SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2004
Commission File Number 002-90539
Applied DNA Sciences, Inc.
(Exact Name of Small Business Issuer in its charter)
Nevada 59-2262718
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
9229 W. Sunset Boulevard, Suite 830, Los Angeles, CA 90069
(Address of principal executive offices) (Zip code)
Issuer's telephone number (310) 860-1362
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.50 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. None
State the aggregate market value of the voting stock held by non- affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $35,687,181.
Number of outstanding shares of the registrant's par value $0.50 common stock as
of January 13, 2005: 30,909,292
TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business 3
Item 2. Description of Property 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Plan of Operation 17
Item 7. Financial Statements F-1
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
Item 8(a) Controls and Procedures 30
Item 8(b) Other Information 30
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 31
Item 10. Executive Compensation 33
Item 11. Security Ownership of Certain Beneficial Owners and Management 34
Item 12. Certain Relationships and Related Transactions 34
PART IV
Item 13. Exhibits 35
Item 14. Principal Accountant's Fees and Services 36
2
ITEM 1. DESCRIPTION OF BUSINESS
This Annual Report on Form 10-KSB (including the section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations) contains forward-looking statements regarding our business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not deemed to represent an all-inclusive
means of identifying forward-looking statements as denoted in this Annual Report
on Form 10-KSB. Additionally, statements concerning future matters are
forward-looking statements.
Although forward-looking statements in this Annual Report on Form 10-KSB
reflect the good faith judgment of our management, such statements can only be
based on facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, without
limitation, those specifically addressed under the heading "Risks Related to Our
Business" below, as well as those discussed elsewhere in this Annual Report on
Form 10-KSB. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-KSB. We file reports with the Securities and Exchange
Commission ("SEC"). We make available on our website under "Investor
Relations/SEC Filings," free of charge, our annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file
such materials with or furnish them to the SEC. Our website address is
www.adnas.com. You can also read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
You can obtain additional information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Annual Report on Form 10-KSB. Readers are urged to carefully
review and consider the various disclosures made throughout the entirety of this
Annual Report, which attempt to advise interested parties of the risks and
factors that may affect our business, financial condition, results of operations
and prospects.
OUR BUSINESS
Overview
We are a provider of proprietary DNA-embedded biotechnology security
products that protect corporate and intellectual property from counterfeiting,
fraud, piracy, product diversion and unauthorized intrusion. We offer a cost
effective method to detect, deter, interdict and prosecute counterfeiting
enterprises. We provide proprietary DNA-embedded biotechnology solutions to
companies to protect corporate and intellectual property from counterfeiting,
fraud, piracy, product diversion and unauthorized intrusion. We use segments of
naturally occurring botanical DNA that have unique characteristics, which are
one-of-a-kind sequences. Using various anti-counterfeit mediums, or substrates,
such as ink, microchips, glue, paints and holograms, we can authenticate the
unique DNA characters to ensure that the product has not been counterfeited or
tampered with.
Sectors of commerce benefiting from our products include: corporations,
federal government agencies, information technology, security and surveillance,
entertainment media, the arts, cosmetics, pharmaceutical and biometrics, as well
as vertical retail markets. Our applications also enhance capabilities of
product origination, identification verification, and validation of the source
of components for critical manufacturing, defense, medical and other
highly-integrity or secure products.
Our mission is to become the recognized stantard in providing total
security solutions to protect corporate and intellectual property from
counterfeiting and fraud.. The Company will deliver its products to a global
market via existing and emerging strategic business development agreements with
recognized leaders in the security industry and through collaborations with
leading Security Consultancy companies.
We have acquired the exclusive license to sell, market, and sub-license all
of Biowell's DNA anti-counterfeit and fraud prevention biotechnology and
products in North America (U.S. and Canada), Latin America and Europe. The
exclusive license also gives us the initial rights to future biotechnologies
developed by Biowell and also new applications for the existing technology that
may be developed for the marketplace. Biowell has selected us to be its
marketing and licensing partner to introduce the DNA biotechnology products to
the world's largest consumer markets. In addition to marketing the DNA products
3
in its territory, we will develop DNA production laboratories in the United
States, as well as develop capabilities in DNA authentication, analysis and
detection products with ongoing relationships with the Department of Energy's
national laboratory system.
We have a very seasoned and experienced management team. This was a key
factor in establishing the partnership with Biowell. Our combined executive team
has professional experience totaling more than 100 years in the areas of
anti-counterfeiting technology, microchip development, security, printing,
marketing, and corporate sub-licensing development. Our management team has also
been active in the International Anti-Counterfeiting Coalition, Homeland
Security technology communities, and the anti-fraud investigation industry. Our
executives have developed strong links with major international corporations,
intellectual property and copyright holders, U.S. Government affiliations, and
international anti-fraud organizations.
License Agreement with Biowell Technology
In consideration for the granting of the exclusive license to us, Biowell
received 1.5 million shares of our common stock, with the option to purchase
another 500,000 shares. In return, we received the option to purchase 500,000
shares of Biowell common stock.
License Agreement with Biowell Technology
In consideration for the granting of the exclusive license to us, Biowell
received 1.5 million shares of our common stock, with the option to purchase
another 500,000 shares. In return, we received the option to purchase 500,000
shares of Biowell common stock.
On August 20, 2004, we entered into a provisional Letter of Agreement with
Biowell to acquire certain assets in return for shares of our common stock.
Subsequent to the Letter of Agreement, the Company and Biowell entered into an
oral agreement to sell all rights, title and interest in its intellectual
property to us. On December 17, 2004, we entered into a superceding conditional
Agreement with Biowell to acquire all of the Intellectual Property of Biowell in
exchange for shares of our common stock. We expect to enter into a definitive
agreement on or before January 31, 2005, which is subject to certain conditions
including our raising $5,000,000 in capital and our discharging of all debts.
Biowell DNA Technologies
Every living thing has a unique DNA code in its cellular composition. By
taking the DNA from a plant material, Biowell is able to create a group of DNA
codes that can be turned into a unique and traceable marking for any product.
In the early 1980's the primary emphasis in DNA research was applied to
pharmaceutical applications. There was very little focus in the living
biotechnology arena. During the l990's, a group of elite scientists, led by Dr.
Sheu Jun-Jei of Taiwan, focused on the first research and development of a DNA
based anti-counterfeit biotechnology. In the late 1990's, Dr. Sheu made a major
breakthrough in biotechnology, and patents with commercial applications were
filed. Two additional patent applications have been filed during this reporting
period.. Biowell was formed in Taiwan in October of 1999 to hold these pending
patents and continues to advance in the areas of DNA anti-counterfeiting
biotechnology.
The key to this exclusive biotechnology is the ability to mix or attach
scientifically selected and processed DNA to specific media such as paint, glue,
polymer, and ink. In doing this, the characteristics of DNA are used to
distinguish genuine products from counterfeits. This technology can also be used
to authenticate microchips and circuit boards that contain them. The DNA AC
(anti-counterfeit) biochip is a Biowell product in which DNA is embedded into a
microchip. When biochips are embedded into circuitry, the biological data can be
read electronically and the component can be authenticated. Without
authentication, the device will not operate.
Intellectual Property
Key to our success is ongoing research and development. Biowell has over 10
patents pending and we have filed two new patent applications this year. While
patents are an important asset, they are not the only instruments used to
sequester a competitive position for us. We are developing numerous tools to
maintain technical superiority, which includes licensing other component and
complementary technologies that will keep pace with our speed to market efforts.
4
We regard our patents, trademarks, trade secrets and other intellectual
property as an integral component of our success. We rely on patent law,
trademark law, trade secret protection and confidentiality and/or license
agreements with employees, customers, partners and others to protect our
intellectual property. Effective patent, trademark and trade secret protection
may not be available in every country in which our products are available. We
cannot be certain that we have taken adequate steps to protect our intellectual
property, especially in countries where the laws may not protect our rights as
fully as in the United States. In addition, if our third-party confidentiality
agreements are breached there may not be an adequate remedy available to us. If
our trade secrets become publicly known, we may lose our competitive position.
Additionally, litigation regarding patents and other intellectual property
rights is extensive in the biotechnology industry. In the event of an
intellectual property dispute, we may be forced to litigate. This litigation
could involve proceedings instituted by the U.S. Patent and Trademark Office or
the International Trade Commission, as well as proceedings brought directly by
affected third parties. Intellectual property litigation can be extremely
expensive, and these expenses, as well as the consequences should we not
prevail, could seriously harm our business.
If a third party claims an intellectual property right to technology we
use, we might need to discontinue an important product or product line, alter
our products and processes, pay license fees or cease our affected business
activities. Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all.
Global Market Penetration
We have redirected our sales and marketing strategy to place a premium on
business-to-business opportunities. In order to effectively service our products
globally, we may enter into both exclusive and non-exclusive agreements. Each of
these agreements will have time limits and have very specific revenue targets
set against them. In the case of an exclusive agreement, we may further limit
our relationship to certain products that are offered for sale in a specific
region. All exclusive agreements will have time limits with specific targets for
revenue to be derived out of a given region. Additionally, we have and will
retain the right to allow certain global partners (as we decide from time to
time) to sell into a restricted exclusive market with the provision that a fee
be paid to the exclusive licensee in a given region for products sold in that
region that are covered under their exclusive license. This provision was
adopted to allow for certain Fortune 50 companies to pursue selling our products
and services globally without restrictions and encumbrances with specific
geographical regions.
Our Products
With our exclusive licensing of Biowell's DNA technologies, we will be
working to provide complete DNA anti-counterfeit and fraud prevention solutions.
We will offer comprehensive and price-competitive products and solutions. The
key characteristics of the DNA biotechnology are as follows:
Unique and Impossible to Replicate DNA Codes -- specially processed DNA
fragments, with unique characteristics and one-of-a-kind sequences, are
used. The embedded DNA concentration is extremely small (3-5 micron) and
cannot be analyzed unless proprietary biochemistry and reagents are used,
along with our proprietary DNA reader systems..
Easy to Customize -- We can tailor the DNA tagging to meet the customer's
product requirements. For example, the DNA codes can be generated based on
one or more DNA sources and one or more anti-counterfeit technologies.
Easy and Quick to Use -- With the DNA instant verification kit or scanner,
instant verification can be obtained at the point-of-purchase. Hence, the
authentication process can be performed quickly. Traditional
anti-counterfeit technology analysis requires anywhere from 24 to 48 hours.
Our technology will achieve an effective and timesaving deterrent against
counterfeiters.
Broad Applications -- DNA anti-counterfeiting technology can be applied to
almost any product on the market. The DNA ink is edible and can be used on
tablets or capsules ensuring against counterfeiting pharmaceuticals.
5
DNA Marker
Our first anti-counterfeiting product is the DNA Marker, an agent that can
be used to authenticate textile products. The DNA Marker can be applied at any
point in the manufacturing process, from the freshly cut raw fibers through to
the finished garment. As the DNA Marker can be applied to any fabric from cotton
to wool, this will help textile vendors and governments determine the origin of
thread, yarn and fabric through to the high-end garment manufacturers who suffer
lost sales at the hands of counterfeiters. DNA Marker protection will also help
preserve jobs at the legitimate textile and clothing manufacturers as well as
ensuring that the proper taxes are collected on textiles and garments from
authorities. The DNA Marker will remain effective into the 22nd century and will
be detectable throughout the different manufacturing stages without degrading.
It can be detected in a variety of manners from inspection under infrared light
to laboratory forensic analysis that authenticates it to a certainty of 99.9999
percent Driven by market needs, this is the first of what is expected to be a
number of products and services based upon the DNA marker technology. We will
continuously assess the anti-counterfeit needs of markets, companies and
governmental organizations and will develop proprietary technologies, solutions
and products for these opportunities.
Inks
DNA anti-counterfeit ink has been developed as two major applications. The
first ink is Biowell's unique anti-counterfeit ink (covert ink), which can be
authenticated at a forensic-science level of certainty, in a lab, with detailed
DNA analysis. The second application is an enhanced version of the first,
integrating into the original anti-counterfeit ink an additional instant
detection function for on-site authentication (overt ink).
This instant verification process has been designed to allow sampling at
any point in the product supply chain. By swabbing testing fluid containing a
special activation buffer across the authentic DNA ink surface, a biochemical
reaction occurs between the coating of the DNA molecules in the ink and the
buffer fluid. This reaction manifests as a reversible color change, with the ink
changing color from blue to pink, and back to blue within seconds. Testing can
be repeated at various checkpoints throughout the product supply chain.
Proprietary production techniques are used to manufacture DNA with the
unique property for integration with ink. The key to utilizing DNA for
anti-counterfeit purposes lies in the preservation of DNA. The system of
production ensures that DNA can survive for over 100 years. In addition, special
materials are used to shield purified DNA from environmental variation, which
allows perpetual preservation of DNA and permanent proof of authenticity for
genuine products.
DNA ink can be applied to:
o General Company Use: trade marks, patents, company logos, important
documents
o Financial industry: currency, stocks, checks, bills, bonds, checks
o Retail: event tickets, VIP tickets, clothing labels
o Medicines: capsule and pill surface printing
o Inner package: foil blister packs
o Outer package: boxes, bottles
o Arts: paintings, artifacts, collectibles and memorabilia
o Others: lottery tickets, stamps, custom seals, passports, visas, etc.
Virtually any item that can be duplicated now can be protected with any of
these DNA ink applications. These applications are cost-effective and can be
adapted to any company's current branding, product tracking, or other
anti-counterfeiting program.
DNA Labels
DNA anti-counterfeit ink can be applied to garment labels. It can also be
printed onto logos or on any other surface. Labels are printed with the
proprietary ink containing the specific authentication DNA code for a
manufacturer. The labels can then be easily tested for authenticity.
Knowledge that the labels are DNA-imprinted and can be quickly and easily
verified serves as a deterrent to counterfeiters. We believe this in itself will
create a demand for the proprietary DNA ink-impregnated label technology.
DNA Chip
Computer and electronic signals constitute most of the corporate security
systems. These systems are of similar function and design, and are susceptible
to duplication and counterfeit. The polymorphism of DNA is significantly more
complex than electronic signals, and better suited for security systems.
6
The DNA chip card is intended for both authentication of the card and
identification of the individual. For that purpose, a set of DNA chip cards are
assigned with specific DNA (group ID), along with the individual's
identification information and recorded in the chip's memory. A reader module is
configured to recognize (and therefore verify) only the chip carrying the
correct group ID. Any DNA chip card with different group ID, or indeed any other
chip card, will be rejected.
The DNA chip uses artificially constructed DNA, with each user group having
the same DNA code. Individuals are differentiated in the system by
identification codes stored in the chip's memory. In addition, the DNA chip can
be configured for the customer to have a particular person have their own DNA as
the source DNA for that user group. The DNA chip generates unique signals and
will not function properly once removed from the casing. The empty chip is not
available anywhere else on the market, thus making it impossible to counterfeit.
Once the imbedded DNA chip is sabotaged or removed the chip will cease
functioning, thus preventing data on the chip from being duplicated.
The signal of a DNA chip is generated through an interaction between DNA
and a specially devised mechanism known as a DNA chip reader. A real DNA chip
will generate an analogical signal and be received by the reader after the chip
is stimulated. An LCD display screen provides immediate authentication by
reading the unique DNA signals embedded in the chip.
The DNA chip function is versatile, which allows it to be integrated into
the form of slot reader, slide through reader, or contact point reader for
instant authentication. Biowell has also developed a portable, lightweight,
hand-held scanner that can be used to authenticate the DNA chips. The cost of
the DNA chip, card, and reader system is comparable to existing smart card
systems. Above all, the reader can be linked externally with existing card
readers to save replacement costs.
We believe that the DNA chip system is more secure than all other systems;
since it cannot be copied or hacked, and works with specially configured
readers.
The DNA biochip can be applied to many products. For example:
o Security ID cards
o Passports
o Licenses
o Credit and ATM cards
o Debit cards
o Consumer merchandise (CDs, VCDs, DVDs, notebook computers, PDAs,
handbags, etc.)
o Other applications where authentication is required (antiques,
paintings, etc.,)
Demands for Security and Positive Identification
As nations are threatened by terrorism and corporations try to prevent
corporate fraud and 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. Our
anti-counterfeiting technology can be used for the following types of
identification and important government documents:
o Passports
o Green cards
o Visas
o Driver's licenses
o Social Security cards
o Student visas
o Military ID's
o Other important Identity cards and official documents
We will explore contracting with consultants in Washington D.C. that will
assist with identifying and securing potential Government contracts that will
utilize the DNA technology for identity and authentication. In 2004, we won the
"Best of New technology" prize at the Security Industry Association conference
in Washington D.C. in competition against some of the world's largest
corporations. Shortly thereafter, we were inducted into the InteGuard Alliance,
a consortium of 29 major companies providing security services and security
technology to the US Government.
We 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 of our and is currently underway in
the Biowell labs.
7
Business Strategy and Approach
Our goal is to establish three integrated business operations addressing
and servicing the needs of the marketplace for anti-counterfeit, fraud
prevention, and homeland security solutions.
Intellectual Property Development, Product Operations & Partnerships
We are a developer of security solutions that protects corporate and
intellectual property from counterfeiting, fraud, piracy and product diversion
using a proprietary line of DNA embedded biotechnology products accompanied by
monitoring and enforcement support, we produce solutions customized to their
customer's need. We intend to market and sell DNA anti-counterfeit and fraud
prevention products and oversee laboratory facilities where consumer and
corporate products can be tested for authenticity. It will oversee the
development of new product lines that will address specific and individual
customer needs. Additionally, this division will identify strategic licensees
and partnerships in multiple sectors that will license and sell our products and
biotechnologies. This will include sub-licensing the technology to key partners
in each sector with an established base of customers. These new partners will be
able to enhance their client services by adding our technology to the existing
product line or current security methods to deter fraud and counterfeiting.
Consultant & Enforcement Operations
As a service to our clients, we will consult with them on how to best
protect their intellectual property and products. We will offer worldwide
investigative and DNA analysis services for the enforcement and prosecution of
counterfeiters and fraud itself and through our subcontractors or sub-licensees.
International Sub-License Operations
This division will oversee the activities of all international sub-license
alliances and partnerships. This division will also develop a corporate policy
for all marketing and promotional activities.
We intend to seek alliances with existing anti-counterfeit networks in
each market. We will train these networks to use our technology to detect and
monitor counterfeit and fraud, and we will use our own anti-counterfeit and
security experts to help detect counterfeiting attempts against corporations and
government agencies.
By combining our three operations, we will provide multiple security
solutions. Each division will produce separate revenue streams and integrated
organizational structures that we believe will make us a leader in the field of
anti-counterfeit and fraud prevention services.
Our management team and advisory board have a unique combination of skills
for providing integrated DNA anti-counterfeit and fraud prevention systems for
the protection and tracking of documents, products, and intellectual property:
-- Strong Security Knowledge Base -- Our team has the experience to
analyze and provide solutions that address the security needs of
companies in such diverse market segments as pharmaceuticals,
designer clothing, luxury goods and cosmetics, aerospace,
defense, diamonds, automotive, holography and chip manufacturing.
Several team members are published authors in the area of
security and are recognized globally as experts in their fields.
-- Leading Technology -- We have exclusive rights to all patent
pending, leading DNA anti-counterfeit, and fraud prevention
technologies created by Biowell. We also have an agreement in
place with HoloMex, Inc., a leading security hologram
manufacturer, to create DNA-holograms, a new generation security
product. Our management also hasan in-depth understanding of
microchip design and applications.
-- Strategic Corporate Relationships -- Our management has personal
and corporate relationships with leaders in key industries such
as: high-end fashion retail, computers, entertainment,
automobiles, aerospace, defense and pharmaceuticals. We will
utilize these existing relationships to introduce our
anti-counterfeiting products and generate contracts, although no
discussions have yet been held. Each industry has multiple facets
for the anti-counterfeit DNA technology. For example, fashion
retail can use our anti-counterfeit chip in its high-end fashion
handbags, while a company producing fine wines can take advantage
of our DNA-embedded label. Our proprietary technologies offer
immediate and affordable detection and security for all of their
trademarks and products.
8
-- Strong Technology Alliances -- Our products can also work with
and supplement products in key anti-fraud and security
industries, such as:
o Electronics security
o Hologram manufacturing
o Radio Frequency Identification (RFID) systems
o Isotopic Markers
o Security papers and printing
o Other security-related products, systems, and services
-- Law Enforcement Expertise -- Our management includes former
federal law enforcement, security, and intelligence officers who
provide us with extensive 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
Patents Pending
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Patent Name Application No. Filed by Date Filed Jurisdiction
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
A Method of Utilizing 089108443 Biowell March 17, 2000 Taiwan
Nucleic Acids as
Markers for Product 00107580.2 May 18, 2000 China
Anti-Counterfeit Labeling
and Verification 09/832,048; April 9, 2001 United States
published 20020187263-A1
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
EppenLocker (A 089204158 Biowell March 10, 2000 Taiwan
Leakage-Prevention Apparatus
of Microcentrifuge)
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Multiple Tube Structure for 089210575 Biowell June 20, 2000 Taiwan
Multiple in a Closed
Container
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Method for Processing 89111477 Biowell June 12, 2000 Taiwan
Multi-PCR in Closed Vessel
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Method for Mixing Nucleic 2002-294229 Biowell August 31, 2002 Japan
Acid in
Water Insoluble Media and 03007023.9 March 27, 2003 European
Application Thereof Patent Office
92121973 August 11, 2003 Taiwan
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Method for Hiding Secret 92121490 Biowell August 6, 2003 Taiwan
Message Carrying a DNA
Molecule and a Method for pending August 6, 2003 China
Decoding the Secret Message
Hiding by thereof
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Method for Transferring 92119302 Biowell July 15, 2003 Taiwan
Giveback Funds by
Recognizing Plurality of 03150071.4 July 31, 2003 China
Objects
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Anti-Counterfeit Chip None Biowell To be filed Taiwan
Recognizing Device
China
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
9
A System and Method for 60/463215 Biowell April 16, 2003 United States
Marking Textiles Using DNA
Applied DNA Sciences
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
A System and Method for 2004/012031 Applied DNA Sciences April 15, 2004 United States
Marking Textiles Using
Nucleic Acids
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
System and Method for 10/825968 Applied DNA Sciences January 21, 2004 United States
Authenticating Clients on a
Local Area Network Using
Nucleic Acids
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Sales and Marketing
We employ a multi-tier sales and marketing strategy. We develop strategic
alliances and marketing partners, by setting up alliances with Biowell's
technology partners, granting licenses to existing anti-counterfeit suppliers
and partner with industry leaders for intellectual property development.
We provide anti-counterfeiting and security solutions through our sales
force covering a multitude of potential clients either directly or via
resellers.
Customers
We do not currently have any revenue-generating customers at this point.
Our client base will consist of major corporations, government entities and
educational institutions. We will provide DNA chip technology, DNA ink
technology as well as DNA profiling/tagging technology through various types of
resale agreements. We will apply these technologies to labels and security ink,
to a chip and reader as well as textile markers and agriculture profiling.
Competition
The anti-counterfeit and fraud prevention market is highly competitive and
diverse. Since we believe that other forms of anti-counterfeiting and security
measures can be easily defeated, we expect that utilizing DNA which cannot be
replicated will garner great demand from the market. Some examples of
biotechnology and other security technologies include:
FINGERPRINT- a systems scans fingerprints before granting access to
computer files.
VOICE- Off-the-shelf software authenticates users based on individual vocal
patterns.
CORNEA- Scanners that scan the iris of a user's eye to match compared to a
computer database.
FACIAL SCAN- Computers can use complex algorithms to distinguish one face
from another.
IC CHIP & MAGNETIC STRIP- Integrated circuit chip that runs an electric
current through a circuit and is verified by a IC card. Is used in many parts of
Europe and Asia.
HOLOGRAPH- Optical security elements ('holograms') constitute a family of
optically variable microstructures, which are difficult to copy. Most of them
are difficult to reproduce using advanced color photocopiers and printing
techniques. This is why they are so widely used as anti-counterfeit devices.
Holograms are only one member of a family of optically variable devices which
all have several features in common. These are:
o Highly visible to the naked eye under good or reasonable
conditions of illumination.
o Colorful and change their colors with viewing angle.
o They derive their colorful effects from microstructures within
the devices, which cause interference or diffraction of the light
falling upon them.
FLUORESCENCE- X-ray Fluorescence (XRF) and elemental taggant technologies were
developed as a unique method for assaying uranium ore. Later on was used as a
handheld alloy grade identification and spectral analysis instrument. Its use is
limited to label/printing applications.
10
RADIOACTIVITY& RARE MOLECULES- a method of Radiation detection is very effective
but limited to use on crude oil.
Some of the bigger competitors in the field of anti-counterfeiting and
fraud protection include:
o DNA Technologies. Inc.
o Art Guard International
o Theft Protection Systems
o Cypher Science (United Kingdom) Mt. Sinai Hospital
o ChemTAG (Norway)
o NTT DATA Labs (Japan)
o November AG
Management Strategy
In anticipation of internal growth, we will organize resources to manage
our development effectively, minimizing organic growth, while optimizing our use
of excess capacity, where core competency in the biotech arena is made
available. Our Chief Executive Officer is responsible for the strategic
direction, coordinating with our overseas technology partner Biowell and others
as well as operations. Our President is responsible for government entity
relations, corporate governance and building shareholder value. Our Chief
Financial Officer covers overall financial management, financial reporting,
corporate administration, investors relations. Our Vice President covers
specific industries, such as the pharmaceutical, cosmetic and comestible sectors
and acts as our media spokesperson, clarifying for the pharmaceutical and
nutraceutical industries, allied health professionals and consumers the
advantages of our anti-counterfeit, diversion and piracy applications and
products.
Employees
As of January 12, 2005, we employed 11 full-time employees, of which five
are in management, five are sales & marketing executives and one is in
administration.
Giuliani Partners
On or about August 6, 2004, we engaged Giuliani Partners LLC as our
strategic marketing partner and advisor. Giuliani Partners has extensive
experience in advising corporations and organizations in various business
sectors. The engagement agreement had an effective date of September 1, 2004.
Giuliani Partners has been engaged, on a non-exclusive basis, to provide
advice and assistance to us regarding issues associated with our proprietary DNA
embedded security solutions. Giuliani Partners will assist us with strategic
positioning and enhancement of our business, and will assist us in the
development of domestic and international marketing strategies for our DNA
products and services. The term of the engagement is one year from the effective
date, with automatic one year renewals unless either party expresses, in
writing, an intention not to renew within 60 days prior to the expiration of the
term.
As compensation for Giuliani Partners' performance, we will pay Giuliani
Partners an aggregate advisory fee of $2,000,000 payable in increments over the
term and renewal term. The initial payment of $500,000 was made by us on or
about September 7, 2004. Additionally, we will issue a net-exercisable warrant
to purchase shares of our common stock at a later date. Fees were placed in
escrow during Giuliani Partners' completion of its due diligence review.
All our promotional materials will be submitted to Giuliani Partners for
its review, including all advertising, written sales promotion, press releases,
news clippings and other publicity matters relating to Giuliani Partners'
engagement and the strategic relationship created.
We have agreed to maintain confidentiality with regard to our relationship
with Giuliani Partners, wherever appropriate, and have indemnified Giuliani
Partners, its controlling persons, respective partners, shareholders, directors,
officers, employees, agents, affiliates and representatives and will hold them
harmless against any actions, judgments, claims, etc.
11
ITEM 2. DESCRIPTION OF PROPERTY
Presently, we maintain our principal office at 9229 W. Sunset Boulevard,
Suite 830, Los Angeles, California 90069. We signed a lease for our office space
in November 2003. The office space, which is provided to us for $11,312.70 per
month for the first twelve months of the lease, for $ 11,635.92 for the second
12 months and $ 12,031.01 for the last 12 months of the lease, has approximately
5,387 square feet. We consider the premises adequate for our purposes for the
immediate future. Our Web address is www.adnas.com.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders for the year
ended September 30, 2004.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Market Information
Our Common Stock is traded over-the-counter on the Over the Counter Bulletin
Board maintained by the National Association of Securities Dealers under the
symbol "APDN". There is no certainty assurance that the Common Stock will
continue to be quoted or that any liquidity exists for our shareholders.
The following table sets forth the quarterly quotes of high and low prices for
our Common Stock on the OTC Bulletin Board during the fiscal years September 30,
2003 and September 30, 2004. In February of 2003, we changed our year end to
September 30.
Year ended 9/30/04 High Low
December 31, 2003 $3.54 $2.45
March 31, 2004 $3.55 $1.51
June 30, 2004 $2.55 $0.71
September 30, 2004 $0.96 $0.43
Year ended 9/30/03* High Low
December 31, 2002 $2.55 $0.05
March 31, 2003 $2.48 $2.05
June 30, 2003 $2.85 $2.30
September 30, 2003 $2.80 $2.40
* We have disclosed the numbers with both years ending on September 30 for
comparative purposes. Our prior year end was December 31.
The source of this information is NASDAQ Over the Counter Bulletin Board
Research Reports and Yahoo Finance Historical Prices reports, as well as
broker-dealers making a market in our Common Stock. These prices reflect
inter-dealer prices, without retail markup, mark-down or commission and may not
represent actual transactions. Number of Stockholders
As of January 7, 2005, the approximate number of holders of record of our
Common Stock, which is our only class of common equity, is 465 This number does
not include holders of securities in street name.
Dividends
We are in the developmental stage and accordingly have not generated any
revenues nor had net profits on operations and therefore are currently
proscribed under the Nevada Revised Statutes from declaring dividends. We have
not paid any cash dividends on our Common Stock or our Preferred Stock. Our
Board of Directors has no present intention of declaring any cash dividends, as
we expect to re-invest all profits in the business for additional working
capital for continuity and growth. The declaration and payment of dividends in
the future will be determined by our Board of Directors considering the
conditions then existing, including our earnings, financial condition, capital
requirements, and other factors.
OUR CAPITAL STRUCTURE
We are authorized to issue 10,000,000 shares of Preferred Stock and
100,000,000 shares of common stock. We have designated one series of convertible
preferred stock, and as of this date, 60,000 shares are issued and outstanding.
Both our Preferred Stock and common stock had a par value of $0.0001 per
share through December 3, 2003. On December 12, 2003, we increased the par value
of our common stock to $0.50 and our Preferred Stock to $0.001 per share by
filing Articles of Amendment to our Articles of Incorporation.
13
The authorized classes, and the amount or number of each, which are authorized
and outstanding as of January 7, 2005 are as follows:
Security Authorized Issued and Outstanding Expiration Date
Preferred Stock 10,000,000 60,000
Common Stock 100,000,000 30,909,292
2003 Offering Units 2,000 183.5
Underlying Common Stock 3,200,000 293,600
Underlying Warrants* 1,000,000 91,750 September 1, 2005
($0.60/share)
Bridge Unit Offering 33.5 33.5
Underlying Notes 33.5 33.5
Underlying Shares 5,583,333
Underlying Warrants 1,675,000 1,675,000 September 30, 2008
(Repriced at $0.60/share)
Underlying Warrants 335,000 335,000 September 30, 2008
($0.10/share)
Consulting Warrants August 1, 2007
(Stonestreet & Walehaven) 750,000 750,000
($0.70/share)
[Stephanie] Stern Warrants 62,503 62,503 December 31, 2005
($3.00/share)
Hutchison Warrants 1,000,000 1,000,000
($0.60/share)
Directors and Advisors Warrants ($0.60/share) 3,000,000 2,850,000 October 29, 2009
Alpha Spectrum Warrants 50,000 50,000 October 6, 2009
($0.50/share)
Lee Warrants 600,000 600,000
($0.60/share)
Bonus Compensation Warrants 1,000,000 136,000 October 16, 2006
(Lower of $1.00 or 55% of 20
day average bid and ask)
Hart Compensation Warrants 250,000 250,000 March 31, 2005
Lower of $1.00 or 65% of
20 day average bid and ask)
Founders Compensation Warrants ($0.60) 560,000 296,000 January 31, 2008
*As consideration for consenting to a filing date extension, all bridge
note investor's warrant exercise prices were adjusted from $3.20 per share to
$0.60 per share, and for each Unit purchased, 7,500 shares with registration
rights were issued.
Preferred Stock
The 10,000,000 shares of Preferred Stock authorized are undesignated as to
preferences, privileges and restrictions. As the shares are issued, the Board of
Directors must establish a "series" of the shares to be issued and designate the
preferences, privileges and restrictions applicable to that series. To date, the
Board has designated a Founders' Series of Convertible Preferred Stock, which,
in six months from the date of issuance, shall be convertible at the option of
the holder and upon our reaching certain financial objectives, into shares of
our restricted Common Stock. Each share, when eligible, is convertible into 25
fully paid and non-assessable shares of our Common Stock, subject to a leak out
agreement that extends the 144 Rule to two years. Holders will be permitted to
14
sell, after a one year holding period through a three year holding period, 1% of
the issued and outstanding shares of our common stock every 90 days. This series
has been authorized by the Board of Directors. As of January 13, 2005, there are
a total of 60,000 convertible preferred shares issued and outstanding.
Common Stock
Our authorized common equity consists of One Hundred Million (100,000,000)
shares of a single class of Common Stock, having a par value of $0.50 per share.
As of January 13, 2005, there were 30,909,292 shares issued and outstanding. The
holders of our Common Stock (i) have general ratable rights to dividends from
funds legally available therefore, when, as and if declared by the Board of
Directors; (ii) are entitled to share ratably. In all assets available for
distribution to shareholders upon liquidation, dissolution or winding up of our
affairs; (iii) do not have preemptive, subscription or conversion rights, nor
are there any redemption or sinking fund provisions applicable thereto; and (iv)
are entitled to one vote per share on all matters on which shareholders may vote
at all shareholder meetings. The Common Stock does not have cumulative voting
rights, which means that the holders of more than fifty percent of the Common
Stock voting for election of directors can elect one hundred percent of our
directors if they choose to do so.
2003 Offering Units
In September 2003, we sold 16 units at $4,000 a unit, for a total of
$64,000, and between October and December 2003, we sold 167.5 units for a total
of $670,000 in a private offering of its securities under Regulation D of the
Securities Act of 1933, and Rule 506 promulgated thereunder. Each Unit consisted
of 1,600 shares of our Common Stock plus 500 Common Stock Purchase Warrants.
The Warrants are exercisable on a one for one basis at an exercise price of
$3.50 per share for a two year exercise period from the date of issuance. The
Units, and their constituent securities, were granted piggyback registration
rights.
Bridge Unit Offering
From November through December 2003, we sold 23.25 units (the "Units") to
accredited investors at a price of $50,000 per Unit (the "Offering") for a total
of $1,162,500. Each Unit consists of (i) a $50,000 Principal Amount 10% Secured
Convertible Promissory Note ("Note" or "Notes"), (ii) warrants to purchase
50,000 shares of our common stock, exercisable for a period of five years at a
price of $3.20 per share ("$3.20 Warrant") and (iii) warrants to purchase 10,000
shares of our common stock, exercisable for a period of five years at a price of
$0.10 per share ("$0.10 Warrant" and together with the $3.20 Warrant, the
"Warrants"). The Notes are convertible into shares of our common stock at a
price of $2.50 per share.
Notes
All of the Notes have been either repaid or converted.
Bridge Offering Warrants
Each $3.20 Warrant offered, which has been repriced to a $0.60 Warrant,
entitled the registered holder to purchase 50,000 shares of Common Stock at an
exercise price of $0.60 per share during a five-year period commencing on the
initial closing of the Offering. Each $0.10 Warrant offered entitled the
registered holder to purchase 10,000 shares of Common Stock at an exercise price
of $0.10 per share during a five-year period commencing on the initial closing
of the Offering.
The Warrants expire at 5:00 p.m., New York time, on the fifth anniversary
after the initial closing of the Offering. In the event a holder of Warrants
fails to exercise the Warrants prior to their expiration, the Warrants will
expire and the holder thereof will have no further rights with respect to the
Warrants.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
In November of 2002, we created a special compensation plan to pay the
founders, consultants and professionals that had been contributing valuable
services to us during the previous nine months. The plan is called the
Professional/Employee/ Consultant Compensation Plan (the "Plan"). Share and
option issuances from the Plan were to be staggered over the following six to
eight months, and consultants that were to continue providing services
thereafter either became employees or received renewed contracts from us in July
of 2003, which contracts contained a more traditional cash compensation
component. The Plan was designed by the Board to meet our important team
building objectives in our early stages, and to be temporary. As of December 31,
2004, a total of 1,440,003 shares have been issued from the Plan and 560,000
options, 264,000 of which were exercised as of as of December 31, 2004.
15
December 5, 2003, an additional 32,000 options were exercised. [ANDREA]
Each qualified and eligible recipient of shares and/or options under the
Plan received securities in lieu of cash payment for services. Each recipient
agreed, in his or her respective consulting contract with us, to sell a limited
number of shares monthly. Management feels that this carefully designed Plan was
successful in attracting and retaining a strong team at a time when we had no
established revenue stream and limited or no outside financing. Because
recipients sold their respective shares in a controlled manner, there was also
no apparent negative impact to the market from sales of these unrestricted
securities, which was an important objective of the Board when the Plan was
contemplated.
In our financial statements, shares that were issued from November 2002
through June 30, 2003 that were valued at $0.065 per share were shares issued
from this Plan created in November of 2002 on the basis of contracts executed at
that time for previously rendered services. Common Stock disclosed as being
issued in exchange for cash at $1.00 per share represents options that were
exercised under this Plan. In December of 2004, we adjusted the exercise price
to $0.60 per share.
Any other unrestricted shares that were issued either before or after
July 1, 2003 were valued at the fair market value.
------------------------ --------------------------- ----------------------------- ----------------------
Plan Category Number of Securities to be Weighted Average Exercise Number of Securities
Issued Upon Exercise of Price of Outstanding Options, Remaining Available
Outstanding Options, Warrants and Rights for Future Issuance
Warrants and Rights
(a) (b) (c)
------------------------ --------------------------- ----------------------------- ----------------------
Professional/Consultant/
Employee Stock and Stock
Option Compensation Plan 2,000,000 $177,600 -0-
------------------------ --------------------------- ----------------------------- ----------------------
Total 2,000,000 $177,600 -0-
------------------------ --------------------------- ----------------------------- ----------------------
As of December 31, 2004, a total of 1,440,000 shares have been issued from the
Plan and 560,000 options, 264,000 of which were exercised as of that date.
SALES OF UNREGISTERED SECURITIES DURING THE QUARTER ENDED SEPTEMBER 30, 2004
The issuances of unregistered securities which occurred during the fiscal
year were as follows:
Unless otherwise noted, each of the issuances described below is considered
by us to be exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
On June 30, 2004, we issued 50,000 shares of our common stock to an
investor relations firm as compensation for services performed on our behalf.
On July 23, 2004 and August 2, 2004, we issued an aggregate of 55,000
shares of our common stock to our legal counsel as compensation for legal
services performed on our behalf.
From July through September 2004, we issued an aggregate of 1,550,000
shares of our common stock to certain of our officers, directors and employees
as compensation for services performed on our behalf.
On September 21, 2004, we issued 100,000 shares of our common stock
pursuant to a conversion by one of the holders of our convertible preferred
stock.
SUBSEQUENT SALES OF UNREGISTERED SECURITIES
Unless otherwise noted, each of the issuances described below is considered
by us to be exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
16
On October 1, 2004, we issued a total of 199,999 shares to parties related
to an investment banker with which we have a non-exclusive engagement.
On October 13, 2004, we issued a total of 257,500 shares to two consultants
for financial advisory and marketing services.
On October 18, 2004, we issued a total of 347,500 shares to previous
investors as consideration for our agreement to extend our registration
commitment.
On October 19, 2004, we issued 1,000,000 shares to a single investor for
total proceeds of $500,000.
On October 26, 2004, we issued a total of 500,000 shares to parties related
to our investment banker in settlement for various breaches made in our
Placement Agent Agreement.
On November 4, 2004, we issued 100,000 to an employee as compensation for
services previously rendered.
On November 15, 2004 through December 17, 2004, we issued a total of
415,000 shares to a consultant for financial advisory services.
On December 17, 2004, we issued 5,000 shares to an employee for services
previously rendered.
On January 4, 2005, we issued 12,500 shares as a result of an investor's
exercise of his $0.10 warrants. This issuance is considered exempt under
Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder.
Also on January 10, 2005, we issued additional shares to our investors in
accordance with an adjustment provision in our private placement and placement
agent agreement. We issued a total of 3,249,750 shares of Common Stock to 24
investors.
On January 13, 2005, we issued additional shares to two consultants in
accordance with an adjustment provision in their consulting agreements. A total
of 662,000 shares were issued.
ITEM 6. PLAN OF OPERATIONS
When used in this Form 10-KSB and in our future filings with the Securities
and Exchange Commission, the words or phrases will likely result, management
expects, or we expect, will continue, is anticipated, estimated or similar
expressions are intended to identify forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. These statements are subject to
risks and uncertainties, some of which are described below. Actual results may
differ materially from historical earnings and those presently anticipated or
projected. We have no obligation to publicly release the result of any revisions
that may be made to any forward-looking statements to reflect anticipated events
or circumstances occurring after the date of such statements.
Business Strategy and Approach
The Company has 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
The company has proprietary DNA security technology, and develops 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 OEM level with ink, paper, liquids, thread and hologram
producers, who in turn sell/supply finished security products such as primary
and secondary product packaging for pharmaceuticals, beauty products, textiles,
currency, passports, ID Cards, etc. We have strict protocols for specifying,
integrating, testing, shipping and confirming the presence of DNA in any given
product. We use highly reputable outside labs to provide independent third party
validation testing to assure maximum quality control, objectivity and strict
security procedures in handling and shipping. No compromise can enter the
security chain of our product(s).
17
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.
Consultant & Enforcement Operations
We will consult with our clients on a total security service offering; how
to protect their brands, intellectual property, products and physical security
access and how to reduce risk exposure, product liability exposure and product
recall liabilities. We plan to offer worldwide DNA analysis services supporting
the authentication of products and the detection, interdiction, deterrence and
prosecution of counterfeiters and related crimes, through our subcontractors,
sub-licensees and security industry collaborative partners.
International Sub-License Operations
This division will oversee the activities of all international
sub-licensees and partnerships. This division will also develop a corporate
policy for all marketing and promotional activities.
We intend to establish alliances with existing anti-counterfeit experts,
agencies and companies in each market. This collaborative security consortium
will employ DNA technology to detect illegal activities, counterfeiting and
fraud, and provide the gold standard in security for corporations and government
agencies.
These operations will provide multiple security solutions. Each
sub-licensee or collaborative partnership will produce separate revenue streams
and be operational via integrated organizational structures.
Our management and advisory board and strategic consultants have the
knowledge, experience, contacts and skills to provide a comprehensive DNA
security business, with advanced anti-counterfeit and fraud prevention systems
for the protection and tracking of currency, documents, consumer products, and
intellectual property.
Strong Security Knowledge Base -- Our executives and consultants have the
requisite experience to provide solutions that address the security needs of
major companies in such diverse markets as pharmaceuticals, automotive,
cosmetics, apparel and accessories, aerospace, luxury goods, among others.
Developing Technology - We plan to acquire all rights, title and interest
in all patents, patents pending, developing, DNA anti-counterfeit, and fraud
prevention technologies created by Biowell. We also 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 OEM's in these specialist fields.
Strategic Corporate Relationships - The management has personal and
corporate relationships with leaders in key industries such as: pharmaceuticals,
cosmetics/beauty, fashion, retail, computers, entertainment, automobiles,
petroleum, fine arts and collectibles.
The Company will utilize its existing relationships and develop new ones to
introduce its anti-counterfeiting technology to generate business. Each industry
has unique requirements and needs for their anti-counterfeit solutions, and the
company's DNA technology stands at the pinnacle of available maximum security
technologies. For example, the company's 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. The Company's proprietary technology offers immediate and
affordable detection and security for their brands and products.
Strong Technology Alliances - Our technology can also provide advanced
security dimensions to;
o Electronics security: access and physical/plant security (biometric
security cards enhanced with DNA) o Security Holograms (DNA enhanced)
o Radio Frequency Identification systems (DNA + RFID)
o Security papers and printing
o Holograms (DNA holograms)
o Other security-related products and systems
18
Law Enforcement Expertise - The resources of our collaborative partners in
the security industry include former federal law enforcement, security, and
intelligence officers who provide the company with extensive contacts and
hands-on experience in:
o Intellectual property investigation
o Counter-intelligence
o Personal security services
o Anti-counterfeit technologies
o Secure communications and data management
Critical Accounting Policy
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements; we believe the following
critical accounting policy involve the most complex, difficult and subjective
estimates and judgments:
o stock-based compensation
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 -
Accounting for Stock-Based Compensation, providing alternative methods of
voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2003.
We elected to continue to account for stock-based compensation plans using
the intrinsic value-based method of accounting prescribed by APB No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
the provisions of APB No. 25, compensation expense is measured at the grant date
for the difference between the fair value of the stock and the exercise price.
Revenues
We have not generated any revenues from operations from our inception. We
believe we will begin earning revenues from operations during fiscal year 2005
as we transition from a development stage company to that of an active growth
and acquisition stage company.
Costs and Expenses
From our inception through September 30, 2004, we have incurred losses of
$22,815,034. These expenses were associated principally with equity-based
compensation to employees and consultants, product development costs and
professional services.
Liquidity and Capital Resources
As of September 30, 2004, we had a deficiency in working capital of $4.8
million. For the year ended September 30, 2004, we generated a net cash flow
deficit from operating activities of $3,100,000, consisting primarily of year to
date losses of $19,400,000, adjusted for non cash expenses of $1,625,000 for
beneficial conversion amortization, $9,820,000 in net stock issued for
consulting services, $1,500,000 for preferred shares in exchange for services,
$2,020,000 for warrants issued to consultants as well as a net increase in
current liabilities and other of $1,300,000.
19
Cash used in investing activities totaled $74,000, which was utilized for
patent filings, facility lease deposits and property, plant, and equipment. Cash
provided by financing activities totaled $3,000,000 consisting of $2,800,000 in
proceeds from loans, and $124,000 and $87,000 in common stock and exercised
options proceeds, respectively.
We expect capital expenditures to be nominal for fiscal 2005. These
anticipated expenditures are for continued investments in property and equipment
used in our business.
By adjusting our operations and development to the level of capitalization,
we believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial condition.
We have a variety of financing arrangements. Please see Notes C, D, E and F
in the notes to our consolidated financial statements for the year ended
September 30, 2004 for the terms of each separate financing arrangement.
Recent Accounting Pronouncements
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities. SFAS 149 amends SFAS No. 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar characteristics be accounted
for on a comparable basis. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS 150 did not have a material impact on the Company's results
of operations or financial position.
In December 2003, the FASB issued a revision of SFAS No. 132, "Employers'
Disclosures About Pensions And Other Postretirement Benefits." This
pronouncement, SFAS No. 132-R, expands employers' disclosures about pension
plans and other post-retirement benefits, but does not change the measurement or
recognition of such plans required by SFAS No. 87, No. 88, and No. 106. SFAS No.
132-R retains the existing disclosure requirements of SFAS No. 132, and requires
certain additional disclosures about defined benefit post-retirement plans.
Except as described in the following sentence, SFAS No. 132-R is effective for
foreign plans for fiscal years ending after June 15, 2004; after the effective
date, restatement for some of the new disclosures is required for earlier annual
periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such
as the components of net periodic benefit cost, and certain key assumptions) are
effective for foreign plans for quarters beginning after December 15, 2003;
other interim-period disclosures will not be required for the Company until the
first quarter of 2005. Since the Company does not have any defined benefit
post-retirement plans, the adoption of this pronouncement did not have any
impact on the Company's results of operations or financial condition.
In November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS 151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This
Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
20
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company. In December 2004, the FASB issued SFAS No.152, "Accounting for Real
Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67"
("SFAS 152) The amendments made by Statement 152 This Statement amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to real
estate time-sharing transactions. The accounting for those operations and costs
is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. with
earlier application encouraged. The Company does not anticipate that the
implementation of this standard will have a material impact on its financial
position, results of operations or cash flows. On December 16, 2004, the
Financial Accounting Standards Board ("FASB") published Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R").
SFAS 123R requires that compensation cost related to share-based payment
transactions be recognized in the financial statements. Share-based payment
transactions within the scope of SFAS 123R include stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee
share purchase plans. The provisions of SFAS 123R are effective as of the first
interim period that begins after June 15, 2005. Accordingly, the Company will
implement the revised standard in the third quarter of fiscal year 2005.
Currently, the Company accounts for its share-based payment transactions under
the provisions of APB 25, which does not necessarily require the recognition of
compensation cost in the financial statements. Management is assessing the
implications of this revised standard, which may materially impact the Company's
results of operations in the third quarter of fiscal year 2005 and thereafter.
On December 16, 2004, FASB issued Statement of Financial Accounting Standards
No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions (" SFAS 153"). This statement amends APB
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Under SFAS 153, if a
nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
Product Research and Development
We anticipate continuing to incur research and development expenditures in
connection with the development of our DNA embedded biotechnology security
products and solutions during the next twelve months. This includes, but is not
limited to projects involving the following agencies and companies:
o Department of Energy;
o Department of Agriculture;
o Oakridge National Laboratories; and
o Holo-Mex
These projected expenditures are dependent upon our generating revenues and
obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months
Acquisition or Disposition of Plant and Equipment
We do not anticipate the sale of any significant property, plant or
equipment during the next twelve months. We do not anticipate the acquisition of
any significant property, plant or equipment during the next 12 months.
Number of Employees
From our inception through the period ended September 30, 2004, we have
relied on the services of outside consultants for services and currently have 11
full time employees. In order for us to attract and retain quality personnel, we
anticipate we will have to offer competitive salaries to future employees. We do
not anticipate our employment base will significantly change during the next 12
months. As we continue to expand, we will incur additional cost for personnel.
This projected increase in personnel is dependent upon our generating revenues
and obtaining 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.
21
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.
Cautionary Factors that may Affect Future Results
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products. These
are factors that we think could cause our actual results to differ materially
from expected results. Other factors besides those listed here could adversely
affect us.
RISKS RELATED TO OUR BUSINESS
We Have A Limited Operating History With Which To Judge Our Performance.
We have only been engaged in our current and proposed business operations
since October of 2002. Accordingly, we have a limited operating history. We may
encounter risks and difficulties frequently encountered by early stage companies
in new and rapidly evolving markets. We cannot assure stockholders that our
business strategy will be successful or that we will successfully address these
risks. Our failure to do so could materially adversely affect our business,
financial condition and operating results.
22
We Have A History Of Losses And We Anticipate Future Losses And Negative Cash
Flow.
We incurred net losses from operations of $22,803,423 from the date of our
inception through September 30, 2004. We cannot assure you that we can achieve
or sustain profitability on a quarterly or annual basis in the future. If
revenues grow more slowly than we anticipate, or if operating expenses exceed
our expectations or cannot be adjusted accordingly, we will continue to incur
losses. In addition, we require additional funds to implement, sustain and
expand our manufacturing, sales and marketing activities, research and
development, and our strategic alliances, particularly if a well-financed
competitor emerges or if there is a rapid technological shift in our industry.
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 sufficient funds from
operations or external sources would require us to curtail or cease operations.
We Need Additional Financing.
We have insufficient capital resources to fully develop and implement our
business plan and need to raise additional capital through equity or debt
financings, research and development financings or collaborative relationships.
There is no assurance that additional capital will be available or be on terms
acceptable to us. If additional capital is unavailable, we may be forced to
limit or cease our business operations accordingly. In such event, it will
adversely and materially effect our business operations.
Given that we are primarily a research and development company, certain
economic and strategic factors may require us to raise additional capital in
order to:
o Finance our biotechnology or DNA development programs;
o Fund our operating expenses;
o Pursue regulatory approvals;
o License or acquire additional DNA entity candidates or technologies;
o Develop manufacturing, marketing and sales capabilities; and
o Prosecute and defend our intellectual property rights.
Doubt About Our Ability To Continue Operations as a "Going Concern"; You May
Lose All Of Your Investment If We Are Unable to Continue Operations.
Our ability to continue as a going concern is subject to substantial doubt
given our current financial condition and requirements for additional funding.
There can be no assurance that we will be able to obtain sufficient funds to
continue the development of and, if successful, to commence the sale of our
products and services under development. As a result of the foregoing, our
auditors have expressed substantial doubt about our ability to continue as a
going concern. If we cannot continue as a going concern, then you may lose all
of your investment.
23
If we raise additional funds by issuing equity securities, existing
stockholders may experience a dilution in their ownership. In addition, as a
condition to giving additional funds to us, future investors may demand, and may
be granted, rights superior to those of existing stockholders.
Our Research And Development Efforts For New Products May Be Unsuccessful.
We 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.
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 obtain a
license for these technologies from these third parties or discontinue our
products. There can be no assurance that we will be able to continue to
successfully identify new technologies developed by others. Even if we are able
to identify new technologies of interest, we may not be able to negotiate a
license on favorable terms, or at all. If we lose the rights to patented
technology, we may need to discontinue selling certain products or redesign our
products, and we may lose a competitive advantage. Potential competitors could
license technologies that we fail to license and potentially erode our market
share for certain products. Our licenses typically subject us to various
commercialization, sublicensing, minimum payment, and other obligations. If we
fail to comply with these requirements, we could lose important rights under a
license. In addition, certain rights granted under the license could be lost for
reasons beyond our control. We do not always receive significant indemnification
from a licensor against third party claims of intellectual property
infringement.
We are currently in the process of negotiating several of these licenses
and expect that we will also negotiate these types of licenses in the future.
There can be no assurances that we will be able to negotiate these licenses on
favorable terms, or at all.
Our Future Success May Depend On The Timely Introduction Of New Products And The
Acceptance Of These New Products In The Marketplace.
Our ability to gain access to technologies needed for new products and
services depends in part on our ability to convince licensors that we can
successfully commercialize their inventions. We cannot assure that we will be
able to continue to 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 Fail To Introduce New Products, Or Our New Products Are Not Accepted By
Potential Customers, We 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;
24
o Ease of use;
o Consistency with prior practices;
o Scientists' opinions of the products' usefulness;
o Citation of the product in published research; and
o General trends in life sciences research.
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.
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 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.
Dependence On Key Personnel.
Our success depends on the continuing services of our management team, the
loss of any of which could have a material and adverse effect on our business
operations. In particular, our success depends on our Chairman of the Board,
Robin (Rob) Hutchison, our President Peter Brocklesby, our Chief Marketing
Officer, Adrian Botash, and our Chief Operating Officer, Karin Klemm. We do not
maintain any "key man" insurance policies regarding any of these individuals. We
may not be able to retain the services of our executive officers and key
personnel or attract additional qualified members to management in the future.
The loss of services of these individuals, or of any of our other key management
or employees, could have a material adverse effect upon our business.
Failure To Attract and Retain Qualified Scientific or Production Personnel Could
Have a Material Adverse Effect On Us.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing are critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining a qualified personnel base.
Although we believe we have been and will be able to attract and retain these
personnel, there is no assurance that we will be able to continue to
successfully 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.
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, 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.
Limited Board of Directors.
We currently have five directors on our Board of Directors, two of which
are independent outside (non-employee) directors. We have allocated necessary
capital and are actively seeking to purchase a Director and Officers Insurance
Policy and will actively recruit 1-2 additional qualified outside directors upon
purchase of the insurance policy.
25
After we purchase an appropriate D&O policy, however, we cannot guarantee
that we will be able to attract or retain qualified directors.
Limitation of Officers' and Directors' Liabilities
The Company's by-laws limit directors' and officers' liabilities to the
maximum extent permitted under Nevada Law. In addition, the Company is obligated
under its by-laws to indemnify its directors and officers against certain
liabilities incurred with respect to their service in such capacities. Each of
these measures could reduce the legal remedies available to the Company and the
shareholders against such individuals.
We Depend Upon Our Third Party Suppliers.
We will rely on third party suppliers to supply the raw materials that we
will utilize in our manufacturing processes.
We cannot assure our ability to obtain adequate supplies of raw materials
on time to manufacture our products. Our inability to obtain adequate supplies
of product may materially and adversely affect our business operations.
We Have Experienced Delays in the Introduction of Our Products
We have experienced numerous delays in the introduction of our DNA embedded
security and related products. These delays have been caused by lack of working
capital and completion of research and development efforts. We cannot assure our
ability to raise the necessary working capital or completion of our research and
development efforts in order to produce our products.
Reduction Or Delays In Research And Development Budgets And In Government
Funding May Negatively Impact Our Sales.
Our future customers may include researchers at pharmaceutical and
biotechnology companies, academic institutions and government and private
laboratories. Fluctuations in the research and development budgets of these
researchers and their organizations could have a significant effect on the
demand for our products. Research and development budgets fluctuate due to
numerous factors that are outside our control and are difficult to predict,
including changes in available resources, spending priorities and institutional
budgetary policies. Our business could be seriously damaged by any significant
decrease in life sciences research and development expenditures by
pharmaceutical and biotechnology companies, academic institutions or government
and private laboratories. A portion of our future sales may be to researchers,
universities, government laboratories and private foundations whose funding is
dependent upon grants from government agencies such as the U.S. National
Institute of Health ("NIH") and similar domestic and international agencies.
Although the level of research funding has increased during the past several
years, we cannot assure that this trend will continue. Government funding of
research and development is subject to the political process, which is
inherently unpredictable. Our revenues may be adversely affected if our
customers delay purchases as a result of uncertainties surrounding the approval
of government budget proposals. Also, government proposals to reduce or
eliminate budget deficits have sometimes included reduced allocations to the NIH
and other government agencies that fund research and development activities. A
reduction in government funding for the NIH or other government research
agencies could seriously damage our business. Also, our potential customers
receive funds from government-approved grants at particular times of the year.
In the past, grants have been frozen for extended periods or have otherwise
become unavailable to various institutions without advance notice. The timing of
the receipt of grant funds affects the timing of purchase decisions by our
customers and, as a result, can cause fluctuations in our sales and operating
results.
The Biomedical Research Products Industry Is Very Competitive, and We May Be
Unable To Continue To Compete Effectively In This Industry In The Future.
We are engaged in a segment of the biomedical research products industry
that is highly competitive. We compete with many other suppliers and new
competitors continue to enter the market. Many of our competitors, both in the
United States and elsewhere, are major pharmaceutical, chemical and
biotechnology companies, and many of them have substantially greater capital
resources, marketing experience, research and development staff, and facilities
than we do. Any of these companies could succeed in developing products that are
more effective than the products that we have or may develop and may be more
successful than us in producing and marketing their products. We expect this
competition to continue and intensify in the future. Competition in our markets
is primarily driven by:
o Product performance, features and liability;
o Price;
o Timing of product introductions;
o Ability to develop, maintain and protect proprietary products and
technologies;
26
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.
We May Be Unable To Protect Our Trademarks, Trade Secrets And Other Intellectual
Property Rights That Are Important To Our Business.
We regard our trademarks, trade secrets and other intellectual property as
an integral component of our success. We rely on trademark law, trade secret
protection and confidentiality and/or license agreements with employees,
customers, partners and others to protect our intellectual property. Effective
trademark and trade secret protection may not be available in every country in
which our products are available. We cannot be certain that we have taken
adequate steps to protect our intellectual property, especially in countries
where the laws may not protect our rights as fully as in the United States. In
addition, if our third-party confidentiality agreements are breached there may
not be an adequate remedy available to us. If our trade secrets become publicly
known, we may lose our competitive position.
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.
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 carry product liability
insurance coverage which is limited in scope and amount but which we believe to
be adequate. We cannot assure, however, that we will be able to maintain this
insurance at reasonable cost and on reasonable terms. We also cannot assure that
this insurance will be adequate to protect us against a product liability claim,
should one arise.
We Are Currently Subject To Governmental Regulation
Our business is currently subject to regulation, supervision and licensing
by federal, state and local governmental authorities. We must also expend
resources from time to time to comply with newly adopted regulations, as well as
changes in existing regulations. If we fail to comply with these regulations, we
could be subject to disciplinary actions or administrative enforcement actions.
These actions could result in penalties, including fines.
RISKS RELATED TO OUR COMMON STOCK
Effect of Issuance of Preferred Stock.
27
Our authorized capital consists of 100,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock. We have attained board approval and
written approval from holders of the majority of issued and outstanding shares
of Common Stock to increase the authorized Common Stock to 400,000,000 shares
and reduce the par value to $0.001 per share, and also to adopt a Stock Option
Plan. We plan to file a 14C Information Statement soon after filing this 10-KSB.
The Board of Directors, without any action by our shareholders, is
authorized to designate and issue shares of Preferred Stock in such series as it
deems appropriate and to establish the rights, preferences and privileges of
such shares, including dividends, liquidation and voting rights. The rights of
holders of shares of Preferred Stock that may be issued may be superior to the
rights granted to the holders of existing Shares of Common Stock. The ability of
the Board of Directors to designate and issue such undesignated shares could
impede or deter an unsolicited tender offer or takeover proposal regarding the
Company, and the issuance of additional shares having preferential rights could
adversely affect the voting power and other rights of holders of Common Stock.
The Lack of a Mature Trading Market for our Common Stock May Cause our Stock
Price to Decline Significantly and Limit the Liquidity of our Common Stock.
We do not meet the listing requirements for the listing or quotation of our
common stock on any national or regional securities exchange or on NASDAQ.
Currently, our common stock is traded on the Over-The-Counter Bulletin Board. As
a result, accurate current quotations as to the value of our common stock are
unavailable making it more difficult for investors to dispose of our common
stock. The lack of current quotations and liquidity can cause our stock price to
decline or to trade lower than the prices that might prevail if our securities
were listed or quoted on an exchange or on NASDAQ.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
We Have Paid No Dividends On Our Common Stock
28
We have paid no cash dividends on our Common Stock in the past and do not
intend to pay any dividends on our Common Stock in the foreseeable future. Our
Board of Directors is empowered to declare dividends, if any, to holders of the
common stock, based on our earnings, capital requirements, financial condition,
and other relevant factors. We anticipate that we will reinvest profits from our
operations, if any, into our business. We cannot assure you that we will ever
pay dividends to holders of our common stock.
29
ITEM 7. FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FINANCIAL STATEMENTS AND SCHEDULES
SEPTEMBER 30, 2004 AND 2003
APPLIED DNA SCIENCES, INC.
(A development Stage Company)
APPLIED DNA SCIENCES , INC.
Index to Financial Statements
Page
------
Report of Registered Independent Certified Public Accountants F-3
Consolidated Balance Sheet as of September 30, 2004 F-4
Consolidated Statement of Losses for the year ended September 30, 2004 and 2003 and the period
September 16, 2002 (date of inception) to September 30, 2004 F-5
Consolidated Statement of Deficiency in Stockholders' Equity for the period
September 16, 2002 (date of inception) to September 30, 2004 F-6 to F-8
Consolidated Statements of Cash Flows for the year ended September 30, 2004 and
2003, and the period September 16, 2002 (date of inception) to September 30, 2004 F-9
Notes to Consolidated Financial Statements F-10 to F-26
F-2
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Applied DNA Sciences, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Applied DNA
Sciences, Inc. (a development stage company) as of September 30, 2004 and the
related consolidated statements of losses, deficiency in stockholders' equity,
and cash flows for the years ended September 30, 2004 and 2003 and the period
September 16, 2002 (date of inception) through September 30, 2004. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the financial statements based upon
our audits.
We have conducted our audits in accordance with auditing standards of the
Public Company Accounting Oversight Board (PCAOB) (United States of America).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Applied DNA Sciences , Inc.
(a development stage company) at September 30, 2004 and the results of its
operations and its cash flows for the years ended September 30, 2004 and 2003,
and the period September 16, 2002 (date of inception) through September 30, 2004
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the Note K to the
accompanying financial statements, the Company is in the development stage and
has not established a source of revenues. This raises substantial doubt about
the company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ RUSSELL BEDFORD Stefanou MIRCHANDANI LLP
--------------------------------------------
Russell Bedford Stefanou Mirchandani LLP
Certified Public Accountants
McLean, Virginia
January 11, 2005
F-3
APPLIED DNA SCIENCES , INC
(A development stage company)
CONSOLIDATED BALANCE SHEET
September 30, 2004
ASSETS
Current Assets:
Cash $ 1,832
------------
Total Current Assets 1,832
Property, Plant and Equipment (Note A) 29,507
Less: accumulated depreciation (1,405)
------------
Total Property, Plant and Equipment 28,102
Other Assets:
Deposits 23,559
Intangible assets (net of accumulated amortization of $1,756) (Note A) 28,154
------------
Total Other Assets 51,713
$ 81,647
============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,770,379
Accrued expenses - related parties (Note D) 117,333
Convertible notes payables (Note F) 1,625,000
Due to related parties (Note D) 111,943
Note payable -related parties (Note C) 1,163,500
============
Total Current Liabilities 4,788,155
============
Commitments and contingencies (Note J)
DEFICIENCY IN STOCKHOLDERS' EQUITY: (Note E)
Convertible Preferred Stock, par value $0.001 per share; 10,000,000 shares
authorized; 60,000 shares issued and outstanding at September 30, 2004 6
Common Stock, par value $0.50 per share; 100,000,000 authorized;
23,981,054 shares issued and outstanding at September 30, 2004 11,990,527
Additional paid in capital 6,118,993
============
Common stock subscribed (1,000)
Deficit accumulated during development stage (22,815,034)
============
Total deficiency in stockholders' equity (4,706,508)
$ 81,647
------------
See accompanying notes to consolidated financial statements
F-4
APPLIED DNA SCIENCES , INC.
( A development stage company)
CONSOLIDATED STATEMENT OF LOSSES
For the Period
September 16, 2002
For the Year Ended For the YearEnded (Date Of Inception)
September 30, September 30, through September 30,
2004 2003 2004
--------------- -------------- ----------------------
Operating expenses:
General and administrative $ 17,580,098 $ 3,468,363 $ 21,060,073
--------------- -------------- ----------------------
Depreciation and Amortization 3,161 - 3,161
--------------- -------------- ----------------------
Total expenses 17,583,259 3,468,363 21,063,234
--------------- -------------- ----------------------
Loss from operations (17,583,259) (3,468,363) (21,063,234)
--------------- -------------- ----------------------
Other income(expense) 1,385 25,000 26,385
Interest (expense) (1,776,385) (1,801) (1,778,186)
Income (taxes) benefit - - -
--------------- -------------- ----------------------
Net loss $ (19,358,259) $ (3,445,164) $ (22,815,035)
=============== ============== ======================
Basic and diluted loss per common share (Note H) $ (0.93) $ (0.27) n/a
=============== ============== ======================
Weighted average common shares outstanding 20,819,700 12,955,358 n/a
--------------- -------------- ----------------------
See accompanying notes to consolidated financial statements
F-5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2004
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
-------- -------- -------- --------- -------- ------------ ---------- ---------- -----------
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share - $ - 100,000 $ 10 $ 990 - $ - $ - $ 1,000
Net Loss - - - - - - - (11,612) (11,612)
-------- -------- -------- --------- -------- ------------ ---------- ---------- -----------
Balance at September 30,
2002 - - 100,000 10 990 - - (11,612) (10,612)
Issuance of common stock
in connection with merger
with Prohealth Medical
Technologies , Inc on
October 1, 2002 - - 10,178,352 1,018 - - - - 1,000
Cancellation of Common
stock in connection with
merger with Prohealth
Medical Technologies ,
Inc on October
21, 2002 - - (100,000) 10 (1,000) - - - (1,000)
Issuance of common stock
in exchange for services
in October 2002 at $ 0.65
per share - - 602,000 60 39,070 - - - 39,130
Issuance of common stock in
exchange for subscription
in November and December
2002 at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - -
Cancellation of common
stock in January 2003
previously issued in
exchange for consulting
services - - (836,000) (84) (54,264) - 54,340 - -
Issuance of common stock
in exchange for licensing
services valued
at $ 0.065 per share in
January 2003 - - 1,500,000 150 97,350 - - - 97,500
Issuance of common stock
in exchange
for consulting services
valued at $ 0.13 per share
in January 2003 - - 586,250 58 76,155 - - - 76,213
Issuance of common stock
in exchange
for consulting services
at $ 0.065 per
share in February 2003 - - 9,000 1 584 - - - 585
Issuance of common stock
to Founders 1in exchange
for services valued at
$0.0001 per share in
March 2003 - - 10,140,000 1,014 - - - - 1,014
Issuance of common stock
in exchange for consulting
services valued at
$2.50 per share in March 2003 - - 91,060 9 230,625 - - - 230,634
See accompanying notes to consolidated financial statements
F-6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2004
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ------- ---------- ------- -------- ---------- ---------- ------- --------
Issuance of common stock in
exchange for consulting
services valued at $
0.065 per share in March 2003 - - 6,000 1 389 - - - 390
Common stock subscribed in
exchange for cash at $1 per
share in March 2003 - - - - 18,000 - - - 18,000
Common stock issued in
exchange for consulting
services at $ 0.065 per
share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900
Common stock issued in
exchange for
cash at $ 1.00 per share
on April 9, 2003 - - 18,000 2 - - - - 2
Common stock issued in
exchange for
consulting services at $
0.065 per
share on April 9, 2003 - - 9,000 1 584 - - - 585
Common stock issued in
exchange for
consulting services at
$ 2.50 per
share on April 23, 2003 - - 5,000 1 12,499 - - - 12,500
Common stock issued in
exchange for
consulting services at
$ 2.50 per
share, on June 12, 2003 - - 10,000 1 24,999 - - - 25,000
Common stock issued in
exchange for
cash at $ 1.00 per share
on June 17, 2003 - - 50,000 5 49,995 - - - 50,000
Common stock subscribed
in exchange
for cash at $ 2.50 per
share pursuant
to private placement
on June 27, 2003 - - - - - - 24,000 - 24,000
Common stock retired in
exchange for note payable
at $0.0118 per share,
on June 30, 2003 - - (7,500,000) (750) 750 - - - -
Common stock issued in
exchange for
consulting services at
$0.065 per
share, on June 30, 2003 - - 270,000 27 17,523 - - - 17,550
Common stock subscribed
in exchange for cash at
$ 1.00 per share pursuant
to private placement on
June 30, 2003 - - - - - 10,000 - - 10,000
Common stock subscribed
in exchange for cash at
$ 2.50 per share pursuant
to private placement on
June 30, 2003 - - - - - 24,000 - - 24,000
Common stock issued in
exchange for consulting
services at approximately
$2.01 per share, July 2003 - - 213,060 21 428,797 - - - 428,818
See accompanying notes to consolidated financial statements
F-7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2004
(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 17 410,913 - - - 410,931
Common stock issued in
exchange for
options exercised at
$1.00 in August 2003 - - 29,000 3 28,997 - - - 29,000
Common stock issued
in exchange for
consulting services
at approximately
$2.42 per share,
September 2003 - - 395,260 40 952,957 - - - 952,997
Common stock issued
in exchange for
cash at $2.50 per
share-subscription
payable-September 2003 - - 19,200 2 47,998 (48,000) - - -
Common stock issued in
exchange for
cash at $2.50 per
share pursuant to
private placement
September 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for
options exercised at
$1.00 in September 2003 - - 95,000 10 94,991 - - - 95,000
Common stock subscription
receivable reclassification
adjustment
Common Stock subscribed to
at $2.50 per share in
September 2003 - - - - 2,600 - 2,600
Net Loss for the year
ended September 30, 200 - - - 300,000 - - 300,000
Balance at September 30,
2003 - - - - - - - (3,445,164) (3,445,164)
-------- -------- ----------- -------- ----------- --------- --------- ------------- -----------
- $ - 17,811,082 $ 1,781 $2,577,568 $300,000 $ - $(3,456,776) $(577,427)
======== ======== =========== ======== =========== ========= ========= ============= ============
See accompanying notes to consolidated financial statements
F-8
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2004
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ------- ---------- ------- ------ ---------- ---------- ------- --------
Preferred shares issues
in exchange for services
at $25.00 per share,
October 2003 1500 15 15
Common stock issued in
exchange for consulting
services at
approximately $2.85 per
share, October 2003 287,439 29 820,389 - - - 820,418
Common stock issued in
exchange for cash at
$2.50 per
share-subscription
payable-October 2003 120,000 12 299,988 (300,000) - - -
Common stock canceled
in October 2003,
previously issued for
services rendered at
$2.50 per share (100,000) (10) (249,990) - - - (250,000)
Common stock issued in
exchange for consulting
services at approximately
$3 per share,
November 2003 100,000 10 299,990 - - - 300,000
Common stock subscribed
in exchange for cash at
$2.50 per share pursuant
to private placement,
November, 2003 100,000 10 249,990 - - - 250,000
Common stock subscribed
in exchange for cash at
$2.50 per share pursuant
to private placement,
December, 2003 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for consulting
services at approximately
$2.59 per share,
December 2003 2,125,500 213 5,504,737 - - - 5,504,950
Common Stock subscribed to
at $2.50 per share in
December 2003 - - - 104,000 - - 104,000
Beneficial conversion
feature relating
to notes payable - - 1,168,474 - - - 1,168,474
Beneficial conversion
feature relating
to warrants - - 206,526 - - - 206,526
Adjust common stock par
value from $0.0001 to
$0.50 per share, per
amendment of articles
dated Dec 2003 - 10,223,166 (10,223,166) - - - -
Common Stock issued
pursuant to subscription
at $2.50 share in Jan 2004 41,600 20,800 83,200 (104,000) - - -
Common stock issued in
exchange for consulting
services at $2.95 per
share, Jan 2004 13,040 6,520 31,948 - - - 38,468
Common stock issued in
exchange for consulting
services at $2.60 per
share, Jan 2004 123,000 61,500 258,300 - - - 319,800
Common stock issued in
exchange for consulting
services at $3.05 per
share, Jan 2004 1,000 500 2,550 - - - 3,050
See accompanying notes to consolidated financial statements
F-9
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2004
(Continued)
Deficit
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ------- ---------- ------- ------ ---------- ---------- ------- --------
Common stock issued in
exchange for employee
services at $3.07 per
share, Feb 2004 6,283 3,142 16,147 - - - 19,288
Common stock issued in
exchange for consulting
services at $3.04 per
share, Mar 2004 44,740 22,370 113,640 - - - 136,010
Common Stock issued for
options exercised at
$1.00 per share in Mar
2004 55,000 27,500 27,500 - - - 55,000
Common stock issued in
exchange for employee
services at $3.00 per
share, Mar 2004 5,443 2,722 13,623 - - - 16,344
See accompanying notes to consolidated financial statements
F-10
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2004
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ------- ---------- ------- ------ ---------- ---------- ------- --------
Common stock issued in
exchange for employee
services at $3.15 per
share, Mar 2004 5,769 2,885 15,293 - - - 18,177
Preferred shared
converted to common
shares for consulting
services at $3.00per
share, Mar 2004 5000 5 125,000 62,500 312,500 - - - 374,995
Common stock issued in
exchange for employee
services at $3.03 per
share, Mar 2004 8,806 4,403 22,236 - - - 26,639
Common Stock issued
pursuant to
subscription at $2.50
per share in Mar. 2004 22,500 11,250 (9,000) - - - 2,250
Beneficial Conversion
Feature relating
to Notes Payable - - 122,362 - - - 122,362
Beneficial Conversion
Feature relating
to Warrants - - 177,638 - - - 177,638
Common stock issued in
exchange for consulting
services at $2.58 per
share, Apr 2004 9,860 4,930 20,511 - - - 25,441
Common stock issued in
exchange for consulting
services at $2.35 per
share, Apr 2004 11,712 5,856 21,667 - - - 27,523
Common stock issued in
exchange for consulting
services at $1.50 per
share, Apr 2004 367,500 183,750 367,500 - - - 551,250
Common stock returned
to treasury at
$0.065 per share,
Apr 2004 (50,000) (25,000) 21,750 - - - (3,250)
Preferred stock
converted to common
stock for consulting
services at $1.01
per share in May 2004 4000 4 100,000 50,000 51,250 - - - 101,246
Common stock issued per
subscription May 2004 10,000 5,000 (4,000) - (1,000) - -
Common stock issued in
exchange for consulting
services at $0.86 per
share in May 2004 137,000 68,500 50,913 - - - 119,413
Common stock issued in
exchange for consulting
services at $1.15 per
share in May 2004 26,380 13,190 17,147 - - - 30,337
Common stock returned to
treasury at $0.065 per
share, Jun 2004 (5,000) (2,500) 2,175 - - - (325)
See accompanying notes to consolidated financial statements
F-11
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2004
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ------- ---------- ------- ------ ---------- ---------- ------- --------
Common stock issued in
exchange for consulting
services at $0.67 per
share in June 2004 270,500 135,250 45,310 - - - 180,560
Common stock issued in
exchange for consulting
services at $0.89 per
share in June 2004 8,000 4,000 3,120 - - - 7,120
Common stock issued in
exchange for consulting
services at $0.65 per
share in June 2004 50,000 25,000 7,250 - - - 32,250
Common stock issued
pursuant to private
placement at $1.00
per share in June 2004 250,000 125,000 125,000 - - - 250,000
Common stock issued in
exchange for consulting
services at $0.54 per
share in July 2004 100,000 50,000 4,000 - - - 54,000
Common stock issued in
exchange for consulting
services at $0.72 per
share in July 2004 5,000 2,500 1,100 - - - 3,600
Common stock issued in
exchange for consulting
services at $0.47 per
share in July 2004 100,000 50,000 (2,749) - - - 47,251
Common stock issued in
exchange for consulting
services at $0.39 per
share in August 2004 100,000 50,000 (16,500) - - - 58,500
Preferred stock converted
to common stock for
consulting services at
$0.39 per share in
August 2004 (2000) (2) 50,000 25,000 (5,500) - - - 19,498
See accompanying notes to consolidated financial statements
F-12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2004
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ------- ---------- ------- ------ ---------- ---------- ------- --------
Common stock issued in
exchange for consulting
services at $0.50 per
share in August 2004 100,000 50,000 250 50,250
Common stock issued in
exchange for consulting
services at $0.56 per
share in August 2004 200,000 100,000 12,500 - - - 112,500
Common stock issued in
exchange for consulting
services at $0.41 per
share in August 2004 92,500 46,250 (8,787) - - - 37,463
Common stock issued in
exchange for consulting
services at $0.52 per
share in September 2004 1,000,000 500,000 17,500 - - - 517,500
Common stock issued in
exchange for consulting
services at $0.46 per
share in September 2004 5,000 2,500 (212) - - - 2,288
Common stock issued
pursuant to subscription
at $0.50 per share in
September 2004 40,000 20,000 - - - - 20,000
Preferred shares
converted to common
stock for consulting
services at $0.41
per share in September
2004 (4000) (4) 100,000 50,000 4,000 - - - 53,996
Preferred shares issued
in exchange for service
at $25 per share in
September 2004 60,000 6 1,499,994 1,500,000
Warrants issued to
consultants in the
fourth quarter 2004 2,019,862 2,019,862
Net Loss - - - - - (19,358,259) (19,358,259)
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)
====== == ========== ========== ========= ======== ======= ============ ===========
F-13
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period
September 16, 2002
For the Year Ended For the Year Ended (Date of Inception)
September 30, September 30, through September
2004 2003 30, 2004
------------- ------------- -------------
Cash Flows from operating activities:
Net loss from operating activities $ (19,358,259) $(3,445,164) $(22,815,034)
Adjustments to reconcile net loss to net
cash (used in) operating
activities:
Depreciation and amortization 3,161 - 3,161
Organizational expenses - 88,500 88,500
Preferred shares issued in exchange for
service at $25 per share in September 2004 1,500,000 - 1,500,000
Warrants issued to consultants in the
fourth quarter 2004 2,019,862 - 2,019,862
Amortization of beneficial conversion
feature 1,625,000 - 1,625,000
Common stock issued in exchange for
consultant services rendered 10,105,382 2,292,350 12,397,732
Common stock canceled-previously issued for
services rendered (285,575) - (285,575)
Changes in assets and liabilities:
Prepaid Expenses and Deposits - - -
Increase in-Other Assets - (13,890) (13,890)
Increase (decrease) in: -
Increase in due related parties 20,000 132,696 152,696
Accounts payable and accrued liabilities 1,301,560 454,000 1,755,560
Net cash (used in) operating activities (3,068,719) (491,509) (3,571,838)
Cash flows from investing activities:
Payments for Patent Filing (21,351) - (21,351)
Payments for security deposits (23,559) - (23,559)
Capital expenditures (29,507) - (29,507)
Net cash (used in) investing activities (74,417) - (74,417)
Cash flows from financing activities:
Proceeds from sale of common stock, net of
cost - 432,000 432,000
Proceeds from subscription of common stock 124,000 - 125,000
Proceeds from sale of options 87,000 154,000 241,000
Net advances from shareholders (9,504) 98,980 100,088
Proceeds from loans 2,750,000 - 2,750,000
------------- ------------- -------------
Net cash provided by financing activities 2,951,496 684,980 3,648,088
Increase (decrease) in cash and cash
equivalents (191,640) 193,471 1,832
Cash and cash equivalents, beginning of year 193,471 - -
Cash and cash equivalents, end of year
$ 1,832 $ 193,471 $ 1,832
============== ============ =============
Supplemental Information:
Cash paid during the period for interest $ - $ - $ -
Cash paid during the year for taxes - - -
Non cash disclosures:
Common stock issued for services
$ 10,105,382 $ 2,292,350 $ 12,398,732
Amortization of beneficial conversion
feature $ 1,625,000 $ - $ 1,625,000
Common stock canceled-previously issued for
services rendered $ (285,575) $ - $ (285,575)
Preferred shares issued in exchange for
service at $25 per share in September 2004 1,500,000 - 1,500,000
-------------- ------------- -------------
Warrants issued to consultants in the
fourth quarter 2004 2,019,862 - 2,019,862
-------------- ------------- -------------
Acquisition:
Common stock retained $ - $ 1,015 $ 1,015
Assets acquired $ - $ (135) $ (135)
-------------- ------------- -------------
Total consideration paid $ - $ 880 $ 880
-------------- ------------- -------------
Organization expenses- note issued in
exchange of shares retired $ - $ 88,500 $ 88,500
See accompanying notes to consolidated financial statements
F-14
APPLIED DNA SCIENCES, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
Business and Basis of Presentation
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of Nevada. The Company is in the
development stage , as defined by Statement of Financial Accounting Standards
No. 7 ("SFAS No. 7") and its efforts have been principally devoted to developing
DNA embedded biotechnology security solutions in the United States. To date, the
Company has generated nominal sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
inception through September 30, 2004, the Company has accumulated losses of
$22,815,034.
Estimates
The preparation of the financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
requires that four basic criteria must be met before revenue can be recognized
:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred;
(3) the selling price is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the selling prices of the
products delivered and the collectibility of those amounts. Provisions for
discounts and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
On December 17, 2003, the SEC staff released Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. The staff updated and revised the existing revenue
recognition in Topic 13, Revenue Recognition, to make its interpretive guidance
consistent with current accounting guidance, principally EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." Also, SAB 104 incorporates
portions of the Revenue Recognition in Financial Statements - Frequently Asked
Questions and Answers document that the SEC staff considered relevant and
rescinds the remainder. The company's revenue recognition policies are
consistent with this guidance; therefore, this guidance will not have an
immediate impact on the company's consolidated financial statements.
Cash Equivalents
For the purpose of the accompanying financial statements, all highly liquid
investments with a maturity of three months or less are considered to be cash
equivalents.
Income Taxes
The Company has adopted Financial Accounting Standard No. 109 (SFAS 109) which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Temporary differences between
taxable income reported for financial reporting purposes and income tax purposes
are insignificant.
F-15
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives of 3 to 5 years using the straight line method. At September 30,
2004 property and equipment consist of:
September 30, 2004
------------------
Furniture $ 29,507
Accumulated depreciation 1,405
==================
Net $ 28,102
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted undercounted cash flows. Should an impairment in value be indicated,
the carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset. SFAS No. 144 also requires assets to be disposed of be reported at
the lower of the carrying amount or the fair value less costs to sell.
Comprehensive Income
The Company does not have any items of comprehensive income in any of the
periods presented.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," specifying the computation, presentation and disclosure
requirements of earnings per share information. Basic earnings per share has
been calculated based upon the weighted average number of common shares
outstanding. Stock options and warrants have been excluded as common stock
equivalents in the diluted earnings per share because they are either
antidilutive, or their effect is not material.
F-16
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended September 30, 2004 and for
the subsequent periods.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note E):
For the Year Ended For the Year Ended
September 30,2004 September 30, 2003
------------------ -------------------
Net loss - as reported $ (19,358,259) $ (3,445,164)
Add: Total stock based employee compensation - -
expense as reported under intrinsic value method
(APB. No. 25)
Deduct: Total stock based employee compensation
expense as reported under fair value based method
(SFAS No. 123) - -
------------------ -------------------
Net loss - Pro Forma $ (19,358,259) $ (3,445,164)
Net loss attributable to common stockholders -
Pro forma $ (19,358,259) $ (3,445,164)
Basic (and assuming dilution) loss per share - as
reported $ (0.93) $ (0.27)
Basic (and assuming dilution) loss per share -
Pro forma $ (0.93) $ (0.27)
F-17
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Liquidity
As shown in the accompanying financial statements, the Company incurred a net
loss of $22,815,034. during the period September 16, 2002 (date of inception)
through September 30, 2004. The Company's current liabilities assets exceeded
its current assets by $4,786,323 as of September 30, 2004.
Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company
to concentrations of credit risk, consist primarily of cash, cash equivalents
and trade receivables. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such investments
may be in excess of the FDIC insurance limit.
Research and Development
The Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs.
Under SFAS 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and developments costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. The Company did not incur
any research and development expenses from September 16, 2002 (date of
inception) through September 30, 2004.
Advertising
The Company will follow a policy of charging the costs of advertising to
expenses incurred. The Company incurred advertising costs of $125,758 and $0,
respectively during the years ended September 30, 2004 and 2003, respectively.
Reclassifications
Certain reclassifications have been made in prior year's financial statements to
conform to classifications used in the current year.
F-18
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Intangible Assets
Intangible assets are amortized using the straight-line method over their
estimated period of benefit, ranging from one to ten years. We periodically
evaluate the recoverability of intangible assets and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that an impairment exists. All of our intangible assets are subject to
amortization.
At September 30, 2004, intangible assets consist of:
September 30,
2004
Intangible assets $ 29,910
Accumulated amortization (1,756)
-----------
Net Intangible Assets $ 28,154
===========
New Accounting Pronouncements
F-19
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities. SFAS 149 amends SFAS No. 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar characteristics be accounted
for on a comparable basis. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS 150 did not have a material impact on the Company's results
of operations or financial position.
In December 2003, the FASB issued a revision of SFAS No. 132, "Employers'
Disclosures About Pensions And Other Postretirement Benefits." This
pronouncement, SFAS No. 132-R, expands employers' disclosures about pension
plans and other post-retirement benefits, but does not change the measurement or
recognition of such plans required by SFAS No. 87, No. 88, and No. 106. SFAS No.
132-R retains the existing disclosure requirements of SFAS No. 132, and requires
certain additional disclosures about defined benefit post-retirement plans.
Except as described in the following sentence, SFAS No. 132-R is effective for
foreign plans for fiscal years ending after June 15, 2004; after the effective
date, restatement for some of the new disclosures is required for earlier annual
periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such
as the components of net periodic benefit cost, and certain key assumptions) are
effective for foreign plans for quarters beginning after December 15, 2003;
other interim-period disclosures will not be required for the Company until the
first quarter of 2005. Since the Company does not have any defined benefit
post-retirement plans, the adoption of this pronouncement did not have any
impact on the Company's results of operations or financial condition.
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152) The amendments made by Statement 152 This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005. with earlier application encouraged.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
F-20
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year 2005. Currently, the Company accounts for its share-based
payment transactions under the provisions of APB 25, which does not necessarily
require the recognition of compensation cost in the financial statements.
Management is assessing the implications of this revised standard, which may
materially impact the Company's results of operations in the third quarter of
fiscal year 2005 and thereafter.
On December 16, 2004, FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions (" SFAS 153"). This statement
amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. Under SFAS 153, if
a nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
NOTE B - MERGER
Acquisition
On October 21, 2002, the Company completed a Plan and Agreement of
Reorganization ("Merger") with ProHealth Medical Technologies, Inc.
("ProHealth") an inactive publicly registered shell corporation with no
significant assets or operations. For accounting purposes, the Company shall be
the surviving entity. The transaction is accounted for using the purchase method
of accounting. The total purchase price and carrying value of net assets
acquired of was $ 880. From November 1988 until the date of the merger,
ProHealth was an inactive entity with no significant assets and liabilities
Effective with the Merger , all previously outstanding common stock, preferred
stock, options and warrants owned by the Company's shareholders were exchanged
for an aggregate of 10,178,352 shares of ProHealth common stock. The value of
the stock that was issued was the historical cost of the ProHealth's net
tangible assets, which did not differ materially from their fair value. In
accordance with SFAS No. 141, the Company is the acquiring entity.
Effective with the Merger, ProHealth changed its name to Applied DNA Sciences,
Inc.
F-21
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE B - MERGER (continued)
The total purchase price and carrying value of net assets acquired of ProHealth
was $1. The net assets acquired were as follows:
Common stock retained by ProHealth shareholders $ 1,015
Assets acquired (135)
----------
Total consideration paid $ 880
==========
In accordance with SOP 98-5, the Company expensed $880 as organization costs.
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 E). The option
expires on December 10, 2004. On June 30, 2003, the Company exercised its option
and acquired 7,500,000 common shares under this agreement in exchange for an
$88,500 convertible promissory note payable to the former controlling owner.
The Company accounted for the acquisition of the shares as an organization cost
and charged $88,500 to operations and retired the 7,500,000 shares acquired
common stock.
NOTE C - RELATED PARTY TRANSACTIONS
At September 30, 2004, notes payable are as follows:
September
30, 2004
----------
Note payable , related party, together with interest at 8% per annum,
unsecured. Should the Company default under the terms of the Note, Noteholder
has the option to convert the unpaid principal at maturity to 7,500,000
shares of the Company's common stock and receive additional common shares in
exchange for accrued and unpaid interest at a conversion rate equal to the
then fair market value of the Company's common stock. (refer to note J) $88,500
----------
Note payable, unsecured, related party, payable from August 1, 2005, right to
convert to restricted stock in lieu of cash, rate of interest 4%, 160,000
shares prior to October 31, 2005 or 180,000 shares after that date. 425,000
----------
Due to ex-president, in September 2004, note holder entered into a private
transaction, selling a total of 2,500,000 shares to him, after which he
loaned all proceeds of $600,000 to us. 600,000
----------
Note payable, ex-officer of the Company, due $70,000 upon first funding, 20%
rate of interest, or 100,000 shares at par value of $0.001 50,000
----------
1,163,500
----------
Less: current portion 1,163,500
----------
Note payable - long-term $ -
----------
F-22
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE C - RELATED PARTY TRANSACTIONS
Included in current liabilities is $111,943 at September 30, 2004 which
represents advances from the stockholders of the Company. No formal agreements
or repayment terms exist.
Also, the Company owed $117,333 at September 30, 2004 to the stockholders and
other related parties towards accrued expenses.
The Company leases office space under a sub lease agreement with an entity
controlled by a former significant former shareholder of the Company (see Note
H).
The Company has entered into long term employment and consulting agreements with
Company's ex- President and Chief Executive Officer and an entity controlled by
a significant Company shareholder, respectively (see Note H).
NOTE D - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of convertible preferred
stock, with $0.001 par value per share. The Company is authorized to issue
100,000,000 shares of common stock, with $0.50 par value per share. In January
2004, the Company passed a resolution authorizing change in the par value per
common shares from $0.0001 per share to $0.50 per share. As of September 30,
2004, the Company has issued and outstanding 23,981,054 common share with par
value of $0.50 per share and 60,000 convertible preferred shares with par value
of $0.0001.
During the period September 16, 2002 through September 30, 2003, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately $1,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc (see Note
B).
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
In October 2002 the Company issued 602,000 shares of common stock in exchange
for services valued at $ 0.065 per share. In accordance with EITF 96-18 the
measurement date to determine fair value was in October 2002. This was the date
at which a commitment for performance by the counter party to earn the equity
instrument was reached. The Company valued the shares issued at approximately
$0.065 per share, which presents the fair value of the services received which
did not differ materially from the value of the stock issued.
F-23
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE D- CAPITAL STOCK (continued)
In November and December 2002, the Company issued 876,000 shares of common stock
in exchange for subscription at $ 0.065 per share. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
In January 2003, the Company canceled 836,000 shares of common stock previously
issued in exchange for consulting services.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement (see Note H). The Company valued the shares issued at
approximately $ .065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In January 2003, the Company issued 586,250 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.13 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In February 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.065 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In March 2003, the Company issued 91,060 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $2.53
per share, which represents the fair value of the services received which did
not differ materially from the value of the stock issued.
F-24
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE D- CAPITAL STOCK (continued)
In March 2003, the Company issued 6,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $
0.065 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued.
In March 2003, the Company received subscription for 18,000 shares of common
stock in exchange for cash at $1 per share.
On April 1, 2003, the Company issued 860,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 9, 2003, the Company issued 18,000 shares of common stock in exchange
for previously issued options to purchase the Company's common stock at $1.00
per share.
On April 9, 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 23, 2003, the Company issued 5,000 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 12, 2003, the Company issued 10,000 shares common stock in exchange for
consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 17 2003, the Company issued 50,000 shares of common stock in exchange
for cash at $1.00 per share
On June 30, 2003, the Company issued 270,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
F-25
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE D- CAPITAL STOCK (continued)
On June 30, 2003, the Company received $10,000 as subscription for options to
purchase the Company's common stock at $1.00 per share.
In June, 2003, the Company received $48,000 in connection with a subscription to
purchase the Company's common stock pursuant to a private placement.
In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth granted the Company an option to acquire up to 8,500,000 shares of
the Company's common stock in exchange for $100,000 (see Note B). The option
expires on December 10, 2004. On June 30, 2003, the Company exercised its option
and acquired 7,500,000 common shares under this agreement in exchange for an
$88,500 convertible promissory note payable to the former controlling owner. The
Company has an option through December 10, 2004 to acquire the remaining
1,000,000 shares from the former controlling owner in exchange for $11,500. On
June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant
to the option agreement.
In July 2003 the Company issued 213,060 shares of common stock for consulting
services provided to the Company. The Company valued the shares issued at
approximately $ 2.01 per share, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In July 2003, the Company canceled 24,000 shares of common stock, previously
issued for services valued at $2.50 per share.
In July 2003, the Company received $20,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
In July 2003, the Company issued 10,000 shares of common stock for cash
previously subscribed at $1.00 per share.
In August 2003, the Company issued 172,500 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.38 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued
In August 2003, the Company received $29,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
In September 2003, the Company issued 395,260 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.42 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
F-26
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE D- CAPITAL STOCK (continued)
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
In September 2003, the Company issued 6,400 shares of common stock issued in
exchange for cash at $2.50 per share pursuant to private placement.
In September 2003, the Company received $95,000 in exchange for previously
issued options to purchase the Company's common stock at $1.00 per share.
In September 2003, the Company received $300,000 in connection with a
subscription to purchase the Company's common stock pursuant to a private
placement.
The Company valued the shares issued for consulting services at the rate which
represents the fair value of the services received which did not differ
materially from the value of the stock issued.
In October 2003, the Company issued 15,000 shares of convertible preferred stock
in exchange for services. The Company valued the shares issued at the $15 par
value and recorded the value for services when the shares were converted into
common shares as identified below.
In October 2003, the Company issued 287,439 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$2.85 per share for a total of $820,418, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2003, the Company issued 120,000 shares of common stock for shares
previously subscribed at $2.50 per share in September 2003.
In October 2003, the Company canceled 100,000 shares of common stock previously
issued in exchange for services at $2.50 per share.
In November 2003, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$3.00 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued.
In November 2003, the Company sold 100,000 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
In December 2003, the Company sold 6,400 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
In December 2003, the Company issued 2,125,500 shares of common stock in
exchange for consulting services. . The Company valued the shares issued at
approximately $2.59 per share, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In December 2003, the Company received $104,000 in exchange for a common stock
subscription at $2.50 per share pursuant to private placement.
In January 2004, the Company issued 41,600 shares of common stock at $2.50 share
pursuant to a subscription made on December 2003.
In January 2004, the Company issued 13,040 shares of common stock at $2.95 per
share in exchange for consulting services valued at $38,468.
In January 2004, the Company issued 123,000 shares of common stock at $2.60 per
share in exchange for consulting services valued at $319,800.
In January 2004, the Company issued 1,000 shares of common stock at $3.05 per
share in exchange for consulting services valued at $3,050.
In February 2004, the Company issued 6,283 shares of common stock at $3.07 per
share in exchange for employee services valued at $19,288.
In March 2004, the Company issued 44,740 shares of common stock at $3.04 per
share in exchange for consulting services valued at $136,010.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
F-27
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
In March 2004, the Company issued 5,443 shares of common stock at $3.00 per
share in exchange for employee services valued at $16,344.
In March 2004, the Company issued 5,769 shares of common stock at $3.15 per
share in exchange for employee services valued at $18,177.
In March 2004, the Company converted 5,000 preferred shares into 125,000 shares
of common stock at $3.00 per share in exchange for employee services valued at
$375,000.
In March 2004, the Company issued 8,806 shares of common stock at $3.03 per
share in exchange for employee services valued at $26,639.
In April 2004, the Company issued 22,500 shares of common stock at $0.10 for
subscription of warrants to be exercised.
In April 2004, the Company issued 9,860 shares of common stock at $2.58 per
share in exchange for employee services valued at $25,441.
In April 2004, the Company issued 11,712 shares of common stock at $2.35 per
share in exchange for consulting services valued at $27,523.
In April 2004, the Company issued 367,500 shares of common stock at $1.50 per
share in exchange for consulting services valued at $551,250.
In April 2004, the Company retired 50,000 shares of common stock previously
issued for consulting services at $0.065 per share or $3,250.
In May 2004, the Company converted 4,000 preferred shares into 100,000 shares of
common stock at $1.01 per share in exchange for consulting services valued at
$101,250.
In May 2004, the Company issued 10,000 shares of common stock at $0.10 per share
in a stock subscription for $1,000.
In May 2004, the Company issued 137,000 shares of common stock at $0.86 per
share in exchange for consulting services valued at $119,233.
In May 2004, the Company issued 26,380 shares of common stock at $1.15 per share
in exchange for consulting services valued at $30,337.
In June 2004, the Company retired 5,000 shares of common stock previously issued
for consulting services at $0.065 per share or $325.
In June 2004, the Company issued 270,500 shares of common stock at $0.67 per
share in exchange for consulting services valued at $180,560.
In June 2004, the Company issued 8,000 shares of common stock at $0.89 per share
in exchange for consulting services valued at $7,120.
In June 2004, the Company issued 50,000 shares of common stock at $0.645 per
share in exchange for consulting services valued at $32,250.
In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share
for total proceeds of $250,000 pursuant to private placement.
In July 2004, the Company issued 100,000 shares of common stock at $0.54 per
share in exchange for consulting services valued at $54,000.
In July 2004, the Company issued 5,000 shares of common stock at $0.72 per share
in exchange for consulting services valued at $3,600.
In July 2004, the Company issued 100,000 shares of common stock at $0.47 per
share in exchange for consulting services valued at $47,250.
In August 2004, the Company converted 2,000 preferred shares into 50,000 shares
of common stock at $0.39 in exchange for consulting services valued at $19,500.
In August 2004, the Company issued 100,000 shares of common stock at $0.39 in
exchange for consulting services valued at $39,000.
In August 2004, the Company issued 100,000 shares of common stock at $0.50 in
exchange for consulting services valued at $50,250.
F-28
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
In August 2004, the Company issued 200,000 shares of common stock at $0.56 in
exchange for consulting services valued at $112,500.
In September 2004, the Company issued 1,000,000 shares of common stock at $0.52
in exchange for consulting services valued at $517,500.
In September 2004, the Company issued 45,000 shares of common stock at $0.50 in
exchange for consulting services valued at $22,288.
In September 2004, the Company converted 4,000 preferred shares into 100,000
shares of common stock at $0.41 in exchange for consulting services valued at
$54,000.
In September 2004, the Company issued 60,000 convertible preferred shares at
$25.00, in exchange for consulting services valued at $1,500,000.
In accordance with EITF 96-18 the measurement date to determine fair value was
the date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued for
consulting services at the rate which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
NOTE 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 Warrants Exercisable
Weighted Average Weighed Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- --------------------- -------------- ----------- --------------
$0.10 335,000 4.79 $ 0.10 335,000 $ 0.10
$0.60 3,472,750 4.01 $ 0.60 3,472,750 $ 0.60
$0.70 750,000 2.84 $ 0.70 750,000 $ 0.70
$1.00 250,000 1.61 $ 1.00 250,000 $ 1.00
$3.00 62,503 1.25 $ 3.00 62,503 $ 3.00
4,870,253 4,870,253
F-29
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE E- STOCK OPTIONS AND WARRANTS (continued)
Transactions involving warrants are summarized as follows:
Number of Shares Weighted Average
Price Per Share
---------------- -----------------
Outstanding at September 30, 2003 383,500 $ 1.38
Granted 4,574,753 0.58
Exercised (88,000) 1.00
Canceled or expired - -
Outstanding at September 30, 2004 4,870,253 $ 0.63
The estimated value of the compensatory warrants granted to non-employees in
exchange for services and financing expenses was determined using the
Black-Scholes pricing model and the following assumptions: contractual term of 2
to 5 years, a risk free interest rate of 3.00%, a dividend yield of 0% and
volatility of 30%. The amount of the expense charged to operations for
compensatory warrants granted in exchange for services was $0 for the years
ended September 30, 2004 and 2003.
The estimated value of the compensatory warrants granted to non-employees in
exchange for services and financing expenses was determined using the
Black-Scholes pricing model and the following assumptions: contractual term of 2
to 5 years, a risk free interest rate of 1.00%, a dividend yield of 0% and
volatility of 22.9%. The amount of the expense charged to operations for
compensatory warrants granted in exchange for services was $2,019,862 and $0,
respectively, for the years ended September 30, 2004 and 2003.
NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE
A summary of convertible promissory notes payable at September 30, 2004 is as
follows:
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 $3M or more; The Company,
in its sole discretion, may prepay principal at any time without penalty. The
notes are convertible into shares of common stock of the Company at a price of
$2.50 per share.
September 30, 2004
------------------
Convertible notes
payable $ 1,675,000
------------------
Debt discount - beneficial conversion feature, net of
accumulated amortization of $1,270,444 (20,393)
------------------
Debt discount, net of accumulated amortization of
$354,556
(29,607)
------------------
Net balance $ 1,625,000
------------------
During the three months ended December 31, 2003, the Company sold 27.5 units
(the "Units") to accredited investors at a price of $50,000 per Unit (the
"Bridge Offering") for a total of $1,375,000. Each Unit consists of (i) a
$50,000 Principal Amount 10% Secured Convertible Promissory Note ("Note" or
"Notes"), (ii) detachable warrants to purchase 50,000 shares of our common
stock, exercisable for a period of five years at a price of $3.20 per share
("$3.20 Warrant") and (iii) detachable warrants to purchase 10,000 shares of our
common stock, exercisable for a period of five years at a price of $0.10 per
share ("$0.10 Warrant" and together with the $3.20 Warrant, the "Warrants"). The
Notes are convertible into shares of our common stock at a price of $2.50 per
share.
F-30
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
The Company accounted for the warrants and notes payable in accordance with APB
No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants" ("APB 14"). APB 14 requires a portion of the proceeds from the
issuance of debt securities with detachable stock warrants be allocated to the
warrants and treated as paid-in capital. Any resulting discount or premium on
the notes payable should be recorded and amortized over the life of the notes.
The Company used the Black-Scholes model to determine the value of the warrants
issued to the noteholders. Under the Black-Scholes model, the value of the
warrants are determined by taking the difference between acquiring the stock
outright and the present value of paying the exercise price on the expiration
day. As a result, the Company valued the warrants at $206,526. This amount was
recorded as paid-in capital and the resulting discount on the notes payable was
recorded and is being amortized using the interest method over the life of the
notes. The debt discount attributed is amortized over the Bridge Offering's
earliest maturity period of 9 months from the date of issue as interest expense.
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 Bridge Offering note. 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 $1,168,474 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and a
discount against the Bridge Offering. The debt discount attributed to the
beneficial conversion feature is amortized over the Bridge Offering's earliest
maturity period of 9 months from the date of issue as interest expense.
The Company valued the beneficial conversion of the notes and warrants in
accordance with EITF 00-27 using the Black-Scholes pricing model and the
following assumptions:
o contractual terms of 5 years
o an average risk free interest rate of 1.00%
o a dividend yield of 0.00%
o volatility of 22.9%.
During the three months ended March 31, 2004, the Company sold 6 units (the
"Units") to accredited investors at a price of $50,000 per Unit (the "Bridge
Offering") for a total of $300,000. Each Unit consists of (i) a $50,000
Principal Amount 10% Secured Convertible Promissory Note ("Note" or "Notes"),
(ii) warrants to purchase 50,000 shares of our common stock, exercisable for a
period of five years at a price of $3.20 per share ("$3.20 Warrant") and (iii)
warrants to purchase 10,000 shares of our common stock, exercisable for a period
of five years at a price of $0.10 per share ("$0.10 Warrant" and together with
the $3.20 Warrant, the "Warrants"). The Notes are convertible into shares of our
common stock at a price of $2.50 per share.
The Company accounted for the warrants and notes payable in accordance with APB
No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants" ("APB 14"). APB 14 requires a portion of the proceeds from the
issuance of debt securities with detachable stock warrants be allocated to the
warrants and treated as paid-in capital. Any resulting discount or premium on
the notes payable should be recorded and amortized over the life of the notes.
The Company used the Black-Scholes model to determine the value of the warrants
issued to the noteholders. Under the Black-Scholes model, the value of the
warrants are determined by taking the difference between acquiring the stock
outright and the present value of paying the exercise price on the expiration
day. As a result, the Company valued the warrants at $177,638. This amount was
recorded as paid-in capital and the resulting discount on the notes payable was
recorded and is being amortized using the interest method over the life of the
notes. The debt discount attributed is amortized over the Bridge Offering's
earliest maturity period of 9 months from the date of issue as interest expense.
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 Bridge Offering note. 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 $122,362 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and a
discount against the Bridge Offering. The debt discount attributed to the
F-31
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
beneficial conversion feature is amortized over the Bridge Offering's earliest
maturity period of 9 months from the date of issue as interest expense.
The Company valued the beneficial conversion of the notes and warrants in
accordance with EITF 00-27 using the Black-Scholes pricing model and the
following assumptions:
o contractual terms of 5 years
o an average risk free interest rate of 4.25%
o a dividend yield of 0.00%
o volatility of 42.0%.
In September 2004, the Company re-priced the $3.20 warrants to $0.60 as an
inducement to convertible note holders as the Company sought additional
financing. The Company recorded a charge of $371,850 to earning for the year
ended September 30, 2004.
NOTE G- INCOME TAXES
The Company has adopted Financial Accounting Standard No. 109 which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statement or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant.
At September 30, 2004, the Company has available for federal income tax purposes
a net operating loss carryforward of approximately $22,815,034, expiring in the
year 2023, that may be used to offset future taxable income. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, since in the opinion of management based upon the earnings history of
the Company, it is more likely than not that the benefits will not be realized.
Due to significant changes in the Company's ownership, the future use of its
existing net operating losses may be limited.
F-32
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE G- INCOME TAXES (continued)
Components of deferred tax assets as of September 30, 2003 are as follows:
Non current:
Net operating loss carryforward
$7,985,000
Valuation allowance (7,985,000)
-----------
Net deferred tax asset $ -
===========
NOTE H-LOSSES PER SHARE
The following table presents the computation of basic and diluted losses per
share:
For the Year Ended For the Year Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Loss available for common shareholders $ (19,358,259) $ (3,445,164)
================== ==================
Basic and fully diluted loss per share $ (0.93) $ (0.27)
================== ==================
Weighted average common shares outstanding 20,819,700 12,955,358
Net loss per share is based upon the weighted average of shares of common stock
outstanding
NOTE I- COMMITMENTS AND CONTINGENCIES
Licensing Agreement
In October 2002, the Company entered into an exclusive Licensing Agreement
("License") with Biowell Technology, Inc., a company formed under the laws of
Taiwan, Republic of Taiwan. The initial term of the License expires in 2007 with
renewal options under certain terms and conditions. The License grants the
Company the exclusive use of certain patented DNA technology, along with the
rights to future technology, in exchange for an initial payment of 1,500,000
shares of the Company's restricted common stock (see Note D). The Company is
obligated to order minimum purchase orders or make future certain minimum annual
royalty payments as follows:
Year ending Minimum purchase orders Alternative Minimum
October 8, Royalty Payable
2004 $300,000 $100,000
2005 360,000 -
2006 432,000 -
2007 518,400 -
Consulting Agreement
GP has been engaged, on a non-exclusive basis, to provide advice and assistance
to the Company regarding issues associated with Applied DNA's proprietary DNA
embedded security solutions. GP will assist the Company with strategic
positioning and enhancement of the Company's business, and will assist the
Company in the development of domestic and international marketing strategies
for the Company's DNA products and services. The term of the engagement is one
year from the effective date, with automatic one year renewals unless either
party expresses, in writing, an intention not to renew within 60 days prior to
the expiration of the term.
F-33
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
As compensation for GP's performance, the Company will pay GP an aggregate
advisory fee of Two Million Dollars ($2,000,000) payable in increments over the
term and renewal term. Two payments of $500,000 each were made by the Company in
September 2004 and January 2005. Thereafter, eight payments of $125,000 are due
monthly over the period February through September 2005. Additionally, the
Company will issue a net-exercisable warrant to purchase shares of Common Stock
of the Company at a later date. Fees were placed in escrow during GP's
completion of its due diligence review.
All promotional materials of the Company, on a going forward basis, will be
submitted to GP for its review, including all advertising, written sales
promotion, press releases, news clippings and other publicity matters relating
to GP's engagement and the strategic relationship created.
The Company has agreed to maintain confidentiality with regard to its
relationship with GP, wherever appropriate, and has indemnified GP, its
controlling persons, respective partners, shareholders, directors, officers,
employees, agents, affiliates and representatives and will hold them harmless
against any actions, judgments, claims, etc. The Agreement, in its entirety,
will be filed with the Company's 10-KSB in accordance with SEC regulatory
requirements.
Franchising and Distribution Agreements
The Company has entered into a Distribution and Franchising Agreement
("Franchise Agreement") in July 2003. Under the terms of the Franchise
Agreement, the franchisee is obligated to pay the Company $3,000,000 payable
$25,000 upon execution of the Franchise Agreement and the balance of $2,975,000
payable over five (5) years with interest accruing at 8% per annum. Payments
under the Franchise Agreement are subject to franchisee's net profits, as
defined, under the Franchise Agreement. During the year ended September 30, 2004
and 2003 the Company has received the initial $25,000 and $0, as installment and
has recognized the receipt as other income in the accompanying financial
statements.
F-34
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE I- COMMITMENTS AND CONTINGENCIES (continued)
Operating Lease Commitments
The Company leases office space under operating lease in Los Angeles, California
for its corporate use from an entity controlled by significant former
shareholder, expiring in November 2006. Total lease rental expenses for the
years ended on September 30, 2004 and 2003, was $120,804 and $38,725,
respectively.
Commitments for minimum rentals under non-cancelable lease at September 30, 2004
are as follows:
Year ended September 30,
2005 $ 139,308
2006 143,977
2007 12,031
-----------
$ 295,316
Employment and Consulting Agreements
The Company has employment agreements with the Company's officers and certain
employees. These employment agreements provide for salaries and benefits,
including stock options and extend up to seven years. In addition to salary and
benefit provisions, the agreements include defined commitments should the
employer terminate the employee with or without cause.
The Company has a consulting agreement with an entity controlled by a former
significant shareholder of the Company. The consulting agreement provides for
compensation and certain benefits, including stock options and extends up to
seven years. In addition to compensation and benefit provisions, the agreements
include defined commitments should the employer terminate the consultant with or
without cause.
The Company has consulting agreements with outside contractors to provide
marketing and financial advisory services. The Agreements are generally for a
term of 12 months from inception and renewable automatically from year to year
unless either the Company or consultant terminates such engagement by written
notice.
F-35
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE J- SUBSEQUENT EVENTS
On October 31, 2004, the Company defaulted on a note held by a former company
officer and director in the amount of $88,500 (See Note C), and in accordance
with the default, the noteholder has the right, at any time without further
notice, to demand that his outstanding note be converted back into 7,500,000
shares. On December 28, 2004, the noteholder made his demand for the issuance of
7,500,000 shares of common stock. The Company is currently negotiating a
settlement of this matter with the noteholder.
In October 2004, the Company granted 3,036,000 common stock warrants to the
Company's Directors and certain advisors as additional compensation for
services. The warrants have excise prices between $.50 and $1.00 per share and
expire in periods raging from 3 to 5 years.
In January 2005, the Company arranged a $6 million private placement of 12
million shares at $0.50 per share along with 12 million attached warrants with
an exercise price of $0.75 that expires in 5 years. As of January 10, 2005, $4
million of the $6 million has been subscribed.
In January 2005, holders of 1,625,000 of convertible notes payable elected to
convert their notes to common stock at $.33 per share (See Note F).
NOTE K - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements during the period September 16, 2002 through September 30,
2004, the Company incurred a loss of $22,815,034. In addition, the Company has a
deficiency in stockholder's equity of $4,706,508. These factors among others may
indicate that the Company will be unable to continue as a going concern for a
reasonable period of time.
The Company's existence is dependent upon management's ability to develop
profitable operations. Management is devoting substantially all of its efforts
to developing DNA embedded biotechnology security solutions in the United States
and there can be no assurance that the Company's efforts will be successful.
However, the planned principal operations have not commenced and no assurance
can be given that management's actions will result in profitable operations or
the resolution of its liquidity problems. The accompanying statements do not
include any adjustments that might result should the Company be unable to
continue as a going concern.
In order to improve the Company's liquidity, the Company's management is
actively pursing additional equity financing through discussions with investment
bankers and private investors. There can be no assurance the Company will be
successful in its effort to secure additional equity financing.
F-36
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures: As of September 30, 2004, the
Company's management carried out an evaluation, under the supervision of the
Company's Chief Executive Officer and the Chief Financial Officer of the
effectiveness of the design and operation of the Company's system of disclosure
controls and procedures pursuant to the Securities and Exchange Act, Rule
13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, as of the date of their
evaluation, for the purposes of recording, processing, summarizing and timely
reporting material information required to be disclosed in reports filed by the
Company under the Securities Exchange Act of 1934.
Changes in internal controls: There were no changes in internal controls over
financial reporting, known to the Chief Executive Officer or Chief Financial
Officer that occurred during the period covered by this report that has
materially affected, or is likely to materially effect, the Company's internal
control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
30
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers. The position(s) held by each of our
executive officers and Directors as of January 7, 2005 are shown in the
following table. Biographical information for each is set forth following the
table.
Names: Ages Titles: Board of Directors
--------------------- ------- ------------------------ ------------------
Rob Hutchison 49 Chairman & CEO Director
Peter Brocklesby 52 President Director
Lawrence Lee 44 Chief Technology Strategist Director
Michael Hill 44 Director
Ron Erickson 61 Director
Karin Klemm 38 Secretary
Chairman of the Board & CEO, Robin Hutchison
In November 2003, Robin "Rob" Hutchison joined our Board of Directors. On
December 12, 2003, he was appointed Chairman of the Board and on March 1, 2004,
he was appointed Chief Executive Officer. Previously, Mr. Hutchison served on
Board of Directors of PowerHouse Technologies Group, Inc., the developer of
mobile computing solutions that enhance personal productivity. He is the founder
of several companies, including eCharge Corporation of Seattle, Washington,
specialists in alternative payment methods for the Internet. Mr. Hutchison
served as eCharge's president and chief technical officer and played an integral
role in raising in excess of $90 million in private funding. Mr. Hutchison
pioneered, and holds the patent pending on, unique digital certificate
technology using Bio-metrics that enabled eCharge to provide secure Internet
commerce transactions.
Prior to co-founding eCharge, Mr. Hutchison was president of Canada-based
SNI Corporation, specialists in the integration of SUN Microsystems UNIX-based
systems and Internet and computer firewall security. Mr. Hutchison also served
as the western regional director of sales and operations for Everex Canada Inc.
and as vice president and co-founder of Vivox International Inc.
Mr. Hutchison remains on the Board of Directors of eCharge. He retired from
that company in 2002 to assist in the development of several start-ups and
mature technology companies, including Bit Learning, Via Vis Technologies Inc.,
One Person Health Inc. and Applied DNA Canada. Mr. Hutchison is a member of the
Board of Directors of Golden Goliath Resources and Serebra Learning
Corporations.
President, Peter Brockelsby
Mr. Brocklesby graduated from Leeds University, UK with a BA Honors degree
in History in 1970. He attended the Royal Air Force College, UK and was
commissioned in the RAF. In 1977, after 7 years service in the UK Armed Forces,
Mr. Brocklesby left to become Director of Logistics for Air Asia (Air America),
a US defense contractor providing support for the US military and for other
governments in Asia.
Following acquisition of Air Asia by E-Systems, Inc., a multi-billion
dollar defense contractor, and now part of Raytheon, Mr. Brocklesby was
appointed VP Marketing. E-Systems specialized in the development and integration
of advanced airborne and land-based military and government communications
systems, electronic warfare equipment, electronic surveillance and airborne
intelligence gathering systems.
As an independent businessman, Mr. Brocklesby developed sophisticated
electronics systems for commercial aircraft in a joint-venture with Plessey, a
multi-billion dollar defense contractor and avionics manufacturer. The products
included satellite communication systems, on-board electronic management systems
and fully interactive video, audio and voice/data communications systems. Mr.
Brocklesby has extensive experience in the development, commercialization and
marketing of new technologies and has many contacts in the aerospace, defense,
electronics and telecommunications industries worldwide.
31
Chief Technology Strategist, Director- Larry Lee
Larry Lee served as President, CEO and Director from September of 2002 to
March 1st, 2004, when he assumed the role of Chief Technology Strategist. Lee
has over 20 years of leadership experience in technology and telecommunications
with both Fortune 500 companies and start-up organizations. His roles have
ranged from Senior scientist to CEO, managing all aspects of business
development including technical, financial, resource management and marketing.
Prior to becoming president and CEO of the Company, Lee has held management
positions at Hughes Aircraft, Boeing and General Motors where he worked on
innovative and cutting-edge new technology.
While working in the environment of Fortune 500 companies, he led the new
initiatives divisions where he mastered entrepreneurial skills by developing a
variety of new business ventures. His success was so notable that he was awarded
the coveted Six Sigma Black Belt training award for his accomplishments. This is
an award that is given after an intensive program to groom high corporate
achievers to learn how to make companies successful.
He recently successfully initiated the start-up of three satellite
telecommunications product lines for wireless, broadband and multi-media
applications with sales exceeding $200 million. He was also instrumental in
directing the development of integrated data and software systems for the
automotive industry, military and government security programs.
Lee currently serves on the board of advisors and/or partners for several
U.S. and international companies including: Dery Resources Inc.; IMC, and VO
Management, LLC.
Lee has a Master of Science in Computer/Electronic Engineering from
California State University and a Bachelor of Science in Mechanical/Biomedical
Engineering from Virginia Tech. He has also received advanced training in
Business Executive Management and Finance from University of California, Los
Angeles and the Hughes Education Center.
Consultant-and Director--Michael E. Hill
Mr. Hill has 18 years of experience in venture capital finance, investment
banking and business development in North America and Europe. Hill has been
involved in the initial funding and start-up of numerous companies including:
multi-media, technology, biotech and the resource sectors. He has successfully
completed transactions ranging as high as $200 million and has been an intricate
participant in many acquisition and merger strategies. Hill is currently a major
shareholder in a west coast commercial real estate company and retail chain. He
is also serving as the trustee and governor for the Shawnigan Lake School, a top
ranked, international private school in Canada.
Previous to joining the Applied DNA Sciences team, Hill was an Investment
Banker at Research Capital from 1997-2002 where he managed a portfolio exceeding
$300 million. At Research Capital Hill worked closely with senior executives and
Management in developing new product, marketing, recruiting, due diligence and
structuring investment banking deals. Prior to working with Research Capital,
Hill performed similar tasks with Scotia Capital Markets and Burns Fry Ltd. He
was employed with these companies from 1987 until 1997.
Ronald P. Erickson Director
Ronald Erickson has over thirty years of experience as a manager, attorney
and senior level executive. In January 2004, Mr. Erickson was appointed to the
Company's Board of Directors. From 1997 through the present, Mr. Erickson served
as Chairman and Chief Executive Officer of eCharge Corporation in Seattle,
Washington where he played a major role in raising approximately $90 Million in
equity capital from major international investors including Deutsche Telkom's
venture arm, Korea Telecom, National Data Corp. and others. Previously, from
1995 through 1997, he served as Chairman and Chief Executive Officer of
Globaltel Resources, Inc. where he co-founded and lead the worldwide financing
efforts and managed all aspects of growth of this privately held international
telecommunications and networking company. From 1992 through 1994, he was
Chairman, Interim President and Chief Executive Officer of Egghead Software,
Inc. in Issaquah, Washington.
Karin Klemm
On August 2, 2004, Applied DNA Sciences, Inc. (the "Company") appointed
Karin Lise Klemm to the position of Chief Operating Officer and Secretary. In
that capacity, Ms. Klemm oversees the day-to-day operations of the Company. Ms.
Klemm continues to serve as President of Poly Pacific Entertainment, Inc., an
entertainment company based in Beverly Hills, where she began her employ in that
32
role in August of 1999. Since August of 2003, Ms. Klemm has served as Chief
Executive Officer to Uncensored Music Network, Inc., also an entertainment
company. Previously, from 1997 through 2000, Ms. Klemm was a branch manager of
RH11, an executive search firm in Los Angeles, California.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
In September of 2004, we reviewed the holdings of our officers and directors to
determine if any purchase, sales or transfers were made throughout the year that
may not have been disclosed properly on a Form 4. Any such sales were properly
disclosed on Form 5.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid or accrued by us to
certain Fof our executive officers during fiscal years ended 2004, 2003 and
2002.
Summary Compensation Table
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards ($) (#)(1) ($) Compensation
--------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ --------------
Rob Hutchison, 2004 159,450 0 0 39,000 0 0 0
CEO 2003 0 0 0 0 0 0 0
2002 0 0 0 0 0 0 0
--------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ --------------
Lawrence C. Lee, 2004 150,000 0 0 2,017,500 0 0 0
CEO 2003 300,000 0 0 0 0 0 0
2002 0 0 0 182,000 0 0 0
--------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ --------------
Gerhard Wehr, 2004 58,328 0 22,489 54,000 0 0 0
CFO 2003 180,000 0 0 0 0 0 0
2002 0 0 0 40,000 0 0 0
--------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ --------------
33
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 13, 2005, information
regarding the beneficial ownership of shares of our Common Stock by each person
known by us to own five percent or more of the outstanding shares of our Common
Stock, by each of our executive officers, by each of our directors, and by all
executive officers and directors as a group. At the close of business on January
13, 2005, there were 30,909,292 shares issued and outstanding of record.
Name And Address Shares of Percentage as of
Of Beneficial Owners Common Stock January 10, 2005
---------------------------------------------------------------------------------------------------------
Rob Hutchison 1,120,000 (1) 3.5%
3489 Canterbury Place. S. Surrey BC. V4P
2N5
---------------------------------------------------------------------------------------------------------
Peter Brocklesby 1,000,000 (2) 3.1%
c/o 9229 W. Sunset Blvd. Ste. 830
Los Angeles, CA 90069
---------------------------------------------------------------------------------------------------------
Lawrence Lee
P O Box 88715 2,920,000 (3) 9.3%
Los Angeles, CA 90009
---------------------------------------------------------------------------------------------------------
Michael Hill
44 Sierra Vista Close SW 552,000 (4) 1.8%
Calgary, Alberta T3H3A3
---------------------------------------------------------------------------------------------------------
Ron Erickson
9437 NE Coral Court 550,000 (5) 1.8%
Bainbridge Island, WA 98110
---------------------------------------------------------------------------------------------------------
Karin Klemm
5758 Las Virgenes Road -0- -0-
Calabasas, CA 91302
---------------------------------------------------------------------------------------------------------
Total shares held by Officers and 6,142,000 (6) 17.9%
Directors (6 persons)
---------------------------------------------------------------------------------------------------------
RHL Management, Inc.
Roxbury Road 5,094,525 16.5%
Los Angeles, CA 90069
Chaim Stern
1880 East 26th Street 2,650,000 8.6%
Brooklyn, NY 11229
---------------------------------------------------------------------------------------------------------
* Less than 1%
(1) Includes 1,000,000 shares underlying currently exercisable options.
(2) Includes 1,000,000 shares underlying currently exercisable options.
(3) Includes 600,000 shares underlying currently exercisable options.
(4) Includes 315,000 shares underlying currently exercisable options.
(5) Includes 400,000 shares underlying currently exercisable options and 50,000
shares underlying currently exercisable options owned by Alpha Spectrum
Investments, LLC, of which Mr. Erickson is deemed a beneficial owner.
(6) Includes 3,365,000 shares underlying currently exercisable options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September of 2004, Larry Lee entered into a private transaction with Mr.
Chaim Stern, selling a total of 2,500,000 shares to him, after which he loaned
all proceeds of $600,000 to us.
34
PART IV
ITEM 13. EXHIBITS
The exhibits listed below are required by Item 601 of Regulation S-B. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-KSB has been identified.
2.2* Articles of Merger of Foreign and Domestic Corporations, filed
December 19, 1998 with the Nevada Secretary of State.
3.1* Articles of Incorporation of DCC Acquisition Corporation, filed April
20, 1998 with the Nevada Secretary of State.
3.2* Articles of Amendment of Articles of Incorporation of DCC Acquisition
Corp. changing corporation name to ProHealth Medical Technologies,
Inc.
3.3* Certificate of Designations, Powers, preferences and Rights of the
Founders' Series of Convertible Preferred Stock, filed March 19, 2003
with the Nevada Secretary of State.
3.4* Articles of Amendment of Articles of Incorporation of Applied DNA
Sciences, Inc. increasing the par value of the company's common stock,
filed onDecember 3, 2003 with the Nevada Secretary of State.
3.5* By-Laws of Applied DNA Sciences, Inc.
4.1* 2004 Combined Incentive and Nonqualified Sock Option Plan.
10.1* Exclusive License Agreement between Biowell Technology Corp. and
Applied DNA Sciences, Inc. executed on October 8, 2002.
10.2* Sub-License Agreement with G. A. Corporate Finance Ltd. Applied DNA
Sciences, Inc., executed on July 29, 2003, and amended.
10.3* Indemnification Agreement with Larry Lee.
10.4* Indemnification Agreement with Robin Hutchison.
10.7* Indemnification Agreement with Jaime Cardona.
10.8* Indemnification Agreement with Michael Hill.
10.10* Employment Agreement between the Company and Larry Lee.
10.14* Lease Agreement with SUNSET SIERRA PROPERTIES INC.
10.15* Indemnification Agreement with Peter Brocklesby.
10.16* Indemnification Agreement with Adrian Botash.
10.17* Indemnification Agreement with Karin Klemm
10.18* Giuliani Partners Strategic Marketing Partnership Agreement
31.1 Chief Executive Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Chief Financial Officer certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
35
* Previously filed
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
The following is a summary of the fees billed to Applied DNA Sciences, Inc. by
Russell Bedford Stefanou Mirchandani LLP for professional services rendered for
the fiscal years ended September 30, 2004 and 2003:
Fee Category Fiscal 2004 Fees Fiscal 2003 Fees
------------- ----------------- -----------------
Audit Fees $ 120,433 $ 17,925
Audit-Related Fees - -
Tax Fees - -
-
- -
All Other Fees
Total Fees $ 120,433 $ 17.925
Audit Fees. Consists of fees billed for professional services rendered for the
audit of Applied DNA Sciences, Inc.'s consolidated financial statements and
review of the interim consolidated financial statements included in quarterly
reports and services that are normally provided by Russell Bedford Stefanou
Mirchandani LLP in connection with statutory and regulatory filings or
engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of Applied
DNA Sciences Inc.'s consolidated financial statements and are not reported under
"Audit Fees." There were no Audit-Related services provided in fiscal 2004 or
2003.
Tax Fees. Consists of fees billed for professional services for tax compliance,
tax advice and tax planning..
All Other Fees. Consists of fees for products and services other than the
services reported above. There were no management consulting services provided
in fiscal 2004 or 2003.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors
The Audit Committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The independent auditors and management are
required to periodically report to the Audit Committee regarding the extent of
services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The Audit
Committee may also pre-approve particular services on a case-by-case basis.
36
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: January 14, 2005 Applied DNA Sciences, Inc.
/s/ ROB HUTCHISON
----------------
Rob Hutchison
Chief Executive Officer
/s/ ROB HUTCHISON
------------------
Rob Hutchison, Interim
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Position Date
/s/ ROB HUTCHISON CEO, CFO and Chairman of the Board January 14, 2005
-----------------
Rob Hutchison
/s/ PETER BROCKLESBY President and Director January 14, 2005
--------------------
Peter Brocklesby
/s/ LARRY LEE Chief Technology Strategist, Director January 14, 2005
-------------
Larry Lee
/s/ RON ERICKSON Director January 14, 2005
----------------
Ron Erickson
/s/MICHAEL HILL Director January 14, 2005
---------------
Michael Hill
37