntarily reported our current findings from the
investigation to the SEC, and we have agreed to provide the SEC with further
information arising from the investigation. We believe that the issuance of
8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of the Board of Directors. These former officers received a total of
3,000,000 of these shares. In addition, it appears that the 8,000,000 shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance with the Securities Act of 1933, as amended. Our investigation is
continuing. The members of our management who effectuated the stock issuances
that are being examined in the investigation no longer work for us. We believe
that we may incur significant costs and expenses in continuing this
investigation. In the event that any of the exemptions from registration with
respect to the issuance of the Company's common stock under federal and
applicable state securities laws were not available, the Company may be subject
to claims by federal and state regulators for any such violations. In addition,
if any purchaser of the Company's common stock were to prevail in a suit
resulting from a violation of federal or applicable state securities laws, the
Company could be liable to return the amount paid for such securities with
interest thereon, less the amount of any income received thereon, upon tender of
such securities, or for damages if the purchaser no longer owns the securities.
As of the date of these financial statements, the Company is not aware of any
alleged specific violation or the likelihood of any claim. There can be no
assurance that litigation asserting such claims will not be initiated, or that
the Company would prevail in any such litigation.
The Company is unable to predict the extent of its ultimate liability with
respect to any and all future securities matters. The costs and other effects of
any future litigation, government investigations, legal and administrative cases
and proceedings, settlements, judgments and investigations, claims and changes
in this matter could have a material adverse effect on the Company's financial
condition and operating results
NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
The accompanying financial statements for the three and six months ended March
31, 2006 have been restated for the purpose of correcting errors in accounting
for and disclosing the issuance by the Company of warrants to acquire the
Company's common stock. In addition the Company is correcting certain errors in
accounting for the exchange of its common stock for previously incurred debt
with a Company Director.
Accordingly, the Company restated the financial statements as of and for the
three and six months ended March 31, 2006 by disclosing the effect of these
errors in this Form 10-QSB/A.
For both the three and six months ended March 31, 2006 Condensed Consolidated
Income Statement restatement is to:
- Decrease Selling, General and Administrative for capitalized financing
costs by $390,000.
- To correct the fair value of warrants resulting in a $843,734 increase in
Warrant Liability compared to previous filing.
- Increase in liabilities for accrual of penalties relating to convertible notes
of $1,044,051.
- Decrease additional paid in capital for initial valuation of non debt
related warrants of $1,584,614
- Reflect the reclassification of warrants from equity to liability resulting
in an $7,005,371 increase to Warrant Liability compared to the previous
filing.
- Net Deficit in Shareholders' Equity decreased by $1,497,784 as a result of
the combination of factors described above.
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Balance sheet as of
March 31, 2006:
38
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
(As restated) (As reported)
ASSETS $ 8,976,097 $ 8,586,097
=========== ===========
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS'
EQUITY
Total current liabilities 3,831,376 2,787,325
Warrant liabilities 7,631,128 6,787,395
Convertible notes payable 676,790 676,790
Deficiency in Stockholders' Equity:
Preferred stock 6 6
Common stock 118,582 118,582
Common stock subscription (200,000) (200,000)
Additional paid in capital 81,997,006 88,220,817
Deficit accumulated during development stage
(85,078,791) (89,804,818)
----------- -----------
Total Liabilities and Deficiency in
Stockholders' Equity $ 8,976,097 $ 8,586,097
=========== ===========
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Income Statement as
of March 31, 2006:
For the Three Months Ended March For the Six Months Ended March 31,
31, 2006 2006
(As Restated) (As Reported) (As Restated) (As Reported)
Operating Expenses:
Selling general and administrative $ 949,634 $ 1,009,934 $ 2,794,311 $ 3,088,661
Research and development 75,033 75,033 91,303 91,303
Depreciation and amortization 341,676 341,676 684,375 684,375
----------- ------------ ----------- ------------
Total Operating Expenses 1,366,343 1,426,643 3,569,989 3,864,339
Operating Loss (1,366,343) (1,426,643) (3,569,989) (3,864,339)
Net gain/(loss) on revaluation of
warrant liability 3,967,870 4,846,273 10,756,660 12,973,966
Other income (expense) 3,520 3,520 9,493 9,493
Interest income (expense) (571,696) (59,597) (2,350,402) (79,403)
----------- ------------ ----------- ------------
Net Income (Loss) $ 2,033,351 $ 3,356,513 $ 4,845,762 $ 9,039,717
=========== ============ =========== ============
Net income (loss) per common share-basic $ 0.02 $ 0.03 $ 0.04 $ 0.08
=========== ============ =========== ============
Net Income (Loss) per common share-diluted $ 0.02 $ 0.03 $ 0.04 $ 0.08
=========== ============ =========== ============
Weighted average shares outstanding-basic 116,483,044 116,483,044 114,487,589 114,487,589
Weighted average shares
outstanding-Diluted 116,533,352 116,533,352 114,550,086 114,550,086
39
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
The result of the Cash Flow restatement is to:
- Decrease profit for the six months March 31, 20065 by $4,757,705 as described
above - Reflect the $3,967,870 warrant revaluation gain. - Adjust for
capitalized financing costs paid from proceeds.
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Statement of Cash
Flows for the six month period ended March 31, 2006.
Consistent with the original summary presentation, following is a reconciliation
of the Company's restatement of the Condensed Consolidated Statement of Cash
Flows for the periods ended March 31, 2006. See the full Condensed Consolidated
Statement of Cash Flows for the periods ended March 31, 2006 for additional
details.
For the Six Months Ended March 31,
2006
(As Restated) (As Reported)
Cash Flows from operating
activities:
Net income from operating activities $ 4,845,762 $ 9,039,717
Summary of adjustments to reconcile
net loss to net cash (used in)
operating activities:
Change in fair value of warrant
liabilities (10,756,660) (8,057,745)
Other operating activities - see
Cash Flow statement for full details 4,783,275 3,094,266
------------- -----------
Net cash (used in) operating
activities (1,127,623) (1,517,623)
Cash flows from investing activities:
- see Cash Flow statement for full
details
Net cash (used in) investing
activities (35,852) (35,852)
Cash flows from financing activities:
- see Cash Flow statement for full
details
Proceeds from loans 1,210,000 1,600,000
------------- -----------
Net cash provided by financing
activities
Increase (decrease) in cash and cash
equivalents 46,525 46,525
Cash and cash equivalents,
beginning of period 31,190 31,190
------------- -----------
Cash and cash equivalents, end of
------------- -----------
period $ 77,715 $ 77,715
============= ===========
40
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
MARCH 31, 2006
(Unaudited)
NOTE J - SUBSEQUENT EVENTS
On April 13, 2006, the Company borrowed $100,000, at a rate of 7.5% per annum,
from BioCogent, Ltd., ("BioCogent") whose President and Chief Executive Officer
and sole stockholder is James A. Hayward, one of the Company's directors and its
Chief Executive Officer ("Dr. Hayward"). This loan is due and payable upon the
earlier to occur of (1) the close of business on June 30, 2006, or (2) the
closing of the issuance and sale by the Company of its securities for gross
proceeds of at least $250,000 (see Note C).
In May, 2006 the Company signed a Business Development and Trademark License
Agreement with Dr. Suwelack Skin & Health Care AG ("Dr. Suwelack") providing Dr.
Suwelack rights to use the Company's SigNature(TM) logo, which is printed with
ink containing the Company's proprietary encrypted botanical DNA technology, and
to participate in the Company's SigNature(TM) Program. The terms of this one
year license agreement provide Suwelack with a limited, non-exclusive,
non-transferable right to use the SigNature(TM) logo on its packaging and
labels. Dr. Suwelack will pay us a one time license fee in the amount of EUR
15,000 in consideration for the use of the Company's SigNature(TM) logo.
EUR7,500 of the license fee was due upon signing of the agreement and the
remaining 50% is due upon receipt of the shipped labels. Dr. Hayward, serves on
Dr. Suwelack's board of directors. BioCogent, whose President and Chief
Executive Officer and sole stockholder is Dr. Hayward, provides consulting
services to Dr. Suwelack. Dr. Suwelack and BioCogent recently reached an
agreement in principle, with respect to which no written agreement has been
executed, by which BioCogent will continue to provide consulting services to Dr.
Suwelack and Dr. Hayward will serve as Dr. Suwelack's president on a part-time
basis reporting to Dr. Suwelack's Chief Executive Officer.
41
Item 2. Management's Discussion and Analysis
The following discussion should be read in conjunction with our 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. You should read statements that contain
these words carefully because they:
o Discuss our future expectations;
o Contain projections of our future results of operations or of our
financial condition; and
o State other "forward-looking" information.
We believe it is important to communicate our expectations. However, forward
looking statements involve risks and uncertainties and our actual results and
the timing of certain events could differ materially from those discussed in
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors," "Business" and elsewhere in this prospectus. All
forward-looking statements and risk factors included in this document are made
as of the date hereof, based on information available to us as of the date
thereof, and we assume no obligations to update any forward-looking statement or
risk factor, unless we are required to do so by law.
PLAN OF OPERATIONS
Sales and Marketing
We believe our revenues will come from three sources:
o Direct sales to manufacturers, distributors, and/or retailers;
o Sales through our OEM relationships; and
o Authentication (laboratory) services.
We employ a multi-tier sales and marketing strategy involving our marketing and
sales staff working together with high-level contacts in target industries and
our OEM base. We are attempting to develop strategic alliances and marketing
partners by setting up alliances with Biowell Technology, Inc.'s ("Biowell")
technology partners, granting licenses to existing anti-counterfeit suppliers
and partner with industry leaders for intellectual property development.
We are cognizant that no technology exists today to enable someone in the street
to ascertain, at the point of purchase, whether an expensive product, or a
child's foodstuff, or pharmaceutical product is genuine, worth the money being
paid and safe to use or ingest. No brand owner is able to rapidly determine
whether a product is real of fake. Many multi-billion dollar brands have no
technology to protect against counterfeiting, to detect its occurrence and to
interdict or prosecute the counterfeiter. No company has the capability to
determine with forensic certainty that it is subject to attack. Such companies
remain seriously exposed to product liability, loss of consumer confidence and
loss of revenues. Governments have no rapid detection system to determine at the
point of entry, inspection or seizure whether products are real or fake. A major
thrust of our marketing efforts is to work with consumer groups, media,
corporate officers, government departments, customs, insurers and others to
bring home the message that, in a world of criminality and terrorism, no-one is
safe.
Business Strategy and Approach
We have established integrated business operations addressing and servicing the
needs of the global security marketplace on the part of corporations and
governments for; anti-counterfeiting, fraud prevention, product authentication,
brand protection, supply chain management and protection.
Intellectual Property Development, Product Operations & Partnerships
We have proprietary DNA security technology, and develop security solutions that
protect corporate and intellectual property from counterfeiting, fraud, piracy
and product diversion using botanical DNA as an encrypted/code molecule that can
be embedded in inks, paper, substrates, liquids, textiles, thread, plastics,
holograms and microchips.
We produce security solutions customized to our customer's needs. We market and
sell DNA anti-counterfeit and fraud prevention solutions that integrate into,
and layer with, existing security solutions. These DNA security features are
integrated at the original equipment manufacturer level with ink, paper,
liquids, thread and hologram producers, who in turn sell/supply finished
security products such as primary and secondary product packaging for
pharmaceuticals, beauty products, textiles, currency, passports, ID cards, etc.
We have strict protocols for specifying, integrating, testing, shipping and
confirming the presence of DNA in any given product.
42
We plan to develop new product lines that will address specific new challenges
in the security marketplace, and bring these advances to target industries,
customers and countries.
Additionally, we will identify strategic partnerships and co-marketing ventures,
and licensees to work with us to develop market and sell our biotechnological
security products. This will include sub-licensing the technology to key
partners in specific sectors with an established base of customers. These
partners will be able to enhance their product lines and client services by
adding our technology to the existing security matrix in their products,
providing an enhanced solution to deter fraud and counterfeiting.
Management Strategy
We anticipate a period of rapid change as we begin commercialization of the
products now available subsequent signing of our licenses with Biowell, (b) the
establishment of our prototyping labs at the State University of New York at
Stony Brook ("Stony Brook University"), and (c) the availability of products
that have recently been commercialized in Asia by Biowell.
We have organized our resources to manage our commercialization effectively,
optimizing the delivery of new prototypes for customers, and managing
outsourcing especially through our OEMs. Our Chief Executive Officer is
responsible for the strategic direction, coordinating with our overseas
technology partner Biowell, scientific development, operations and corporate
governance, business development and sales, including relations with US and
foreign government agencies, developing business relationships with target
corporations and OEM's, and securing revenues. Our Controller and acting Chief
Financial Officer cover overall financial management, financial reporting,
corporate administration and investors relations. Our marketing department
develops strategic awareness of our technologies across target industry sectors,
their associated media and lobbying companies and liaises with regulatory bodies
(EPA, FDA, etc) and industry associations (CTFA, PHARMA, etc). Our Chairman
oversees the operations of Biowell, including the development of all Asian
territorial sales that are subject to royalty payments due to us. Both our
Chairman and our Strategic Technology Development Officer manage the development
of core DNA sciences for current and future applications. Our Strategic
Technology Development Officer is principally engaged in the productization of
DNA markers for specific industry applications, and for liaison with
corresponding scientists from our principal OEM partners, e.g., petroleum
markers, chemical markers, markers for precious stones, DNA-encrypted inks, DNA
markers for the pharmaceutical industry, etc.
Consultant & Enforcement Operations
As nations are threatened by terrorism and corporations try to prevent corporate
fraud, counterfeiting, product diversion and industrial espionage, the need for
secure anti-counterfeiting and identification systems increases. Our technology
can provide important and cost-effective support for local, state, and federal
governments as well as corporations doing business with highly sensitive
information or products susceptible to counterfeit. Our anti-counterfeiting
technology can be used for the following types of identification and important
government documents:
o Passports
o Green cards
o Visas
o Driver's licenses
o Social Security cards
o Student visas
o Military ID's
Other important Identity cards and official documents
We intend to work in collaboration with Biowell and other security organizations
in order to continue to research and develop new product lines derived from, but
not limited to, DNA technology. Research and development of new product lines is
an ongoing commitment and is currently underway in the Biowell labs and will
continue in the U.S. at our new facilities established at the Long Island High
Technology Incubator (LIHTI) at Stony Brook University. Research and development
objectives include the development of a new line of detection technologies that
will provide faster and more convenient ways to authenticate DNA, continuous
effort to incorporate our DNA markers with various products for new
applications, and establishment of a leading DNA authentication service lab. We
believe that we will obtain commercial revenues for these efforts within 12-24
months, although no assurances can be given that we will ever generate revenues.
Our prototyping laboratory will customize "off-the-shelf" products for new
customers on a case-by-case basis. These new products are typically newly
configured labels, inks or packing elements. We have identified several options
for remote detection and faster detection methodologies.
We will consult with our clients on a total security service offering; how to
protect their brands, intellectual property, products and physical security
access and how to reduce risk exposure, product liability exposure and product
recall liabilities. We plan to offer worldwide DNA analysis services supporting
the authentication of products and the detection, interdiction, deterrence and
prosecution of counterfeiters and related crimes, through our subcontractors,
sub-licensees and security industry collaborative partners.
43
International Sub-License Operations
Developing Technology - We have an in-depth understanding of DNA microchip
design and applications. We will jointly develop DNA-holograms and
DNA-Hologram-RFID devices, DNA-inks, DNA-dyes and DNA-security labels with
leading original equipment manufacturers in these specialist fields.
We will utilize our existing relationships and develop new ones to introduce our
anti-counterfeiting technology to generate business. Each industry has unique
requirements and needs for their anti-counterfeit solutions, and we believe our
DNA technology will provide maximum security technologies. For example, our
smart packaging solutions with DNA security markers in ink, paper and holograms
has widespread application in packaging for pharmaceuticals, cosmetics,
automotive markets, passports, ID's and currency. Our proprietary technology
offers immediate and affordable detection and security for their brands and
products.
o Strong Technology Alliances - Our technology can also provide advanced
security dimensions to:
o Electronics security: access and physical/plant security (biometric
security cards enhanced with DNA)
o Security Holograms (DNA enhanced)
o Security papers and printing
o Holograms (DNA holograms)
o Other security-related products and systems
o Law Enforcement Expertise - The resources of our collaborative partners
in the security industry include former federal law enforcement,
security, and intelligence officers who provide us with extensive
contacts and hands-on experience in:
o Intellectual property investigation
o Counter-intelligence
o Personal security services
o Anti-counterfeit technologies
o Secure communications and data management
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends that all
companies include a discussion of critical accounting policies used in the
preparation of their financial statements. While all these significant
accounting policies impact our financial condition and results of operations, we
view certain of these policies as critical. Policies determined to be critical
are those policies that have the most significant impact on our consolidated
financial statements and require management to use a greater degree of judgment
and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause a
material effect on our consolidated results of operations, financial position or
liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
o Equity issued with registration rights
o Warrant liability
o Fair value of intangible assets
Equity Issued with Registration Rights
In connection with placement of our convertible notes and warrants to certain
investors during the fiscal quarter ended March 31, 2005, we granted certain
registration rights that provide for liquidated damages in the event of failure
to timely perform under the agreements. Although these notes and warrants do not
provide for net-cash settlement, the existence of liquidated damages provides
for a defacto net-cash settlement option. Therefore, the common stock underlying
the notes and warrants subject to such liquidated damages does not meet the
tests required for shareholders' equity classification, and accordingly has been
reflected between liabilities and equity in the accompanying consolidated
balance sheet until such time as the conditions are eliminated.
Warrant Liability
In connection with the placement of certain debt instruments during the fiscal
quarter ended March 31, 2005, as described above, we issued freestanding
warrants. Although the terms of the warrants do not provide
for net-cash settlement, in certain circumstances, physical or net-
44
share settlement is deemed to not be within our control and, accordingly, we
are required to account for these freestanding warrants as a derivatives
financial instrument liability, rather than as shareholders' equity.
The warrant liability is initially measured and recorded at its fair value, and
is then re-valued at each reporting date, with changes in the fair value
reported as non-cash charges or credits to earnings. For warrant-based
derivative financial instruments, the Black-Scholes option pricing model is used
to value the warrant liability.
The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.
We do not use derivative instruments to hedge exposures to cash flow, market, or
foreign currency risks.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenue and expenses during the reporting
period. The most significant estimates relate to the estimation of percentage of
completion on uncompleted contracts, valuation of inventory, allowance for
doubtful accounts and estimated life of customer lists. Actual results could
differ from those estimates.
Fair Value of Intangible Assets
We have adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby we
periodically test our intangible assets for impairment. On an annual basis, and
when there is reason to suspect that their values have been diminished or
impaired, these assets are tested for impairment, and write-downs will be
included in results from operations.
On July 12, 2005, we acquired certain intellectual properties from Biowell
through an Asset Purchase Agreement in exchange for 36 million shares of our
restricted common stock having an aggregate fair value at the date of issuance
of $24.12 million. The value of the acquired intangible assets was $9,430,900,
with the balance of the purchase price, or $14,689,100, charged to operations as
a cost of the transaction.
Revenues
Since our inception on September 16, 2002, we have not generated material
revenues from operations. We believe we will begin generating revenues from
operations in the fiscal year as we transition from a development stage
enterprise to that of an active growth stage company, although no assurances can
be given that we will generate any revenues from operations.
Costs and Expenses
Selling, General and Administrative
Selling, general and administrative expenses for the six month period ended
March 31, 2006 compared to same period in 2005 decreased $19.786 million or 88%
to $2.794 million from $22.581 million in the prior period due to non-recurring
financing and related costs incurred during the March 2005 quarter.
Research and Development
Research and development expenses increased $91,303 for the six month period
ended March 31, 2006 compared to the same period in 2005 from $0 to $91,303
primarily due to collaboration with The Center for Biotechnology at Stony Brook
University.
Depreciation and Amortization
In the six month period ended March 31, 2006, depreciation and amortization
increased $672,000 for the period compared to the same period in 2005 from
$12,000 to $684,000. In the year ended September 30, 2005, we capitalized $9.431
million related to an intellectual property asset acquisition. As a result, we
recorded amortization expense totaling $677,040 for the six month period ended
March 31, 2006 compared to no intangible asset amortization in the three months
ended March 31, 2005. We estimate a seven year useful life that commenced during
the fourth fiscal quarter of 2005.
Total Operating Expenses
Total operating expenses during the six months ended March 31, 2006 decreased to
$3.570 million from $22.593 million, or a decrease of $19.022 million as a
result of the combination of factors listed above.
Other income/expenses
Gain on revaluation of warrant liability decreased by $19,093 to $10.757 million
from $10.775 million for the six month periods ended March 31, 2006 and 2005,
respectively.
Interest Expenses
45
Interest expense, for the six month period ended March 31, 2006 decreased to
$2.350 million from $32.352 million in the same period of 2005, a decrease of
$30.001 million primarily resulting from the reduction in financing in 2006 as
compared to 2005.
Net Income
Net Income for the six month period ended March 31, 2006 increased to $4.846
million from a loss of $44.165 million in the prior period as a result of the
combination of factors described above.
Liquidity and Capital Resources
Our liquidity needs originate from working capital requirements, indebtedness
payments and research and development expenditure funding. Historically, we have
financed our operations through the sale of equity and convertible debt as well
as borrowings from various credit sources.
In the six month period ended March 31, 2006, we completed two additional
private placements of debt and associated warrants. In November, 2005, we issued
and sold a promissory note in principal amount of $550,000. We issued warrants
to purchase a total of 5,500,000 shares of our common stock at an exercise price
of $0.50 per share to certain persons designated by International Allied Fund,
and paid $55,000 in cash to VC Arjent for its services as the placement agent
for this placement. All principal and accrued but unpaid interest under this
note was paid in full shortly after the closing of and from the proceeds of the
March 8, 2006 offering. On March 8, 2006, we issued and sold an aggregate of 30
units consisting of (i) a $50,000 principal amount secured convertible
promissory note bearing interest at 10% per annum and convertible at $0.50 per
share, and (ii) a warrant to purchase 100,000 shares of our common stock at an
exercise price of $0.50 per share, for aggregate gross proceeds of $1.5 million.
The units were sold pursuant to subscription agreements by and between each of
the purchasers and Applied DNA Operations Management, Inc., a Nevada corporation
and our wholly owned subsidiary (our "Subsidiary"). The $2.050 million in gross
proceeds from these offerings were held by our Subsidiary for our benefit and
used to fund commissions, fees and expenses associated with the placements, to
repay the outstanding promissory note described above plus accrued interest
thereunder, to fund financing fees, consultants and public reporting costs,
salaries and wages, research and development, facility costs as well as and
general working capital needs.
On March 24, 2006, we commenced an offering (the "Offshore Offering") of up to
140 units, at a price of $50,000 per unit, for a maximum offering of $7 million
for sale to "accredited investors" who are not "U.S. persons." The units being
sold as part of the Offshore Offering consist of (i) a $50,000 principal amount
secured convertible promissory note, and (ii) a warrant to purchase 100,000
shares of our common stock at a price of $0.50 per share. On May 2, 2006, we
closed on the first tranche of the Offshore Offering in which we sold 20 units
for aggregate gross proceeds of $1,000,000. We incurred $375,000 in commissions,
fees and expenses which was paid at closing.
On March 29, 2006 and April 13, 2006, we borrowed $200,000 in the aggregate, at
a rate of 7.5% per annum, from BioCogent, Ltd., a New York corporation
("BioCogent") whose President and Chief Executive Officer and sole stockholder
is James A. Hayward, on of our directors and our Chief Executive Officer. These
loans are due and payable upon the earlier to occur of (1) the close of business
on June 30, 2006, or (2) the closing of the issuance and sale of our securities
for gross proceeds of at least $250,000. The proceeds from the loans will be
used for general corporate purposes. The note issued on March 29, 2006 was
repaid with interest in May, 2006.
Substantially all of the real property used in our business is leased under
operating lease agreements.
As of March 31, 2006, we had a working capital deficit of $3,750,533 as a result
of our operating losses from our inception through March 31, 2006. We generated
a cash flow deficit of $13,862,969 from operating activities from our inception
on September 16, 2002 through March 31, 2006. Cash flows used in investing
activities was $74,300 during this period. We met our cash requirements during
this period through the receipt of $14,014,984 in the form of private placement
of our common stock, the issuance of convertible notes (net of repayments and
costs), and advances from the Company's officers, principal shareholders and
third parties.
As of March 31, 2006, we had $1,187,219 in outstanding notes payables. Please
see Note C in our unaudited financial statements included in this Form 10-QSB/A
for the terms of such notes payable.
We expect capital expenditures to be less than $500,000 fiscal 2006. Our primary
investments will be in laboratory equipment to support prototyping and our
authentication services.
While we have raised capital to meet our working capital needs in the past, and
will require additional financing within the next 12 months in order to meet our
current and projected cash flow deficits from operations and development. We
have sufficient funds to conduct our operations for several months, but not for
12 months or longer. 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, a downturn in the U.S. or global
stock and debt markets and other reasons could make it more difficult to obtain
financing through the issuance of equity securities or borrowing. Further, if we
issue additional equity or convertible 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, this could have a material adverse effect on our business,
results of operations liquidity and financial condition.
46
Our registered independent certified public accountants have stated in their
report dated October 21, 2005, that we have incurred operating losses in the
last two years, and that we are dependent upon management's ability to develop
profitable operations. These factors among others may raise substantial doubt
about our ability to continue as a going concern.
In connection with the January and February 2005 Placement, we granted the
investors registration rights. Pursuant to the registration rights agreement, if
we did not file the registration statement by February 15, 2005, or if we did
not have the registration statement declared effective on or before June 15,
2005, we are obligated to pay liquidated damages in the amount of 3.5% per month
of the face amount of the notes, which equals $257,985, until the registration
statement is declared effective. At our option, these liquidated damages can be
paid in cash or restricted shares of our common stock. All of the liquidated
damages that we paid were paid in common stock, although any future payments of
liquidated damages may, at our option, be made in cash. If we decide to pay the
liquidated damages in cash, we would be required to use our limited working
capital and potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Based on the closing
market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our common
stock on July 15, 2005, August 15, 2005, September 15, 2005, October 17, 2005,
November 15, 2005 and December 15, 2005, respectively, we issued a total of
3,807,375 shares of common stock in liquidated damages from August, 2005 to
January, 2006. The issuance of shares upon payment of liquidated damages will
have the effect of further diluting the proportionate equity interest and voting
power of holders of our common stock, including investors in this offering.
Liquidated damages in the form of common stock were paid for the period from
June 15, 2005 to December 15, 2005. We believe that we have no enforceable
obligation to pay further liquidated damages since the shares we agreed to
register for resale are eligible for resale under Rule 144 of the Securities Act
of 1933, as amended, and such continuing liquidated damages are grossly
inconsistent with actual damages to the purchasers of the notes and warrants.
However, we are seeking to confirm this position by obtaining the waiver and
release of the holders of these securities of further liquidated damages. If
these persons do not waive and release and successfully bring a claim against us
with respect to such liquidated damages, it could result in a significant
decrease in our liquidity or assets, which could result in the reduction or
termination of our business. As of March 31, 2006, we have accrued $773,995 in
penalties representing the further liquidated damages associated with our
failure to file the registration statement by the deadline and have included
this amount in accounts payable and accrued expenses.
Matters Voluntarily Reported to the SEC and Securities Act Violations
We previously disclosed that we were investigating the circumstances surrounding
certain issuances of shares to employees and consultants in 2005, and have
engaged our new outside counsel to conduct this investigation. We have
voluntarily reported our current findings from the investigation to the SEC, and
we have agreed to provide the SEC with further information arising from the
investigation. We believe that the issuance of 8,000,000 shares to employees in
July 2005 was effectuated by both our former President and our former Chief
Financial Officer/Chief Operating Officer without approval of the board of
directors. These former officers received a total of 3,000,000 of these shares.
In addition, it appears that the 8,000,000 shares issued in July 2005, as well
as an additional 550,000 shares issued to employees and consultants in March,
May and August 2005, were improperly issued without a restrictive legend stating
that the shares could not be resold legally except in compliance with the
Securities Act of 1933, as amended. Our investigation is continuing. The members
of our management who effectuated the stock issuances that are being examined in
the investigation no longer work for us. We believe that we may incur
significant costs and expenses in continuing this investigation.
In the event that any of the exemptions from registration with respect to the
issuance of our common stock under federal and applicable state securities laws
were not available, we may be subject to claims by federal and state regulators
for any such violations. In addition, if any purchaser of our common stock were
to prevail in a suit resulting from a violation of federal or applicable state
securities laws, we could be liable to return the amount paid for such
securities with interest thereon, less the amount of any income received
thereon, upon tender of such securities, or for damages if the purchaser no
longer owns the securities. As of the date of these financial statements, we are
not aware of any alleged specific violation or the likelihood of any claim.
There can be no assurance that litigation asserting such claims will not be
initiated, or that we would prevail in any such litigation.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Product Research and Development
As a result of the recent financings, we anticipate expending $500,000 of
available cash towards research and development activities during the next
twelve (12) months.
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the sale of any material property, plant or equipment
during the next 12 months. We do 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, 2006, we have mainly
relied on the services of outside consultants for services. We currently have
five employees. In order for us to attract and retain quality
personnel, we anticipate we will have to offer competitive salaries
47
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 our
continuance of as a going concern. Our 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
we 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 our common stock.
RISK FACTORS
Much of the information included in this quarterly report includes or is based
upon estimates, projections or other "forward-looking statements". Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined below. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative. Prospective investors should
consider carefully the risk factors set out below.
RISKS RELATING TO OUR BUSINESS
We Have a History Of Losses Which May Continue, Which May Negatively Impact Our
Ability to Achieve Our Business Objectives.
For the six month period ended March 31, 2006, we produced a net income of
$4,845,762 with $10,756,660 attributable to the revised classification and for
the three month period ended March 31, 2006, we incurred a net income of
$2,033,351. 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. Our
revenues and profits, if any, will depend upon various factors, including
whether we will be able to generate revenue. As a result we continue to incur
losses, our accumulated deficit will continue to increase, which might make it
harder for us to obtain financing in the future. We may not achieve our business
objectives and the failure to achieve such goals would have an adverse impact on
us, which could result in reducing or terminating our operations.
If We Are Unable to Obtain Additional Funding Our Business Operations Will
be Harmed and If We Do Obtain Additional Financing Our Then Existing
Shareholders May Suffer Substantial Dilution.
We will require additional funds to sustain and expand our research and
development activities. We anticipate that we will require up to approximately
$500,000 to fund our anticipated research and development operations for the
next twelve months, depending on revenue from operations. Additional capital
will be required to effectively support the operations and to otherwise
implement our overall business strategy. Even if we do receive additional
financing, it may not be sufficient to sustain or expand our research and
development operations or continue our business operations.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our research and development plans. Any
additional equity financing may involve substantial dilution to our then
existing shareholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated October 21, 2005, our independent auditors stated that our
financial statements for the year ended from September 30, 2005 were prepared
assuming that we would continue as a going concern. Our ability to continue as a
going concern is an issue raised due to our incurring
net losses of $89,924,553 during the period September 16, 2002 (date
of inception) to September 30, 2005. We continue to
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experience net operating losses. Our ability to continue as a
going concern is subject to our ability to generate a profit and/or obtain
necessary funding from outside sources, including obtaining additional funding
from the sale of our securities, generating sales or obtaining loans and grants
from various financial institutions where possible. Our continued net operating
losses increase the difficulty in meeting such goals and there can be no
assurances that such methods will prove successful.
Our Research and Development Efforts for New Products May be Unsuccessful.
We will incur significant research and development expenses to develop new
products and technologies. There can be no assurance that any of these products
or technologies will be successfully developed or that if developed they will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and this may materially and adversely affect our business
operations, which would result in loss of revenues and greater operating
expenses.
Our Acquired Technology Has Yet to be Independently Validated
In July 2005, we acquired certain intellectual property. Such intellectual
property relating to the botanical DNA, encapsulation methods, integrity of the
technology and all other stated claims by the seller need to be independently
validated by a third party. Satisfactory completion of this independent
validation will be required prior to their being available for commercial sale.
In the event that some or all of the technology cannot be independently
validated, we will be unable to commercially develop products utilizing such
technology, which could have a materially adverse effect on our business and
results of operations.
Failure to License New Technologies Could Impair Our New Product Development.
To generate broad product lines, it is advantageous to sometimes license
technologies from third parties rather than depend exclusively on our own
employees. As a result, we believe our ability to license new technologies from
third parties is and will continue to be important to our ability to offer new
products.
In addition, from time to time we are notified or become aware of patents held
by third parties that are related to technologies we are selling or may sell in
the future. After a review of these patents, we may decide to seek a license for
these technologies from these third parties or discontinue our products. There
can be no assurance that we will be able to continue to successfully identify
new technologies developed by others. Even if we are able to identify new
technologies of interest, we may not be able to negotiate a license on favorable
terms, or at all. If we lose the rights to patented technology, we may need to
discontinue selling certain products or redesign our products, and we may lose a
competitive advantage. Potential competitors could license technologies that we
fail to license and potentially erode our market share for certain products. Our
licenses typically subject us to various commercializations, sublicensing,
minimum payment, and other obligations. If we fail to comply with these
requirements, we could lose important rights under a license. In addition,
certain rights granted under the license could be lost for reasons beyond our
control. We may not receive significant indemnification from a licensor against
third party claims of intellectual property infringement.
We Currently Have Limited Manufacturing, Sales, Marketing or Distribution
Capabilities.
We currently have limited in-house manufacturing capability. We rely on Biowell
and third-party vendors for this service. We do not currently have any
arrangements with any distributors and we may not be able to enter into
arrangements with qualified distributors on acceptable terms or at all. We
currently have a limited sales and marketing team. If we are not able to develop
greater sales, marketing or distribution capacity, we may not be able to
generate revenue or sufficient revenue to support our operations.
If We Fail to Introduce New Products, or Our Existing Products are not Accepted
by Potential Customers, We May Not Gain or May Lose Market Share.
Rapid technological changes and frequent new product introductions are typical
for the markets we serve. Our future success will depend in part on continuous,
timely development and introduction of new products that address evolving market
requirements. We believe successful new product introductions provide a
significant competitive advantage because customers invest their time in
selecting and learning to use new products, and are often reluctant to switch
products. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
We may experience delays in the development and introduction of products. We
cannot assure that we will keep pace with the rapid rate of change in life
sciences research or that our new products will adequately meet the requirements
of the marketplace or achieve market acceptance. Some of the factors affecting
market acceptance of new products include:
o Availability, quality and price relative to competitive products;
o The timing of introduction of the product relative to competitive
products;
o Customers' opinions of the products' utility;
o Ease of use;
o Consistency with prior practices;
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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 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:
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o Difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o Different or conflicting regulatory or legal requirements;
o Foreign currency fluctuations; and
o Diversion of significant time and attention of our management.
If We Are Unable to Retain the Services of Messrs. Sheu, Hayward or Liang, or If
We Are Unable to Successfully Recruit Qualified Managerial and Sales Personnel
Having Experience in Business, We May Not Be Able to Continue Our Operations.
Our success depends to a significant extent upon the continued service of Dr.
Jun-Jei Sheu, the Chairman of our Board of Directors; Dr. James A. Hayward, our
Chief Executive Officer; and Dr. Benjamin Liang, our Secretary and Strategic
Technology Development Officer. We do not have employment agreements with Drs.
Sheu, Hayward or Liang. Loss of the services of Drs. Sheu, Hayward or Liang
could have a material adverse effect on our growth, revenues, and prospective
business. We do not maintain key-man insurance on the life of Drs. Sheu, Hayward
or Liang. We are not aware of any named executive officer or director who has
plans to leave us or retire. In addition, in order to successfully implement and
manage our business plan, we will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business. Competition for qualified individuals is intense. There
can be no assurance that we will be able to find, attract and retain existing
employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
Failure to Attract and Retain Qualified Scientific or Production Personnel Could
Have a Material Adverse Effect On Us.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing 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 DNA Security Technology 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 DNA security technology 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, also work with major pharmaceutical, chemical and biotechnology
companies, and many of them have substantially greater capital resources,
marketing experience, research and development staff, and facilities than we do.
Any of these companies could succeed in developing products that are more
effective than the products that we have or may develop and may be more
successful than us in producing and marketing their products. It is impossible
to quantify the number of competitors since they include both the companies we
attempt to sell our products and services to through their use of internal
security and various other security product companies. Some of the
anti-counterfeiting and fraud protection competitors that we are aware of
include: Authentix, InkSure, DNA Technologies, Inc., Art Guard International,
Theft Protection Systems, Tracetag and November AG. Although it is impossible to
determine the total market size and market data information because companies
are secretive about what security methods they utilize and how much they spend
on such measures, we have determined that approximate annual sales by some of
our competitors have been as follows:
InkSure - $1 million
DNA Technologies, Inc. - $22.6 million
November AG - $5.8 million
We expect this competition to continue and intensify in the future. Competition
in our markets is primarily driven by:
o Product performance, features and liability;
o Price;
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o Timing of product introductions;
o Ability to develop, maintain and protect proprietary products and
technologies;
o Sales and distribution capabilities;
o Technical support and service;
o Brand loyalty;
o Applications support; and
o Breadth of product line.
If a competitor develops superior technology or cost-effective alternatives to
our products, our business, financial condition and results of operations could
be materially adversely affected.
Our Trademark and Other Intellectual Property Rights May not be Adequately
Protected Outside the United States, Resulting in Loss of Revenue.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent, as do the laws of the United States.
Intellectual Property Litigation Could Harm Our Business.
Litigation regarding patents and other intellectual property rights is extensive
in the biotechnology industry. In the event of an intellectual property dispute,
we may be forced to litigate. This litigation could involve proceedings
instituted by the U.S. Patent and Trademark Office or the International Trade
Commission, as well as proceedings brought directly by affected third parties.
Intellectual property litigation can be extremely expensive, and these expenses,
as well as the consequences should we not prevail, could seriously harm our
business.
If a third party claims an intellectual property right to technology we use, we
might need to discontinue an important product or product line, alter our
products and processes, pay license fees or cease our affected business
activities. Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all. We are currently not aware of any intellectual property rights
that are being infringed nor have we received notice from a third party that we
may be infringing on any of their patents.
Furthermore, a third party may claim that we are using inventions covered by the
third party's patent rights and may go to court to stop us from engaging in our
normal operations and activities, including making or selling our product
candidates. These lawsuits are costly and could affect our results of operations
and divert the attention of managerial and technical personnel. There is a risk
that a court would decide that we are infringing the third party's patents and
would order us to stop the activities covered by the patents. In addition, there
is a risk that a court will order us to pay the other party damages for having
violated the other party's patents. The biotechnology industry has produced a
proliferation of patents, and it is not always clear to industry participants,
including us, which patents cover various types of products or methods of use.
The coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent infringement, we
would need to demonstrate that our products or methods of use either do not
infringe the patent claims of the relevant patent and/or that the patent claims
are invalid, and we may not be able to do this. Proving invalidity, in
particular, is difficult since it requires a showing of clear and convincing
evidence to overcome the presumption of validity enjoyed by issued patents.
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.
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Some of our competitors may be able to sustain the costs of complex patent
litigation more effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the initiation and
continuation of any litigation could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.
Accidents Related to Hazardous Materials Could Adversely Affect Our Business.
Some of our operations require the controlled use of hazardous materials.
Although we believe our safety procedures comply with the standards prescribed
by federal, state, local and foreign regulations, the risk of accidental
contamination of property or injury to individuals from these materials cannot
be completely eliminated. In the event of an accident, we could be liable for
any damages that result, which could seriously damage our business and results
of operations.
Potential Product Liability Claims Could Affect Our Earnings and Financial
Condition.
We face a potential risk of liability claims based on our products and services,
and we have faced such claims in the past. We currently do not have any product
liability coverage but are attempting to obtain coverage which we will believe
to be adequate. We cannot assure, however, that we will be able to obtain or
maintain this insurance at reasonable cost and on reasonable terms. We also
cannot assure that this insurance, if obtained, will be adequate to protect us
against a product liability claim, should one arise. In the event that a product
liability claim is successfully brought against us, it could result in a
significant decrease in our liquidity or assets, which could result in the
reduction or termination of our business.
Litigation Generally Could Affect Our Financial Condition and Results of
Operations.
We generally may be subject to claims made by and required to respond to
litigation brought by former employees, former officers and directors, and
vendors and service providers. We have faced such claims in the past and we
cannot assure that we will not be subject to claims in the future. In the event
that a claim is successfully brought against us, considering our lack of revenue
and the losses our business has incurred for the period from our inception to
March 31, 2006, this could result in a significant decrease in our liquidity or
assets, which could result in the reduction or termination of our business.
Our Failure to File a Registration Statement Could Affect Our Financial
Condition and Results of Operations.
In June 2005, we engaged Trilogy Capital Partners, Inc. ("Trilogy") as
consultants. In connection with that engagement we issued Trilogy warrants to
purchase 7,500,000 shares of our common stock at a price of $0.55 per share. We
also agreed to file a registration statement with the SEC with respect to the
shares underlying such warrants no later than the earlier to occur of: (i) 15
days following the effectiveness of the registration statement of which this
prospectus forms a part, or (ii) September 15, 2005. As of the date hereof we
have not filed a registration statement with respect to the shares of our common
stock underlying the warrants we issued to Trilogy. In the event that a claim is
successfully brought by Trilogy against us with respect to this matter, it could
result in a significant decrease in our liquidity or assets, which could result
in the reduction or termination of our business.
We Were Obligated to Pay Liquidated Damages As a Result of Our Failure to Have a
Registration Statement Declared Effective Prior to June 15, 2005, and any
Payment of Liquidated Damages Will Either Result in Depletion of Our Working
Capital or Issuance of Shares of Common Stock Which Would Cause Dilution to Our
Existing Shareholders.
Pursuant to the terms of our private placement that closed in January and
February 2005, if we did not have a registration statement registering the
shares underlying the convertible notes and warrants declared effective on or
before June 15, 2005, we are obligated to pay liquidated damages in the amount
of 3.5% per month of the face amount of the notes until the registration
statement is declared effective. At our option, these liquidated damages can be
paid in cash or restricted shares of our common stock. Thus far we have decided
to pay the liquidated damages in common stock, although any future payments of
liquidated damages may, at our option, be made in cash. If we decide to pay such
liquidated damages in cash, we would be required to use our limited working
capital and potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Based on the closing
market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our common
stock on July 15, 2005, August 15, 2005, September 15, 2005, October 17, 2005,
November 15, 2005 and December 15, 2005, respectively, we issued a total of
3,807,375 shares of common stock in liquidated damages from August, 2005 to
January, 2006. The issuance of shares upon payment of liquidated damages will
have the effect of further diluting the proportionate equity interest and voting
power of holders of our common stock, including investors in this offering.
Liquidated damages in the form of common stock were paid for the period from
June 15, 2005 to December 15, 2005. We believe that we have no enforceable
obligation to pay further liquidated damages since the shares we agreed to
register for resale are eligible for resale under Rule 144 of the Securities Act
of 1933, as amended, and such continuing liquidated damages are grossly
inconsistent with actual damages to the purchasers of the notes and warrants.
However, we are seeking to confirm this position by obtaining the waiver and
release of the holders of these securities of further liquidated damages. If
these persons do not waive and release and successfully bring a claim against us
with respect to such liquidated damages, it could result in a significant
decrease in our liquidity or assets, which could result in the reduction or
termination of our business.
Matters Voluntarily Reported to the SEC and Securities Act Violations
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We previously disclosed that we were investigating the circumstances surrounding
certain issuances of shares to employees and consultants in 2005, and have
engaged our new outside counsel to conduct this investigation. We have
voluntarily reported our current findings from the investigation to the SEC, and
we have agreed to provide the SEC with further information arising from the
investigation. We believe that the issuance of 8,000,000 shares to employees in
July 2005 was effectuated by both our former President and our former Chief
Financial Officer/Chief Operating Officer without approval of the board of
directors. These former officers received a total of 3,000,000 of these shares.
In addition, it appears that the 8,000,000 shares issued in July 2005, as well
as an additional 550,000 shares issued to employees and consultants in March,
May and August 2005, were improperly issued without a restrictive legend stating
that the shares could not be resold legally except in compliance with the
Securities Act of 1933, as amended. Our investigation is continuing. The members
of our management who effectuated the stock issuances that are being examined in
the investigation no longer work for us. We believe that we may incur
significant costs and expenses in continuing this investigation.
In the event that any of the exemptions from registration with respect to the
issuance of our common stock under federal and applicable state securities laws
were not available, we may be subject to claims by federal and state regulators
for any such violations. In addition, if any purchaser of our common stock were
to prevail in a suit resulting from a violation of federal or applicable state
securities laws, we could be liable to return the amount paid for such
securities with interest thereon, less the amount of any income received
thereon, upon tender of such securities, or for damages if the purchaser no
longer owns the securities. As of the date of these financial statements, we are
not aware of any alleged specific violation or the likelihood of any claim.
There can be no assurance that litigation asserting such claims will not be
initiated, or that we would prevail in any such litigation.
RISKS RELATING TO OUR COMMON STOCK
There Are a Large Number of Shares Underlying Our Options and 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 March 31, 2006, we had 118,582,385 shares of common stock issued and
outstanding and outstanding options and warrants to purchase in the aggregate
approximately 49,229,464 shares of common stock. All of the shares issuable upon
exercise of our options and 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 options and 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 Over The Counter Bulletin Board ("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 SEC 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 receives from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o Obtain financial information and investment experience objectives of the
person; and
o Make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o Sets forth the basis on which the broker or dealer made the suitability
determination; and
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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.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2006, our management carried out an evaluation, under the
supervision of our Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of our system of disclosure controls
and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and
15d-15(e) under the Exchange Act). Based on that evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures are not effective to provide reasonable assurance that information we
are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and that such information is not accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. Please see the subsection "Significant Deficiencies In
Disclosure Controls And Procedures Or Internal Controls" below.
Changes in internal controls
Except as described below, there were no changes in internal controls over
financial reporting that occurred during the period covered by this report that
have materially affected, or are reasonably likely to materially effect, our
internal control over financial reporting. As described below, as a result of
our evaluation of our disclosure controls and procedures as of March 31, 2006,
we determined that our controls and procedures are not effective and subsequent
to the period of this report, began to implement changes to our internal
controls.
Significant Deficiencies In Disclosure Controls And Procedures Or Internal
Controls
As previously reported, on July 11, 2005, we determined there were errors in
accounting for the valuation of equity consulting service transactions during
the January through March 2005 time period. The valuation resulted in the
overstatement of approximately $2.9 million in services provided. The errors
were discovered in connection with a comment raised by the SEC in their review
and comment on our registration statement on Form SB-2. The SEC requested that
we provided additional disclosure regarding issuances of common stock to
non-employees in exchange for services. Upon reviewing and updating our
disclosure, we discovered our errors. During the quarter ended March 31, 2006,
we implemented the following changes in our internal controls to resolve these
weaknesses and deficiencies:
Establish and maintain a separate binder of all board authorized activities and
a binder with forward looking "budget" of anticipated or contemplated activity
for each of the following:
o Shares issued for services;
o Shares issued for employees;
o Warrant exercises;
o Option exercises;
o Authorized shares and warrant re-pricing;
o Shares issued in exchange for debt; and
o Upcoming ESOP grants and exercises;
o Require the signature of the principal executive and accounting officers
for all issuances of securities;
o Require monthly review of share issuances compared to binders; and
o Authorize our transfer agent to handle and track all warrants and ESOP
grants.
We believe that these actions will correct the material deficiencies and
significant weaknesses in our controls and procedures.
55
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.
Crystal Research Associates, LLC v. Applied DNA Sciences, Inc., Docket No.:
L-7947-04
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us for $13,000 in the Superior Court of New Jersey, Middlesex County. We
intend to move to vacate the default judgment on various grounds. The plaintiff
has agreed in principle to settle this matter with us in exchange for a cash
payment, but, as of the date hereof, we have not executed a settlement
agreement.
Paul Reep v. Applied DNA Sciences, Inc., Case No.: BC345702
Plaintiff Paul Reep, a former employee, commenced this action against us in the
Superior Court for the Sate of California for the County of Los Angeles on
January 10, 2006. Paul Reep asserts eight causes of action for breach of
contract, breach of an oral agreement, negligent misrepresentation, interference
with prospective business advantages, defamation, fraud, accounting and
constructive trust, unjust enrichment. The relief sought includes damages and
attorneys' fees. We dispute all of the allegations of this complaint and intend
to vigorously defend this mater. In this matter we have asked the court to make
a judicial determination that an agreement, which we did not authorize and which
is the basis of previously disclosed litigation against us by Paul Reep, our
former employee, and a new action filed by our former employees as set forth in
the subsequent paragraphs is invalid and unenforceable. This matter is in its
early stages.
Applied DNA Sciences, Inc. v. Paul Reep, Adrian Butash, John Barnett, Chanty
Cheang, Jaime Cardona, and Angela Wiggins, Case No. CV06-2027 RGK
We filed this action against the defendants, Paul Reep, Adrian Butash, John
Barnett, Chanty Cheang, Jaime Cardona, and Angela Wiggins on April 4, 2006, in
the United States District Court for the Central District of California. In this
matter we have asked the court to make a judicial determination that an
agreement, which we did not authorize and which is the basis of previously
disclosed litigation against us by Paul Reep, our former employee, is invalid
and unenforceable. This matter is in its early stages.
Barnett, et al. v. Applied DNA Sciences, et al., Case No.: BC 350904
Plaintiffs John D. Barnett, Jr., Adrian Butash, Jaime A. Cardona, and Chanty
Cheang, our former employees, filed suit against us, Applied DNA Operations
Management, Inc., APDN (B.V.I.), Inc., Peter Brocklesby, James A. Hayward,
and Jun-Jei Sheu in Los Angeles County Superior Court on April 17, 2006. The
complaint alleges causes of action for breach of written contract, breach of
oral contract, fraud, violations of the California Labor Code, and wrongful
termination. We dispute all of the allegations and intend to vigorously
defend this action. This matter is in its early stages.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 8, 2006, we completed a private placement offering in which 30 units
(the "Units") of our securities were sold, each Unit consisting of (i) a $50,000
Principal Amount 10% Secured Convertible Promissory Note (the "Notes") and (ii)
a warrant (the "Warrants") to purchase 100,000 shares of our common stock, or an
aggregate of $1,500,000 in principal amount of Notes and Warrants to purchase
3,000,000 shares of common stock, for aggregate gross proceeds of $1,500,000.
The Units were sold pursuant to Subscription Agreements, by and between each of
the purchasers and Applied DNA Operations Management, Inc., our wholly owned
subsidiary. This issuance is considered exempt under Regulation S of the
Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
Item 5. Other Information
Litigation
We previously disclosed that plaintiff James Paul Brown, filed an action against
us in the Superior Court for the State of California for the County of Los
Angeles on January 12, 2006 (James Paul Brown v. Applied DNA Sciences, Inc.,
Case No. BC 3457814). The complaint asserted a single cause of action for breach
of an alleged oral consulting agreement. The relief sought included money
damages and attorneys' fees. The parties have executed a settlement agreement,
we have performed our obligations under such agreement, and this matter has been
dismissed with prejudice.
56
We previously disclosed that plaintiff Rubenstein Public Relations, Inc.
commenced an action against us in the Civil Court of the City of New York,
County of New York, in New York State Rubenstein Public Relations, Inc. v.
Applied DNA Sciences, Inc.). Plaintiff Rubenstein Public Relations, Inc.
asserted a cause of action for breach of contract based upon the allegations
that we failed to make payments pursuant to a March 2005 investor relations
consulting agreement governed by New York law. Rubenstein Public Relations, Inc.
sought damages in the amount $43,000. The parties have executed a settlement
agreement, we have performed our obligations under such agreement, and this
matter has been dismissed with prejudice.
Related Party Transactions
On May 9, 2006, we issued a press release to announce that we had entered into a
Business Development and Trademark License Agreement with Dr. Suwelack Skin &
Health Care AG ("Dr. Suwelack") providing Dr. Suwelack rights to use our
SigNature(TM) logo, which is printed with ink containing our proprietary
encrypted botanical DNA technology, and to participate in our SigNature(TM)
Program. The terms of this one year license agreement provide Suwelack with a
limited, non-exclusive, non-transferable right to use the SigNature(TM) logo on
its packaging and labels. Dr. Suwelack will pay us a one time license fee in the
amount of EUR15,000 in consideration for the use of our SigNature(TM) logo.
EUR7,500 of the license fee was due upon signing of the agreement and the
remaining 50% is due upon receipt of the shipped labels. James A. Hayward, one
of our directors and our Chief Executive Officer ("Dr. Hayward"), serves on Dr.
Suwelack's board of directors. BioCogent, whose President and Chief Executive
Officer and sole stockholder is Dr. Hayward, provides consulting services to Dr.
Suwelack. Dr. Suwelack and BioCogent recently reached an agreement in principle,
with respect to which no written agreement has been executed, by which BioCogent
will continue to provide consulting services to Dr. Suwelack and Dr. Hayward
will serve as Dr. Suwelack's president on a part-time basis reporting to Dr.
Suwelack's Chief Executive Officer.
Item 6. Exhibits
4.1 Form of Subscription Agreement, filed as an exhibit to the current report on
Form 8-K filed with the Commission on March 14, 2006 and incorporated herein by
reference.
4.9 Form of 10% Secured Convertible Promissory Note of Applied DNA Sciences,
Inc., filed as an exhibit to the current report on Form 8-K filed with the
Commission on March 14, 2006 and incorporated herein by reference.
4.10 Form of Warrant Agreement of Applied DNA Sciences, Inc., filed as an
exhibit to the current report on Form 8-K filed with the Commission on March 14,
2006 and incorporated herein by reference.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule
15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule
15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 2 to Form 10-QSB/A to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLIED DNA SCIENCES, INC.
Date: October 10, 2006 By: /s/ JAMES A. HAYWARD
-------------------------------------
James A. Hayward
Chief Executive Officer (Principal
Executive Officer, Principal Financial
Officer and Principal Accounting
Officer)
58