As filed with the Securities and Exchange Commission on April 29, 2005
An Exhibit List can be found on page II-7.
Registration No. 333-122848
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------
AMENDMENT NO 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
APPLIED DNA SCIENCES, INC.
(Name of small business issuer in its charter)
Nevada 2836 59-2262718
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
9229 W. Sunset Boulevard, Suite 830
Los Angeles, California 90069
(310) 860-1362
(Address and telephone number of principal executive offices
and principal place of business)
Rob Hutchison, Chief Executive Officer
APPLIED DNA SCIENCES, INC.
9229 W. Sunset Boulevard, Suite 830
Los Angeles, California 90069
(310) 860-1362
(Name, address and telephone number of agent for service)
Copies to:
Andrea Cataneo, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
2
CALCULATION OF REGISTRATION FEE
------------------------------- -------------------- ---------------- ------------------ --------------------
Title of each class of Amount to be Proposed Proposed Amount of
securities to be registered registered maximum maximum registration fee
offering aggregate
price per offering price
share (1)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par value 25,608,326 $1.215 $31,114,116.09 $3,662.13
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 285,000 $1.215 $346,275 $40.76
value issuable upon exercise
of Warrants exercisable at
$0.10 per share
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 5,000 $1.215 $6,075 $0.72
value issuable upon exercise
of Warrants exercisable at
$0.20 per share
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 1,500,000 $1.215 $1,822,500 $214.51
value issuable upon exercise
of Warrants exercisable at
$0.60 per share
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 750,000 $1.215 $911,250 $107.25
value issuable upon exercise
of Warrants exercisable at
$0.70 per share
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 17,807,000 $1.215 $21,635,505 $2,546.50
value issuable upon exercise
of Warrants exercisable at
$0.75 per share
------------------------------- -------------------- ---------------- ------------------ --------------------
Total 45,955,326 $55,835,721.09 $6,571.87 (2)
------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over-The-Counter
Bulletin Board on February 14, 2005, which was $1.215 per share.
(2) Fee previously paid.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
3
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL 29, 2005
APPLIED DNA SCIENCES, INC.
45,955,326 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
45,955,326 shares of our common stock, including up to 20,347,000 shares
issuable upon the exercise of common stock purchase warrants and 25,608,326
shares of common stock. The selling stockholders may sell common stock from time
to time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions. We will pay the expenses of
registering these shares.
The following selling stockholders are deemed an "underwriter" within the
meaning of the Securities Act of 1933 in connection with the sale of their
common stock under this prospectus: Vertical Capital Partners, Inc., a
registered broker-dealer; Michael Morris, Susan Diamond; Ronald Heineman and
Michael Gochman; all of whom are employees of Vertical Capital Partners. With
the exception of Vertical Capital Partners, Inc., Michael Morris, Susan Diamond,
Ronald Heineman and Michael Gochman, no other underwriter or person has been
engaged to facilitate the sale of shares of common stock in this offering.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "APDN". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on April 27, 2005, was $.65.
Investing in these securities involves significant risks. See "Risk
Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is_______, 2005.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by Applied
DNA Sciences, Inc. with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
4
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the secured convertible notes to
the financial statements.
APPLIED DNA SCIENCES, INC.
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 use segments of naturally occurring botanical DNA that have
unique characteristics, which are one-of-a-kind sequences. Botanical DNA means
the DNA, or Deoxyribonucleic acid, of plants. DNA is the molecular base of all
living life forms, including animals and plants. 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. Substrates are materials or substances on
which the botanical DNA will interact with the anti-counterfeit solutions we
utilize to determine if a product has been tampered with.
For the three months ended December 31, 2004, we did not generate any
revenues and had a net loss of $12,365,136. For the year ended September 30,
2004, we did not generate any revenues and had a net loss of $19,358,259. As a
result of recurring losses from operations and a net deficit in both working
capital and stockholders' equity, our auditors, in their report dated January
11, 2005, have expressed substantial doubt about our ability to continue as
going concern.
Our principal offices are located at 9229 W. Sunset Boulevard, Suite 830,
Los Angeles, California 90069, and our telephone number is (310) 860-1362. We
are a Nevada corporation. We maintain a website at www.adnas.com. The
information contained on that website is not deemed to be a part of this
prospectus.
The Offering
Common stock offered by selling stockholders...................... Up to 45,955,326 shares, including the following:
- 25,608,326 shares of common stock,
- up to 285,000 shares of common stock issuable
upon the exercise of common stock purchase
warrants at an exercise price of $.10 per share;
- up to 5,000 shares of common stock issuable
upon the exercise of common stock purchase
warrants at an exercise price of $.20 per share;
- up to 1,500,000 shares of common stock issuable
upon the exercise of common stock purchase
warrants at an exercise price of $.60 per share;
- up to 750,000 shares of common stock issuable
upon the exercise of common stock purchase
warrants at an exercise price of $.70 per share;
and
5
- up to 17,807,000 shares of common stock issuable
upon the exercise of common stock purchase
warrants at an exercise price of $.75 per share.
This number represents 53.46% of our current
outstanding stock.
Common stock to be outstanding after the offering................. Up to 85,968,025 shares
Use of proceeds................................................ We will not receive any proceeds from the sale of
the common stock. However, we will receive the
sale price of any common stock we sell to the
selling stockholders upon exercise of the warrants.
We expect to use the proceeds received from the
exercise of the warrants, if any, for general
working capital purposes.
Over-The-Counter Bulletin Board Symbol............................ APDN
The above information regarding common stock to be outstanding after the
offering is based on 65,621,025 shares of common stock outstanding as of April
26, 2005 and assumes the subsequent exercise of warrants by our selling
stockholders.
6
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Relating to Our Business:
We Have a History Of Losses Which May Continue, Which May Negatively Impact Our
Ability to Achieve Our Business Objectives.
We incurred net losses of $19,358,259 for the year ended September 30, 2004
and $3,445,164 for the year ended December 31, 2003. For the three months ended
December 31, 2004, we incurred a net loss of $12,365,136. We cannot assure you
that we can achieve or sustain profitability on a quarterly or annual basis in
the future. Our operations are subject to the risks and competition inherent in
the establishment of a business enterprise. There can be no assurance that
future operations will be profitable. Revenues and profits, if any, will depend
upon various factors, including whether we will be able to generate revenue. As
a result of continuing losses, we may exhaust all of our resources prior to
completing the development of our products. Additionally, as we continue to
incur losses, our accumulated deficit will continue to increase, which might
make it harder for us to obtain financing in the future. We may not achieve our
business objectives and the failure to achieve such goals would have an adverse
impact on us, which could result in reducing or terminating our operations.
If We Are Unable to Obtain Additional Funding Our Business Operations Will be
Harmed and If We Do Obtain Additional Financing Our Then Existing Shareholders
May Suffer Substantial Dilution.
We will require additional funds to sustain and expand our research and
development activities. We anticipate that we will require up to approximately
$3,000,000 to fund our anticipated research and development operations for the
next twelve months, depending on revenue from operations. Additional capital
will be required to effectively support the operations and to otherwise
implement our overall business strategy. Even if we do receive additional
financing, it may not be sufficient to sustain or expand our research and
development operations or continue our business operations.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our research and development plans. Any
additional equity financing may involve substantial dilution to our then
existing shareholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated January 11, 2005, our independent auditors stated
that our financial statements for the year ended December 31, 2004 were prepared
assuming that we would continue as a going concern. Our ability to continue as a
going concern is an issue raised due to our incurring net losses of $22,803,423
during the period September 16, 2002 through September 30, 2004. In addition, we
have a deficiency in stockholder's equity of $4,706,508. We continue to
experience net operating losses. Our ability to continue as a going concern is
subject to our ability to generate a profit and/or obtain necessary funding from
outside sources, including obtaining additional funding from the sale of our
securities, generating sales or obtaining loans and grants from various
financial institutions where possible. Our continued net operating losses
increases the difficulty in meeting such goals and there can be no assurances
that such methods will prove successful.
7
Our Research and Development Efforts for New Products May be Unsuccessful.
We will incur significant research and development expenses to develop new
products and technologies. There can be no assurance that any of these products
or technologies will be successfully developed or that if developed they will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and this may materially and adversely affect our business
operations, which would result in loss of revenues and greater operating
expenses.
Failure to License New Technologies Could Impair Our New Product Development.
To generate broad product lines, it is advantageous to sometimes license
technologies from third parties rather than depend exclusively on our own
employees. As a result, we believe our ability to license new technologies from
third parties is and will continue to be important to our ability to offer new
products.
In addition, from time to time we are notified or become aware of patents
held by third parties that are related to technologies we are selling or may
sell in the future. After a review of these patents, we may decide to seek a
license for these technologies from these third parties or discontinue our
products. There can be no assurance that we will be able to continue to
successfully identify new technologies developed by others. Even if we are able
to identify new technologies of interest, we may not be able to negotiate a
license on favorable terms, or at all. If we lose the rights to patented
technology, we may need to discontinue selling certain products or redesign our
products, and we may lose a competitive advantage. Potential competitors could
license technologies that we fail to license and potentially erode our market
share for certain products. Our licenses typically subject us to various
commercialization, sublicensing, minimum payment, and other obligations. If we
fail to comply with these requirements, we could lose important rights under a
license. In addition, certain rights granted under the license could be lost for
reasons beyond our control. We may not receive significant indemnification from
a licensor against third party claims of intellectual property infringement.
We Currently Have no or Limited Manufacturing, Sales, Marketing or Distribution
Capabilities.
We currently have no in-house manufacturing capability. We rely on
third-party vendors for this service. We do not currently have any arrangements
with any distributors and we may not be able to enter into arrangements with
qualified distributors on acceptable terms or at all. We currently have a
limited sales and marketing team. If we are not able to develop greater sales,
marketing or distribution capacity, we may not be able to generate revenue or
sufficient revenue to support our operations.
We Rely on Our License Agreement With Biowell Technology for the Development of
Our Products, and the Termination of the License Would Have a Material Adverse
Impact on Our Business.
We have executed a licensing agreement with Biowell Technology and we
intend to focus our business on the products developed under this licensing
agreement. We will rely upon Biowell Technology to develop, test and produce
products under this licensing agreement. As a result of the license agreement,
we will not incur expenses with developing products for sale, however, we will
be responsible for marketing the product and building brand recognition in our
licensed territories. Our license could terminate if we fail to perform any
material term or covenant under the license agreement. The termination of our
license agreement would have a material adverse impact on our business, such as
the loss of products and services, which would reduce or eliminate most of our
potential revenue source.
If We Fail to Introduce New Products, or Our existing Products are not Accepted
by Potential Customers, We May Not Gain or May Lose Market Share.
Rapid technological changes and frequent new product introductions are
typical for the markets we serve. Our future success will depend in part on
continuous, timely development and introduction of new products that address
evolving market requirements. We believe successful new product introductions
8
provide a significant competitive advantage because customers invest their time
in selecting and learning to use new products, and are often reluctant to switch
products. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
We may experience delays in the development and introduction of products.
We cannot assure that we will keep pace with the rapid rate of change in life
sciences research or that our new products will adequately meet the requirements
of the marketplace or achieve market acceptance. Some of the factors affecting
market acceptance of new products include:
o Availability, quality and price relative to competitive products;
o The timing of introduction of the product relative to competitive
products;
o Customers' opinions of the products' utility;
o Ease of use;
o Consistency with prior practices;
o Scientists' opinions of the products' usefulness;
o Citation of the product in published research; and
o General trends in life sciences research.
We have not experienced any difficulties with the preceding factors,
however, there can be no assurance that we will not experience difficulties in
the future. The expenses or losses associated with unsuccessful product
development or lack of market acceptance of our new products could materially
adversely affect our business, operating results and financial condition.
A Manufacturer's Inability to Produce Our Goods on Time and to Our
Specifications Could Result in Lost Revenue and Net Losses
We do not own or operate any manufacturing facilities and therefore depend
upon independent third parties for the manufacture of all of our products. Our
products are manufactured to our specifications. The inability of a manufacturer
to ship orders of our products in a timely manner or to meet our quality
standards could cause us to miss the delivery date requirements of our customers
for those items, which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could have a material
adverse effect as our revenues would decrease and we would incur net losses as a
result of sales of the product, if any sales could be made. Because of our
business, the dates on which customers need and require shipments of our
security products from us are critical.
If We Need to Replace Manufacturers, Our Expenses Could Increase Resulting in
Smaller Profit Margins
We compete with other companies for the production capacity of our
manufacturers and import quota capacity. Some of these competitors have greater
financial and other resources than we have, and thus may have an advantage in
the competition for production and import quota capacity. If we experience a
significant increase in demand, or if an existing manufacturer of ours must be
replaced, we may have to expand our third-party manufacturing capacity. We
cannot assure you that this additional capacity will be available when required
on terms that are acceptable to us or similar to existing terms which we have
with our manufacturers, either from a production standpoint or a financial
standpoint. We do not have long-term contracts with any manufacturer. None of
the manufacturers we use produces our products exclusively.
Should we be forced to replace one or more of our manufacturers, we may
experience an adverse financial impact, or an adverse operational impact, such
as being forced to pay increased costs for such replacement manufacturing or
delays upon distribution and delivery of our products to our customers, which
could cause us to lose customers or lose revenues because of late shipments.
9
If a Manufacturer of Ours Fails to Use Acceptable Labor Practices, We Might Have
Delays in Shipments or Face Joint Liability for Violations, Resulting in
Decreased Revenue and Increased Expenses
While we require our independent manufacturers to operate in compliance
with applicable laws and regulations, we have no control over the ultimate
actions of our independent manufacturers. While our internal and vendor
operating guidelines promote ethical business practices and our staff and buying
agents periodically visit and monitor the operations of our independent
manufacturers, we do not control these manufacturers or their labor practices.
The violation of labor or other laws by an independent manufacturer of ours, or
by one of our licensing partners, or the divergence of an independent
manufacturer's or licensing partner's labor practices from those generally
accepted as ethical in the United States, could interrupt, or otherwise disrupt
the shipment of finished products to us or damage our reputation. Any of these,
in turn, could have a material adverse effect on our financial condition and
results of operations, such as the loss of potential revenue and incurring
additional expenses.
The Failure To Manage Our Growth In Operations And Acquisitions Of New Product
Lines And New Businesses Could Have A Material Adverse Effect On Us.
The expected growth of our operations (as to which no representation can be
made) will place a significant strain on our current management resources. To
manage this expected growth, we will need to improve our:
o operations and financial systems;
o procedures and controls; and
o training and management of our employees.
Our future growth may be attributable to acquisitions of and new product
lines and new businesses. We expect that future acquisitions, if successfully
consummated, will create increased working capital requirements, which will
likely precede by several months any material contribution of an acquisition to
our net income.
Our failure to manage growth or future acquisitions successfully could
seriously harm our operating results. Also, acquisition costs could cause our
quarterly operating results to vary significantly. Furthermore, our stockholders
would be diluted if we financed the acquisitions by incurring convertible debt
or issuing securities.
Although we currently only have operations within the United States, if we
were to acquire an international operation; we will face additional risks,
including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o Different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
If We Are Unable to Retain the Services of Messrs. Hutchison, Brocklesby, Botash
or Klemm, or If We Are Unable to Successfully Recruit Qualified Managerial and
Sales Personnel Having Experience in Business, We May Not Be Able to Continue
Our Operations.
Our success depends to a significant extent upon the continued service of
Mr. Rob Hutchison, our Chief Executive Officer, Mr. Peter Brocklesby, our
President, Mr. Adrian Botash, our Chief Marketing Officer and Ms. Karin Klemm,
our Chief Operating Officer and Interim Chief Financial Officer. We do not have
employment agreements with Messrs. Hutchison, Brocklesby, Botash or Klemm. Loss
of the services of Messrs. Hutchison, Brocklesby, Botash or Klemm could have a
material adverse effect on our growth, revenues, and prospective business. We do
not maintain key-man insurance on the life of Messrs. Hutchison, Brocklesby,
Botash or Klemm. Besides Mr. Hutchison's desire to retire within the next few
months, we are not aware of any other named executive officer or director who
has plans to leave us or retire. In addition, in order to successfully implement
and manage our business plan, we will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business. Competition for qualified individuals is intense. There
can be no assurance that we will be able to find, attract and retain existing
employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
10
Failure to Attract and Retain Qualified Scientific or Production Personnel Could
Have a Material Adverse Effect On Us.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining a qualified personnel base.
Although we believe we have been and will be able to attract and retain these
personnel, there is no assurance that we will be able to continue to
successfully attract qualified personnel. In addition, our anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, government approvals, production, and marketing will require
the addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to attract and retain
these personnel or, alternatively, to develop this expertise internally would
adversely affect our business as our ability to conduct research and development
will be reduced or eliminated, resulting in fewer or no products for sale and
lower revenues. We generally do not enter into employment agreements requiring
these employees to continue in our employment for any period of time.
We Need to Expand Our Sales and Support Organizations to Increase Market
Acceptance of Our Products.
We currently have a small customer service and support organization and
will need to increase our staff to support new customers and the expanding needs
of existing customers. The employment market for sales personnel, and customer
service and support personnel in this industry is very competitive, and we may
not be able to hire the kind and number of sales personnel, customer service and
support personnel we are targeting. Our inability to hire qualified sales,
customer service and support personnel may materially adversely affect our
business, operating results and financial condition.
The Biomedical Research Products Industry is Very Competitive, and We may be
Unable to Continue to Compete Effectively in this Industry in the Future.
We are engaged in a segment of the biomedical research products industry
that is highly competitive. We compete with many other suppliers and new
competitors continue to enter the market. Many of our competitors, both in the
United States and elsewhere, are major pharmaceutical, chemical and
biotechnology companies, and many of them have substantially greater capital
resources, marketing experience, research and development staff, and facilities
than we do. Any of these companies could succeed in developing products that are
more effective than the products that we have or may develop and may be more
successful than us in producing and marketing their products. It is impossible
to quantify the number of competitors since they include both the companies we
attempt to sell our products and services to through their use of internal
security and various other security product companies. Also, it is also
impossible to determine market size and market data information because
companies are secretive about what security methods they utilize and how much
they spend on such measures. Some of the anti-counterfeiting and fraud
protection competitors that we are aware of include: Authentix, InkSure, DNA
Technologies, Inc., Art Guard International, Theft Protection Systems, Tracetag
and November AG.
We expect this competition to continue and intensify in the future.
Competition in our markets is primarily driven by:
o Product performance, features and liability;
o Price;
o Timing of product introductions;
o Ability to develop, maintain and protect proprietary products and
technologies;
o Sales and distribution capabilities;
o Technical support and service;
o Brand loyalty;
o Applications support; and
o Breadth of product line.
If a competitor develops superior technology or cost-effective alternatives
to our products, our business, financial condition and results of operations
could be materially adversely affected.
11
Our Trademark and Other Intellectual Property Rights May not be Adequately
Protected Outside the United States, Resulting in Loss of Revenue.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent, as do the laws of the United States.
Intellectual Property Litigation Could Harm Our Business.
Litigation regarding patents and other intellectual property rights is
extensive in the biotechnology industry. In the event of an intellectual
property dispute, we may be forced to litigate. This litigation could involve
proceedings instituted by the U.S. Patent and Trademark Office or the
International Trade Commission, as well as proceedings brought directly by
affected third parties. Intellectual property litigation can be extremely
expensive, and these expenses, as well as the consequences should we not
prevail, could seriously harm our business.
If a third party claims an intellectual property right to technology we
use, we might need to discontinue an important product or product line, alter
our products and processes, pay license fees or cease our affected business
activities. Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all. We are currently not aware of any intellectual property rights
that are being infringed nor have we received notice from a third party that we
may be infringing on any of their patents.
Furthermore, a third party may claim that we are using inventions covered
by the third party's patent rights and may go to court to stop us from engaging
in our normal operations and activities, including making or selling our product
candidates. These lawsuits are costly and could affect our results of operations
and divert the attention of managerial and technical personnel. There is a risk
that a court would decide that we are infringing the third party's patents and
would order us to stop the activities covered by the patents. In addition, there
is a risk that a court will order us to pay the other party damages for having
violated the other party's patents. The biotechnology industry has produced a
proliferation of patents, and it is not always clear to industry participants,
including us, which patents cover various types of products or methods of use.
The coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent infringement, we
would need to demonstrate that our products or methods of use either do not
infringe the patent claims of the relevant patent and/or that the patent claims
are invalid, and we may not be able to do this. Proving invalidity, in
particular, is difficult since it requires a showing of clear and convincing
evidence to overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in the United States may be maintained in
secrecy until the patents are issued, because patent applications in the United
States and many foreign jurisdictions are typically not published until eighteen
months after filing, and because publications in the scientific literature often
lag behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our licensors' issued patents or
our pending applications or our licensors' pending applications or that we or
our licensors were the first to invent the technology. Our competitors may have
filed, and may in the future file, patent applications covering technology
similar to ours. Any such patent application may have priority over our or our
licensors' patent applications and could further require us to obtain rights to
issued patents covering such technologies. If another party has filed a United
States patent application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the United States Patent
and Trademark Office to determine priority of invention in the United States.
The costs of these proceedings could be substantial, and it is possible that
such efforts would be unsuccessful, resulting in a loss of our United States
patent position with respect to such inventions.
12
Some of our competitors may be able to sustain the costs of complex patent
litigation more effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the initiation and
continuation of any litigation could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.
Accidents Related to Hazardous Materials Could Adversely Affect Our Business.
Some of our operations require the controlled use of hazardous materials.
Although we believe our safety procedures comply with the standards prescribed
by federal, state, local and foreign regulations, the risk of accidental
contamination of property or injury to individuals from these materials cannot
be completely eliminated. In the event of an accident, we could be liable for
any damages that result, which could seriously damage our business and results
of operations.
Potential Product Liability Claims Could Affect Our Earnings and Financial
Condition.
We face a potential risk of liability claims based on our products and
services, and we have faced such claims in the past. We currently do not have
any product liability coverage but are attempting to obtain coverage which we
will believe to be adequate. We cannot assure, however, that we will be able to
obtain or maintain this insurance at reasonable cost and on reasonable terms. We
also cannot assure that this insurance, if obtained, will be adequate to protect
us against a product liability claim, should one arise. In the event that a
product liability claim is successfully brought against us, it could result in a
significant decrease in our liquidity or assets, which could result in the
reduction or termination of our business.
Risks Relating to Our Common Stock:
There Are a Large Number of Shares Underlying Our Warrants That May be Available
for Future Sale and the Sale of These Shares May Depress the Market Price of Our
Common Stock and Will Cause Immediate and Substantial Dilution to Our Existing
Stockholders.
As of April 26, 2005, we had 65,621,025 shares of common stock issued and
outstanding and outstanding warrants to purchase 20,347,000 shares of common
stock. All of the shares issuable upon exercise of our warrants may be sold
without restriction. The sale of these shares may adversely affect the market
price of our common stock. The issuance of shares upon exercise of warrants will
cause immediate and substantial dilution to the interests of other stockholders
since the selling stockholders may convert and sell the full amount issuable on
exercise.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Prior to May 2001 and new management, we were delinquent in our reporting
requirements, having failed to file our quarterly and annual reports for the
years ended 1998 - 2000 (except the quarterly reports for the first two quarters
of 1999). We have been current in our reporting requirements for the last three
years, however, there can be no assurance that in the future we will always be
current in our reporting requirements.
13
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.
14
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholders upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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. We changed our fiscal year end in connection with a reverse merger
we entered into in December 2002, in which the acquirer for accounting purposes
had a fiscal year end of September 30. For ease of fiscal reporting, we adopted
the same fiscal year end.
Year ended 9/30/03* High Low
December 31, 2002 $2.55 $0.02
March 31, 2003 $2.85 $2.00
June 30, 2003 $2.85 $2.25
September 30, 2003 $2.80 $2.40
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 9/30/05 High Low
December 31, 2004 $2.39 $0.42
March 31, 2005 $1.83 $0.78
June 30, 2005 (1) $0.92 $0.61
(1) As of April 27, 2005.
* We have disclosed the numbers with years ending on September 30 for
comparative purposes. Effective January 31, 2003, we changed our fiscal year
from December 31 to September 30.
HOLDERS
As of April 26, 2005, we had approximately 589 holders of our common stock.
The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of common stock whose shares are
held in the names of various security brokers, dealers, and registered clearing
agencies. The transfer agent of our common stock is American Stock Transfer &
Trust Company, 6201 15th Avenue, Brooklyn, New York 11219.
15
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends to stockholders in the foreseeable
future. In addition, any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deem relevant.
EQUITY COMPENSATION PLAN INFORMATION
Stock Option Plan
In November of 2002, we created a special compensation plan to pay the
founders, consultants and professionals that had been contributing valuable
services to us during the previous nine months. The plan is called the
Professional/Employee/Consultant Compensation Plan. Share and option issuances
from the Compensation Plan were to be staggered over the following six to eight
months, and consultants that were to continue providing services thereafter
either became employees or received renewed contracts from us in July of 2003,
which contracts contained a more traditional cash compensation component. The
Compensation Plan was designed by the Board to meet our important team building
objectives in our early stages, and to be temporary. As of December 31, 2004, a
total of 1,440,003 shares have been issued from the Compensation Plan and
560,000 options, 264,000 of which were exercised as of as of December 31, 2004.
Each qualified and eligible recipient of shares and/or options under the
Compensation Plan received securities in lieu of cash payment for services. Each
recipient agreed, in his or her respective consulting contract with us, to sell
a limited number of shares monthly. We feel that this carefully designed
Compensation Plan was successful in attracting and retaining a strong team at a
time when we had no established revenue stream and limited or no outside
financing.
In our financial statements, shares that were issued from November 2002
through June 30, 2003 that were valued at $0.065 per share were shares issued
from this Compensation Plan created in November of 2002 on the basis of
contracts executed at that time for previously rendered services. Common Stock
disclosed as being issued in exchange for cash at $1.00 per share represents
options that were exercised under this Plan. In December of 2004, we adjusted
the exercise price to $0.60 per share.
Any other unrestricted shares that were issued either before or after July
1, 2003 were valued at the fair market value.
------------------ ------------------- ------------------------- ------------------
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 Compensation Plan and 560,000 options have been issued, 264,000 of which
were exercised as of that date.
On January 26, 2005, the majority stockholders approved the 2005 Stock
Incentive Plan and authorized 16,000,000 shares of Common Stock for issuance of
stock awards and stock options thereunder. We filed a preliminary information
statement with the Securities and Exchange Commission on February 3, 2005
containing the information on the 2005 Stock Incentive Plan, which shall become
effective 20 days after the mailing of the definitive information statement.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
PLAN OF OPERATIONS
Business Strategy and Approach
We have established integrated business operations addressing and servicing
the needs of the global security marketplace on the part of corporations and
governments for; anti-counterfeiting, fraud prevention, product authentication,
brand protection, supply chain management and protection.
Intellectual Property Development, Product Operations & Partnerships
We have proprietary DNA security technology, and develop security solutions
that protect corporate and intellectual property from counterfeiting, fraud,
piracy and product diversion using botanical DNA as an encrypted/code molecule
that can be embedded in inks, paper, substrates, liquids, textiles, thread,
plastics, holograms and microchips.
We produce security solutions customized to our customer's needs. We market
and sell DNA anti-counterfeit and fraud prevention solutions that integrate
into, and layer with, existing security solutions. These DNA security features
are integrated at the original equipment manufacturer level with ink, paper,
liquids, thread and hologram producers, who in turn sell/supply finished
security products such as primary and secondary product packaging for
pharmaceuticals, beauty products, textiles, currency, passports, ID cards, etc.
We have strict protocols for specifying, integrating, testing, shipping and
confirming the presence of DNA in any given product. We 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. The outside lab we use for the validation testing is the Idaho
National Laboratory, a part of the U.S. National Laboratory System. No
compromise can enter the security chain of our product(s).
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.
17
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 a high 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 - Our 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.
We will utilize our existing relationships and develop new ones to
introduce our anti-counterfeiting technology to generate business. Each industry
has unique requirements and needs for their anti-counterfeit solutions, and we
believe our DNA technology will provide maximum security technologies. For
example, our smart packaging solutions with DNA security markers in ink, paper
and holograms has widespread application in packaging for pharmaceuticals,
cosmetics, automotive markets, passports, ID's and currency. Our proprietary
technology offers immediate and affordable detection and security for their
brands and products.
Strong Technology Alliances - Our technology can also provide advanced
security dimensions to:
o Electronics security: access and physical/plant security (biometric
security cards enhanced with DNA)
o Security Holograms (DNA enhanced)
o Radio Frequency Identification systems (DNA + RFID)
o Security papers and printing
o Holograms (DNA holograms) o Other security-related products and
systems
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 Policies
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements; we believe the following
critical accounting 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.
From its inception, the Company has incurred significant costs in
connection with the issuance of equity- based compensation, which is comprised
primarily of our common stock and warrants to acquire our common stock, to
non-employees. The Company anticipates continuing to incur such costs in order
to conserve its limited financial resources. The determination of the
volatility, expected term and other assumptions used to determine the fair value
of equity based compensation issued to non-employees under SFAS 123 involves
subjective judgment and the consideration of a variety of factors, including our
historical stock price, option exercise activity to date and the review of
assumptions used by comparable enterprises.
We account for equity based compensation, issued to non-employees in
exchange for goods or services , in accordance with the provisions of SFAS No.
123 and EITF No. 96-18, "Accounting for Equity Instruments That are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services".
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.
19
Costs and Expenses
From our inception through September 30, 2004, we have incurred losses of
$22,803,423. These expenses were associated principally with equity-based
compensation to employees and consultants, product development costs and
professional services.
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
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.
20
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.
Liquidity and Capital Resources
As of December 31, 2004, we had a deficiency in working capital of
$5,942,000. For the three months ended December 31, 2004, we generated a net
cash flow deficit from operating activities of ($1,587,000), consisting
primarily of year to date losses of ($12,365,000), $8,724,000 in net stock
issued for consulting services, $1,515,000 for beneficial conversion of
convertible notes payable and warrants, $395,000 for warrants issued to
consultants as well as a net increase in current liabilities and other of
$144,000.
Cash used in investing activities totaled $28,000, which was utilized for
patent filings and, facility lease deposits. Cash provided by financing
activities totaled $1,676,000 consisting of $1,390,000 in proceeds from loans,
and $250,000 and $36,000 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.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required within the next 12 months in
order to meet our current and projected cash flow deficits from operations and
development. We have sufficient funds to conduct our operations for several
months, but not for 12 months or more. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.
By adjusting our operations and development to the level of capitalization,
we believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial condition.
Our registered independent certified public accountants have stated in
their report dated January 11, 2005, that we have incurred operating losses in
the last two years, and that we are dependent upon management's ability to
develop profitable operations. These factors among others may raise substantial
doubt about our ability to continue as a going concern.
21
To obtain funding for our ongoing operations, we sold $1,465,000 in
convertible promissory notes to 13 investors in December 2004. Each promissory
note was automatically convertible into shares of our common stock, at a price
of $0.50 per share, upon the closing of a private placement for $1 million or
more. On January 28, 2005, we closed upon a private placement transaction in
excess of $1 million, and on February 2, 2005, the promissory notes were
converted into an aggregate of 2,930,000 shares of common stock. This prospectus
includes the resale of the common stock issued upon conversion of the promissory
notes. In connection with the sale of the convertible promissory notes, we
issued 2,930,000 warrants to purchase shares of common stock. The warrants are
exercisable until three years from the date of issuance at a purchase price of
$0.75 per share.
To obtain funding for our ongoing operations, we conducted a private
placement offering in January and February 2005, in which we sold $7,361,000 of
10% Secured Convertible Promissory Notes to 61 investors. The 10% Secured
Convertible Promissory Notes automatically convert into shares of our common
stock, at a price of $0.50 per share, upon the filing of this registration
statement. This prospectus includes the resale of the common stock to be issued
upon conversion of the 10% Secured Convertible Promissory Notes. In connection
with the private placement offering, we have issued 15,222,000 warrants. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.75 per share.
Since the conversion price will be less than the market price of the common
stock at the time the secured convertible notes are issued, we anticipate
recognizing a charge relating to the beneficial conversion feature of the
secured convertible notes during the quarter in which they are issued, including
the fourth quarter of fiscal 2004 when $1,465,000 of secured convertible notes
were issued and the first quarter of fiscal 2005 when $7,361,000 of secured
convertible notes were issued
We will still need additional investments in order to continue operations
to cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations.
Product Research and Development
We anticipate incurring 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.
Project Title: "Validation and Verification for DNA Authentication"
22
This project is the main focus of R&D activities to date. These activities
support industry initiatives for textiles, inks, substrates and petrochemicals.
The first such project scheduled for completion is for textiles. This project
has been the major focus of this reporting period. The other three projects are
currently being planned.
1. Development efforts for the first period were $433.765, and for the second
period $450,330, for a total of $884,095 2. The nature of the textile
project has involved embedding the DNA marker into textile processing
materials, where, ultimately a security thread can be used in a wide range
of textile authentication applications.
3. The expected completion date for the textile marker project as described
above is June 30, 2005.
4. The risks involved are low to medium. Once the DNA textile marker begins
commercial scale-up testing, unforeseen issues may arise. These risks are
being minimized by planning more stability tests (approx. one month) for
the DNA marker under manufacturing conditions. The consequences of not
completing this on time are offset significantly because the amount of
research and data on this application is supported by over a year of
development with Biowell, and recent support from the Department of
Energy's National Laboratory.
5. As success is achieved in the manufacturing beta testing, the actual DNA
concentrations will be formulated for each security thread application and
market. Accordingly, pricing will be confirmed and reliable revenue
forecasts can be made available.
23
BUSINESS
HISTORY
We are a Nevada corporation, which was initially formed under the laws of
the state of Florida as Datalink Systems, Inc. in 1983. We changed names and
then was redomesticated to Nevada in 1998, and in 1999, became ProHealth Medical
Technologies, Inc. In November of 2002, we changed our corporation name to
Applied DNA Sciences, Inc. in connection with a reverse merger. As a result of
the reverse merger, we changed our business to that of our acquirer, which
involves researching, developing and selling security and anti-counterfeiting
products that utilize plant DNA for verification purposes. During this time,
most of our efforts have been focused on research and development and the
execution of an exclusive license, as described further herein.
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 that could benefit from our products include:
corporations, federal government agencies, information technology, security and
surveillance, entertainment media, the arts, cosmetics, pharmaceutical and
biometrics, as well as vertical retail markets. Our applications can also
enhance capabilities of product origination, identification verification, and
validation of the source of components for critical manufacturing, defense,
medical and other highly-integrity or secure products.
Our mission is to become the recognized standard in providing total
security solutions to protect corporate and intellectual property from
counterfeiting and fraud. We intend to deliver our 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 Technology, Inc's DNA anti-counterfeit and fraud prevention
biotechnology and products in North America (U.S. and Canada), Latin America and
Europe. Biowell Technology Inc. is a Taiwan company, formed in October 1999,
with its headquarters in Chung-Ho City, Taiwan and currently has over 600
shareholders, with no shareholder holding 20% or more of the outstanding shares.
To date, Biowell products have only been offered within Asia, with limited sales
made. 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 in our territories, 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.
24
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. We currently have Memorandums of
Understanding with one of the largest international security ink producers, an
international petroleum corporation, and one of the worlds largest automobile
manufacturer based out of Germany. We have signed an agreement with Holomex to
co-own IP created utilizing our technology. Our affiliation with the government
is though research and development agreements with the Department of Energy,
United Stated Department of Agriculture and Department of Defense.
License Agreement with Biowell Technology
We entered into exclusive license agreement with Biowell in October 2002,
which was amended in July 2003. Our territories under the license agreement are
the United States, the European Union, Canada, Mexico, Colombia, Saudi Arabia
and the United Arab Emirates. It has an initial term of five years with an
automatic ten-year renewal upon the meeting of certain minimum-guarantee
objectives. Thereafter, the license is renewable for successive three-year terms
upon the successful completion of certain minimum-guarantee objectives.
25
The minimum guarantees that we must meet each year of the license agreement
to retain the exclusive license for the technologies are as follows:
Year Minimum Guarantee
---- -----------------
1st year $50,000 gross purchase orders or payment of $25,000
2nd year $300,000 gross purchase orders or payment of $50,000
3rd year $360,000 gross purchase orders
4th year $432,000 gross purchase orders
5th year $518,400 gross purchase orders
The minimum guarantee payment requirement has been suspended by Biowell. 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. We have not exercised the option to purchase the Biowell
shares.
The license agreement may be terminated by Biowell if:
1) we sell, assign, attempt to sell or assign, or cease to carry on our
business;
2) we fail to make the minimum payment guarantees;
3) there is a change in control of our company;
4) we become insolvent, commence bankruptcy proceedings or make an
assignment for the benefit of creditors; or
5) upon 60 days written notice of a breach of a material obligation, such
breach is not cured.
In the event that we fail to make the minimum payment guarantees or we are
unable to cure a breach within the 60 day period, we have the option, in
our sole discretiion, prior to termination by Biowell, including during any
time when we are in breach of this agreement, to elect to change the
agreement whereby we are a non-exclusive manufacturer in our territories.
Sub-Licensing Agreement
In July of 2003, Applied DNA, Biowell and G. A. Corporate Finance Ltd.
entered into a Sub-License Agreement for the United Kingdom in exchange for
$3,000,000. G. A. Corporate Finance Ltd. paid $25,000 upon its execution of the
Agreement, and the remaining $2,975,000 is subject to an interest bearing
promissory note, payable in twenty (20) consecutive quarterly installments of
Principal and Interest in the amount equal to the lower of $185,937.50 or 35% of
Gross Revenues for that quarter due on the final day of the quarter.
The minimum guarantees that G. A. Corporate Finance, LLC must meet each
year of the license agreement to retain the exclusive license for the
technologies are as follows:
Year Minimum Guarantee
---- -----------------
1st year $50,000 gross purchase orders
2nd year $150,000 gross purchase orders
3rd year $300,000 gross purchase orders
4th year $360,000 gross purchase orders
5th year $432,000 gross purchase orders
26
Due to the lack of marketable products since execution of this agreement,
we suspended the payment under the note and the minimum guarantees owed to us.
We are currently in negotiations with this sub-licensee to either amend or
terminate this agreement.
As with our Exclusive License Agreement with Biowell, our UK Sub-Licensee
will have the opportunity to apply for new product licenses, which can remain
exclusive in its territory for the first eighteen months.
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. 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. While patents are
an important asset, they are not the only instruments used to sequester a
competitive position for us. We are developing numerous tools to maintain
technical superiority, which includes licensing other component and
complementary technologies that will keep pace with our speed to market efforts.
We regard our trade secrets and other intellectual property as an integral
component of our success. We rely on patent law, trademark law, trade secret
protection and confidentiality and/or license agreements with employees,
customers, partners and others to protect our intellectual property. Effective
patent, trademark and trade secret protection may not be available in every
country in which our products are available. We cannot be certain that we have
taken adequate steps to protect our intellectual property, especially in
countries where the laws may not protect our rights as fully as in the United
States. In addition, if our third-party confidentiality agreements are breached
there may not be an adequate remedy available to us. If our trade secrets become
publicly known, we may lose our competitive position.
Additionally, litigation regarding patents and other intellectual property
rights is extensive in the biotechnology industry. In the event of an
intellectual property dispute, we may be forced to litigate. This litigation
could involve proceedings instituted by the U.S. Patent and Trademark Office or
the International Trade Commission, as well as proceedings brought directly by
affected third parties. Intellectual property litigation can be extremely
expensive, and these expenses, as well as the consequences should we not
prevail, could seriously harm our business.
27
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.
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
28
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.
29
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
30
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. 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. We 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.
31
-- 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.
32
-- 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
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
33
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
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
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
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 10/82596 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 targeted client base includes major corporations, government entities and
educational institutions. We will provide DNA chip technology, DNA ink
technology as well as DNA profiling/tagging technology through various types of
resale agreements. We will apply these technologies to labels and security ink,
to a chip and reader as well as textile markers and agriculture profiling.
Competition
The anti-counterfeit and fraud prevention market is highly competitive and
diverse. Since we believe that other forms of anti-counterfeiting and security
measures can be easily defeated, we expect that utilizing DNA which cannot be
replicated will garner great demand from the market. Some examples of
biotechnology and other security technologies include:
FINGERPRINT- a systems scans fingerprints before granting access to
computer files.
VOICE- Off-the-shelf software authenticates users based on individual vocal
patterns.
CORNEA- Scanners that scan the iris of a user's eye to match compared to a
computer database.
FACIAL SCAN- Computers can use complex algorithms to distinguish one face
from another.
34
IC CHIP & MAGNETIC STRIP- Integrated circuit chip that runs an electric
current through a circuit and is verified by a IC card. Is used in many parts of
Europe and Asia.
HOLOGRAPH- Optical security elements ('holograms') constitute a family of
optically variable microstructures, which are difficult to copy. Most of them
are difficult to reproduce using advanced color photocopiers and printing
techniques. This is why they are so widely used as anti-counterfeit devices.
Holograms are only one member of a family of optically variable devices which
all have several features in common. These are:
o Highly visible to the naked eye under good or reasonable
conditions of illumination.
o Colorful and change their colors with viewing angle.
o They derive their colorful effects from microstructures within
the devices, which cause interference or diffraction of the light
falling upon them.
FLUORESCENCE- X-ray Fluorescence (XRF) and elemental taggant technologies
were developed as a unique method for assaying uranium ore. Later on was used as
a handheld alloy grade identification and spectral analysis instrument. Its use
is limited to label/printing applications.
RADIOACTIVITY& RARE MOLECULES- a method of Radiation detection is very
effective but limited to use on crude oil.
Some of the bigger competitors in the field of anti-counterfeiting and
fraud protection include:
o DNA Technologies. Inc.
o Art Guard International
o Theft Protection Systems
o Cypher Science (United Kingdom) Mt. Sinai Hospital
o ChemTAG (Norway)
o NTT DATA Labs (Japan)
o November AG
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.
Giuliani Partners
In August 2004, we engaged Giuliani Partners LLC as our strategic marketing
partner and advisor. The engagement agreement had an effective date of September
1, 2004. Giuliani Partners had been engaged, on a non-exclusive basis, to
provide advice and assistance to us regarding issues associated with our
proprietary DNA embedded security solutions. The term of the engagement was 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.
35
As compensation for Giuliani Partners' performance, we were to 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 were to 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.
On April 11, 2005, we and Giuliani Partners mutually agreed to conclude our
engagement agreement. As a result of the termination of this agreement, we are
not obligated to pay the remainder of the advisory fee of $750,000 and Giuliani
Partners will not receive any shares or warrants to purchase shares of our
common stock.
EMPLOYEES
As of April 25, 2005, we employed 12 full-time employees, of which six are
in management, four in sales & marketing and two in administration. We believe
that our relations with our employees are good.
DESCRIPTION OF PROPERTIES
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 believe that our current office space and facilities are
sufficient to meet our present needs and do not anticipate any difficulty
securing alternative or additional space, as needed, on terms acceptable to us.
We maintain a website at www.adnas.com. The information contained on that
website is not deemed to be a part of this prospectus.
36
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
described below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
Stern & Co. v. Applied DNA Sciences, Inc., Case No.: 05 CV 00202
----------------------------------------------------------------
Plaintiff Stern & Co. commenced this action against us in the United States
District Court for the Southern District of New York on or about January 10,
2005. In this action, Stern & Co. alleges that it entered into a contract with
us to perform media and investor relations for a monthly fee of $5,000 and stock
options. Stern & Co. claims that we failed to make certain payments pursuant to
the contract and seeks damages in the amount of $96,042.00. Although our time to
answer the complaint has not expired, we dispute the allegations of the
complaint in its entirety and intend on vigorously defending this matter.
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
----------------------------------------------------------------------------
Plaintiff Oceanic Consulting, S.A. commenced this action against us in the
Supreme Court of the State of New York, County of New York. Oceanic Consulting,
S.A. asserts a cause of action for breach of contract based upon the allegation
that we failed to make payments pursuant to a consulting agreement. Oceanic
Consulting, S.A.also asserts a causes of action in which it seeks reimbursement
of its expenses and attorneys' fees. Oceanic Consulting, S.A. seeks damages in
the amount of $137,500.00. Oceanic Consulting, S.A. moved for a default
judgment, which we have opposed based upon Oceanic Consulting, S.A.'s failure to
properly serve the complaint as well as our meritorious defenses. We intend on
vigorously defending this matter.
37
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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 Interim Chief Financial
Officer and Secretary
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are three seats on our board of directors.
Currently, our Directors are not compensated for their services. Officers
are elected by the Board of Directors and serve until their successors are
appointed by the Board of Directors. Biographical resumes of each officer and
director are set forth below.
Chairman of the Board and Chief Executive Officer - Robin Hutchison
On November 17, 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. Between June 1997 and December
1997, Mr. Hutchison served as President and then from January 1998 to December
2001 as Chief Technology Officer at eCharge Corporation, a Seattle, Washingon
based company specializing in alternative payment methods for the Internet. Mr.
Hutchison is still a director of eCharge Corporation, a position he has held
since June 1997. Between October 2001 and December 2003, Mr. Hutchison served as
a Director of Global Golf Holdings, Inc. a company that marketed golf course GPS
hand held system to golf courses in Western Canada. Between October 2003 and
April 2005, Mr. Hutchison served as a Director of PowerHouse Technologies Group,
Inc. a San Jose California based developer of mobile computing solutions that
enhance personal productivity.
Since December 2000, Mr. Hutchison has served as a director of Golden
Goliath Resources, a British Columbia, Canada-based company with mining
operations in Mexico. Since March 2003, Mr. Hutchison has also served as a
director of Serebra Learning Corporation, a British Columbia, Canada-based
company that specializes in delivering eLearning solutions. Mr. Hutchison has
also served as president of Canada-based SNI Corporation, specialists in the
integration of SUN Microsystems UNIX-based systems and Internet and computer
firewall security, western regional director of sales and operations for Everex
Canada Inc. and as vice president and co-founder of Vivox International Inc.
President and Director - Peter Brocklesby
Mr. Brocklesby became our President and a Director in May 2004. Between
January 2003 and May 2004, Mr. Brocklesby served as a Project Development
Consultant to Professor Alfred Wong, A.W. Technologies at the University of
California at Los Angeles. In March 2003, Mr. Brocklesby co-founded Cool Grip,
Inc., a golf accessory company, based in Newport Beach, California, and served
as the Vice President of Business Development through May 2004. Between 2000 and
January 2003, Mr. Brocklesby was the Vice President for Business Development at
Boss Industrial Design Company, a communications and electronic product design
company based in Newport Beach, California.
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.
38
Chief Technology Strategist and Director - Larry Lee
Larry Lee has served as a Director since September 2002. Since August 2004,
Mr. Lee has been a senior staff scientist with Boeing, a space and defense
company, in their Los Angeles, California location. Between September 2002 and
March 2004, Mr. Lee served as our President and Chief Executive Officer. Mr. Lee
was appointed our Chief Technology Strategist in March 2004, in which capacity
he continues to serve. Between 1994 and 2001, Mr. Lee was a senior scientist and
manager for GM Hughes Electronics, a Los Angeles, California based electronics,
space and defense company.
Mr. Lee currently serves on the board of advisors and/or partners for
several U.S. and international companies including: Dery Resources Inc.; IMC,
and VO Management, LLC.
Mr. Lee has a Master of Science in Computer/Electronic Engineering from
California State University and a Bachelor of Science in Mechanical/Biomedical
Engineering from Virginia Tech. He has also received advanced training in
Business Executive Management and Finance from University of California, Los
Angeles and the Hughes Education Center.
Consultant and Director - Michael E. Hill
Mr. Hill joined our Board in October 2002. Between November 1997 and
September 2002, Mr. Hill was a registered representative at Research Capital,
Corp., a securities broker/dealer located in Calgary, Canada. Since 1986, Mr.
Hill has been a director and Vice President of Hill's Koksilah Holdings, a
private retail and real estate holding company located in Vancouver, Canada.
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.
Director - Ronald P. Erickson
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.
39
Interim Chief Financial Officer and Secretary - Karin Klemm
Karin Klemm joined us as Secretary on August 2, 2004 and as Interim Chief
Financial Officer on March 15, 2005. Ms. Klemm is currently the President and
Chief Executive Officer of Poly Pacific Entertainment, Inc., an entertainment
company based in Beverly Hills, which she has been since 1997. 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.
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO and
each of our most highly-compensated executive officers whose total annual salary
and bonus for the fiscal years ending September 30, 2004, 2003 and 2002 exceeded
$100,000:
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) 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
--------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ --------------
The Board of Directors, in their discretion, may award stock and stock
options to key executives for achieving financing or expenditure guidelines,
meeting our business plan objectives, as part of their compensation for
employment or for retention purposes.
Employment Agreements
None.
40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September of 2004, Larry Lee entered into a private transaction with Mr.
Chaim Stern, selling a total of 2,500,000 shares to him, after which he loaned
all proceeds of $600,000 to us. On November 3, 2004, we issued a promissory note
to Larry Lee for the loan of the $600,000. The note bore interest at 6% per
annum, and was payable upon demand any time following 120 days after we complete
a financing of at least $5 million. We had the right to repay the note, plus all
accrued interest, at any time, in whole or in part, without premium or penalty.
Upon the repayment of $125,000, we had the right to repay the remainder due
under the note by the issuance of shares of common stock and founders' preferred
stock. We repaid the note in full by paying Mr. Lee $125,000 and issued him
500,000 shares of common stock and 60,000 shares of founders' preferred stock.
We have no policy regarding entering into transactions with affiliated
parties.
41
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 26, 2005:
o by each person who is known by us to beneficially own more than 5% of
our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
PERCENTAGE OF PERCENTAGE OF
CLASS CLASS
NAME AND ADDRESS NUMBER OF PRIOR TO AFTER
OF OWNER TITLE OF CLASS SHARES OWNED(1) OFFERING(2) OFFERING(3)
-----------------------------------------------------------------------------------------------------
Rob Hutchison Common Stock 1,120,000 (4) 1.68% 1.29%
9229 Sunset Blvd., Suite 830
Los Angeles, CA 90069
Peter Brocklesby Common Stock 1,000,000 (5) 1.50% 1.15%
9229 Sunset Blvd., Suite 830
Los Angeles, CA 90069
Lawrence Lee Common Stock 3,820,000 (6) 5.77% 4.41%
9229 Sunset Blvd., Suite 830
Los Angeles, CA 90069
Michael Hill Common Stock 552,000 (7) * *
9229 Sunset Blvd., Suite 830
Los Angeles, CA 90069
Ron Erickson Common Stock 550,000 (8) * *
9229 Sunset Blvd., Suite 830
Los Angeles, CA 90069
Karin Klemm Common Stock 0 0% 0%
9229 Sunset Blvd., Suite 830
Los Angeles, CA 90069
All Officers and Directors Common Stock 7,042,000 (9) 10.21% 7.88%
As a Group (6 persons)
RHL Management, Inc. (10) Common Stock 4,955,475 7.55% 5.76%
Roxbury Road
Los Angeles, CA 90069
Chaim Stern Common Stock 4,500,000 6.86% 5.23%
1880 East 26th Street
Brooklyn, NY 11229
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of April 26, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based upon 65,621,025 shares issued and outstanding on April 26, 2005.
(3) Percentage based on 85,968,025 shares of common stock outstanding, assuming
all shares being registered in the offering are sold.
(4) Includes 1,000,000 shares underlying currently exercisable options.
(5) Includes 1,000,000 shares underlying currently exercisable options.
42
(6) Includes 600,000 shares underlying currently exercisable options.
(7) Includes 315,000 shares underlying currently exercisable options.
(8) 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.
(9) Includes 3,365,000 shares underlying currently exercisable options.
(10) Rick Langley has investment and voting control over the shares owned by RHL
Management, Inc.
43
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 250,000,000 shares of common stock, par
value $.001. As of April 26, 2005, there were 65,621,025 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged American Stock Transfer & Trust Company, located in
Brooklyn, New York, as independent transfer agent or registrar.
PREFERRED STOCK
We are authorized to issue up to 10,000,000 shares of Preferred Stock, par
value $.001. The 10,000,000 shares of Preferred Stock authorized are
undesignated as to preferences, privileges and restrictions. As the shares are
issued, the Board of Directors must establish a "series" of the shares to be
issued and designate the preferences, privileges and restrictions applicable to
that series. To date, the Board has designated a Founders' Series of Convertible
Preferred Stock, which, in six months from the date of issuance, shall be
convertible at the option of the holder and upon our reaching certain financial
objectives, into shares of our restricted Common Stock. Each share, when
eligible, is convertible into 25 fully paid and non-assessable shares of our
Common Stock, subject to a leak out agreement that extends the Rule 144 period
to two years. Holders will be permitted to sell, after a one year holding period
through a three year holding period, 1% of the issued and outstanding shares of
our common stock every 90 days. This series has been authorized by the Board of
Directors. On or about February 1, 2005, the Founders' Series of Preferred Stock
was converted into 1,500,000 shares of our common stock. As of April 26, 2005,
there were no shares of preferred stock issued and outstanding.
OPTIONS
There are currently options outstanding that have been issued to our
officers and directors to purchase 3,365,000 shares of our common stock pursuant
to our Professional/Employee/Consultant Compensation Plan and employment
agreements.
WARRANTS
In connection with the sale of convertible promissory notes in December
2004, we issued 2,930,000 warrants to purchase shares of common stock. The
warrants are exercisable until three years from the date of issuance at a
purchase price of $0.75 per share.
In addition, in connection with a private placement offering in January and
February of 2005, we have issued 14,722,000 warrants. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.75 per share.
We also have outstanding 285,000 warrants exercisable at $0.10 per share,
5,000 warrants exercisable at $0.20 per share, 1,500,000 warrants exercisable at
$0.60 per share, 750,000 warrants exercisable at $0.70 per share and 155,000
warrants exercisable at $0.75 per share.
44
CONVERTIBLE SECURITIES
To obtain funding for our ongoing operations, we sold $1,465,000 in
convertible promissory notes to 13 investors in December 2004. Each promissory
note was automatically convertible into shares of our common stock, at a price
of $0.50 per share, upon the closing of a private placement for $1 million or
more. On January 28, 2005, we closed upon a private placement transaction in
excess of $1 million, and on February 2, 2005, the promissory notes were
converted into an aggregate of 2,930,000 shares of common stock. This prospectus
includes the resale of the common stock issued upon conversion of the promissory
notes.
To obtain funding for our ongoing operations, we conducted a private
placement offering in January and February 2005, in which we sold $7,361,000 of
10% Secured Convertible Promissory Notes to 61 investors. The 10% Secured
Convertible Promissory Notes automatically convert into shares of our common
stock, at a price of $0.50 per share, upon the filing of this registration
statement. This prospectus includes the resale of the common stock to be issued
upon conversion of the 10% Secured Convertible Promissory Notes.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers. In addition, we have entered into indemnification agreements with our
officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers
or persons controlling us pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
45
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any
state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. Vertical
Capital Partners, Inc., a registered broker-dealer; Michael Morris, Susan
Diamond; Ronald Heineman and Michael Gochman; all of whom are employees of
Vertical Capital Partners, are an "underwriter" as that term is defined under
the Securities Exchange Act of 1933, as amended, the Securities Exchange Act of
1934, as amended, and the rules and regulations of such acts. Further, the other
selling stockholders and any brokers, dealers or agents, upon effecting the sale
of any of the shares offered in this prospectus, may be deemed to be
"underwriters." In such event, any commissions received by such broker-dealers
or agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
46
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement
with a broker-dealer for the resale of the common stock, then we would be
required to amend the registration statement of which this prospectus is a part,
and file a prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
PENNY 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.
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.
47
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholder. We will not receive any proceeds
from the resale of the common stock by the selling stockholder. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholder, none of the selling stockholder will
continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
For the table set forth below, the following persons have investment and
voting control over the shares owned by the respective entities:
-------------------------------------------- --------------------------------
Entity Control Person
-------------------------------------------- --------------------------------
-------------------------------------------- --------------------------------
Allied International Fund Rosemarie DePalo
-------------------------------------------- --------------------------------
AS Capital Partners Michael Coughlan
-------------------------------------------- --------------------------------
Avonwoods Ltd. C. Rand
-------------------------------------------- --------------------------------
Basso Private Opportunity Holding Fund Ltd. Howard I. Fischer
-------------------------------------------- --------------------------------
Basso Multi-Strategy Holding Fund Ltd. Howard I. Fischer
-------------------------------------------- --------------------------------
F Berdon Comp. Frederick Berdon
-------------------------------------------- --------------------------------
Beston Worldwide Ltd Michael Ben-Jacob
-------------------------------------------- --------------------------------
Blumfield Investments M. Kraus
-------------------------------------------- --------------------------------
Brighton Capital Jeffery Wolin
-------------------------------------------- --------------------------------
Clear Mountain Holdings Raul Garrido Garibaldo
-------------------------------------------- --------------------------------
The Condor Group, LLC Robert Lowinger
-------------------------------------------- --------------------------------
Consultants and Advisors NJB, Inc. Gary Schonwald
-------------------------------------------- --------------------------------
Cordilliera Funds Stephen J. Carter
-------------------------------------------- --------------------------------
DC Capital Craig Kirsch
-------------------------------------------- --------------------------------
Double U Master Fund David Sims
-------------------------------------------- --------------------------------
Equilibrium Solutions Johnny Vage
-------------------------------------------- --------------------------------
First London Finance, Ltd. Moshe Grauman
-------------------------------------------- --------------------------------
Galileo Asset Management, SA Marie-Christine Wright,
John Sauickie and John Wright
-------------------------------------------- --------------------------------
Gemini Master Funds Steve Winters
-------------------------------------------- --------------------------------
Global Asset Management Robert Fallah
-------------------------------------------- --------------------------------
Goldenberg & Hirsch Properties Leo Hirsch
-------------------------------------------- --------------------------------
GSSF Master Fund E.B. Lyon IV
-------------------------------------------- --------------------------------
Guerilla IRA L.P. Leigh Curry
-------------------------------------------- --------------------------------
Hirsch Family Foundation Leo Hirsch
-------------------------------------------- --------------------------------
ID Federman Holdings LTD Iris Federman
-------------------------------------------- --------------------------------
48
-------------------------------------------- --------------------------------
Ivelocity Fund Scott Parent
-------------------------------------------- --------------------------------
KA Steel Chemical Kenneth Steel Jr.
-------------------------------------------- --------------------------------
Livingston Ventures, LLC Ronald Heineman
-------------------------------------------- --------------------------------
Lone Star Equity Mark A. Bogina
-------------------------------------------- --------------------------------
Marina Ventures Michael Hartstein
-------------------------------------------- --------------------------------
Melton Management Yehuda Breitkops
-------------------------------------------- --------------------------------
Odin Partners LP John A. Gibbons
-------------------------------------------- --------------------------------
Omega Capital Small Cap Abraham Sylverin
-------------------------------------------- --------------------------------
P.R. Diamonds Pinkus Reisz
-------------------------------------------- --------------------------------
Provident Master Fund Steven Winters
-------------------------------------------- --------------------------------
Rock Capital Partners, LLC Howard Chalfin
-------------------------------------------- --------------------------------
Salzwedel Financial Communications, Inc. Jeff Salzwedel
-------------------------------------------- --------------------------------
San Rafael Consulting Group, LLC Isabelle H. Wright and
John Wright
-------------------------------------------- --------------------------------
Rabbi Scheinerman KBY LLC Rabbi Schenerman
-------------------------------------------- --------------------------------
Sichenzia Ross Friedman Ference LLP Greg Sichenzia, Marc Ross,
Richard Friedman and
Michael Ference
-------------------------------------------- --------------------------------
Spencer Edwards, Inc. Thomas Kaufman
-------------------------------------------- --------------------------------
Starboard Capital Markets, LLC James Dotzman
-------------------------------------------- --------------------------------
Steel Harbor Holdings Mark Step
-------------------------------------------- --------------------------------
Stonestreet, LP Michael Finkelstein
-------------------------------------------- --------------------------------
Vertical Capital Partners, Inc. Robert DePalo
-------------------------------------------- --------------------------------
Vestal Venture Capital Allan Lyons
-------------------------------------------- --------------------------------
Whalehaven Evan Schemenauer
-------------------------------------------- --------------------------------
Wolfson Trust Franchesca Wolfson
-------------------------------------------- --------------------------------
49
Beneficial Ownership Beneficial Ownership
Prior to Offering (1) After Offering (1)
Name of Selling Security Holder Shares Percentage (2) Shares Offered Shares Percentage (2)
-----------------------------------------------------------------------------------------------------------------------------------
Allied International Fund 1,237,500 1.89% 1,237,500 0 *
AS Capital Partners 100,000 * 100,000 (3) 0 *
Avonwoods Ltd. 800,000 1.21% 800,000 (3) 0 *
Evan B. Azriliant 100,000 * 100,000 (3) 0 *
Mordechai Bank 200,000 * 200,000 (3) 0 *
Judith Barclay 400,000 * 400,000 (3) 0 *
Jack Basch 600,000 * 600,000 (3) 0 *
Basso Private Opportunity Holding
Fund Ltd. 630,000 * 630,000 (3) 0 *
Basso Multi-Strategy Holding Fund
Ltd. 2,370,000 3.55% 2,370,000 (3) 0 *
Lon E Bell 60,000 * 60,000 (4) 0 *
F Berdon Comp. 200,000 * 200,000 (3) 0 *
Beston Worldwide Ltd 67,500 * 67,500 (4) 0 *
Robert R. Blakely 33,334 * 33,334 0 *
Blumfield Investments 400,000 * 400,000 (3) 0 *
Doug Bowen 138,750 * 138,750 (5) 0 *
Brighton Capital 46,750 * 46,750 0 *
Salvatore Cantatore 112,500 * 112,500 (6) 0 *
Jaime Cardona 100,000 * 100,000 0 *
Andrea Cataneo 250,000 * 250,000 0 *
Notzer Chesed 400,000 * 400,000 (3) 0 *
Clear Mountain Holdings 300,000 * 300,000 (3) 0 *
David Cohen 200,000 * 200,000 (3) 0 *
The Condor Group, LLC 8,250 * 8,250 0 *
Consultant and Advisors NJB, Inc. 145,000 * 145,000 0 *
Cordilliera Funds 1,000,000 1.51% 1,000,000 (3) 0 *
Adrian Davidescu 400,000 * 400,000 (3) 0 *
Jacob and Linda Davidowitz JTWROS 800,000 1.21% 800,000 (3) 0 *
DC Capital 60,000 * 60,000 (4) 0 *
David and Jeanette Defoto JTWROS 200,000 * 200,000 (3) 0 *
Robert DePalo Jr. 20,000 * 20,000 0 *
Susan Diamond 5,000 * 5,000 0 *
Joseph Digiacamo 50,000 * 50,000 (3) 0 *
Double U Master Fund 800,000 1.21% 800,000 (3) 0 *
Richard Durkee 27,000 * 27,000 0 *
Asher Avishay Ephrathi 1,040,230 1.58% 1,040,230 (7) 0 *
Equilibrium Solutions 100,000 * 100,000 (3) 0 *
Douglas Falkner 120,000 * 120,000 0 *
Jeanine Fehn 240,000 * 240,000 (3) 0 *
First London Finance, Ltd. 1,250,000 1.90% 1,250,000 0 *
Frederick Frank 110,000 * 110,000 (8) 0 *
Galileo Asset Management, SA 157,000 * 157,000 0 *
Charles Gargano 62,500 * 62,500 (7) 0 *
Gemini Master Funds 200,000 * 200,000 (3) 0 *
Nicholas Giustino 133,750 * 133,750 (8) 0 *
50
Michael Glazer 16,875 * 16,875 (10) 0 *
Global Asset Management 1,257,500 1.92% 1,257,500 0 *
Michael Gochman 36,750 * 36,750 0 *
Rochelle Gold 600,000 * 600,000 (3) 0 *
Harold Goldenberg 400,000 * 400,000 (3) 0 *
Goldenberg & Hirsch Properties 400,000 * 400,000 (3) 0 *
Mary Anne Gray 60,000 * 60,000 (11) 0 *
Scott R. Griffith 33,333 * 33,333 0 *
Eugene Gross 400,000 * 400,000 (3) 0 *
Wayne Grubb 67,500 * 67,500 (4) 0 *
GSSF Master Fund 1,000,000 1.51% 1,000,000 (3) 0 *
Guerilla IRA L.P. 115,000 * 115,000 (4) 0 *
Paul Reyes-Guerra 31,250 * 31,250 (12) 0 *
Michael Hamblett 84,060 * 84,060 0 *
Ronald Heineman 22,000 * 22,000 0 *
Joseph Henn 15,000 * 15,000 (10) 0 *
Hirsch Family Foundation 160,000 * 160,000 (3) 0 *
Leo Hirsch 240,000 * 240,000 (3) 0 *
ID Federman Holdings LTD 600,000 * 600,000 (3) 0 *
Joseph Iorio 100,000 * 100,000 (3) 0 *
Thomas Iovino 200,000 * 200,000 (3) 0 *
Ivelocity Fund 135,000 * 135,000 (13) 0 *
William L. Jiler 16,875 * 16,875 (9) 0 *
KA Steel Chemical 33,750 * 33,750 (13) 0 *
Ahmed Kareem 10,500 * 10,500 0 *
Jeffery Kessler 33,750 * 33,750 (14) 0 *
Tibor Klein 720,000 1.09% 720,000 (3) 0 *
Yisreal Klein 200,000 * 200,000 (3) 0 *
Yossi Kraus 100,000 * 100,000 (3) 0 *
Alexander J. Lapatka 67,500 * 67,500 (4) 0 *
Livingston Ventures, LLC 170,000 * 170,000 0 *
Lone Star Equity 400,000 * 400,000 (3) 0 *
Jason Lyons 57,000 * 57,000 0 *
Michael Mangan 100,000 * 100,000 (3) 0 *
Tony Manual 200,000 * 200,000 (3) 0 *
Marina Ventures 195,000 * 195,000 0 *
Paul Masters IRA 200,000 * 200,000 (3) 0 *
Melton Management 400,000 * 400,000 (3) 0 *
Linda Michaels 250,000 * 250,000 0 *
Raymond Mikulich 335,000 * 335,000 (15) 0 *
Kyle Morgan 200,000 * 200,000 (3) 0 *
Michael Morris 75,000 * 75,000 0 *
Houston Muthart 267,500 * 267,500 (16) 0 *
Richard Neslund 1,000,000 1.51% 1,000,000 (3) 0 *
Michael Nizza 50,000 * 50,000 (3) 0 *
Marvin Numeroff 267,500 * 267,500 (16) 0 *
Odin Partners LP 67,500 * 67,500 (4) 0 *
Eric Okamoto 493,880 * 493,880 (17) 0 *
Omega Capital Small Cap 1,200,000 1.81% 1,200,000 (3) 0 *
Eileen Patterson 38,750 * 38,750 (18) 0 *
Platinum Partners 400,000 * 400,000 (3) 0 *
P.R. Diamonds 240,000 * 240,000 (3) 0 *
Joseph Prezioso 400,000 * 400,000 (3) 0 *
Arthur Priver 228,750 * 228,750 (18) 0 *
Provident Master Fund 1,200,000 1.81% 1,200,000 (3) 0 *
Robert & Claudia Quinn JTWROS 28,750 * 28,750 (9) 0 *
Avindam Rapaport 100,000 * 100,000 (3) 0 *
Kenneth Reichelle 116,875 * 116,875 (19) 0 *
Rock Capital Partners, LLC 600,000 * 600,000 (3) 0 *
51
Joseph Rozehzadeh 400,000 * 400,000 (3) 0 *
Edward M Rotter 3,320,000 4.93% 3,320,000 (20) 0 *
Angela Chen Sabella 120,000 * 120,000 (21) 0 *
Salzwedel Financial
Communications, Inc. 365,000 * 365,000 0 *
San Rafael Consulting Group, LLC 67,236 * 67,236 0 *
Frederick Sandvick 200,000 * 200,000 (3) 0 *
Rabbi Scheinerman KBY LLC 100,000 * 100,000 (3) 0 *
Joel Schindler 100,000 * 100,000 (3) 0 *
Shatashvili Sharona 200,000 * 200,000 (3) 0 *
Jesse B. Shelmire IV 33,333 * 33,333 0 *
Sichenzia Ross Friedman Ference LLP 112,000 * 112,000 0 *
Jerry Silva 1,000,000 1.51% 1,000,000 (3) 0 *
Jerry and Esther Soloman JTWROS 800,000 1.21% 800,000 (3) 0 *
Anthony Spatacco 42,030 * 42,030 0 *
Spencer Edwards, Inc. 8,000 * 8,00 0 *
Starboard Capital Markets, LLC 42,030 * 42,030 0 *
Steel Harbor Holdings 170,000 * 170,000 0 *
Kenneth Steel Jr. 33,750 * 33,750 (13) 0 *
Chaim Stern 3,000,000 4.47% 3,000,000 (3) 0 *
Alexander Stolin 200,000 * 200,000 (3) 0 *
Stonestreet, LP 600,000 * 600,000 (22) 0 *
Richard Swier Jr. 60,000 * 60,000 (3) 0 *
Stewart Taylor 33,750 * 33,750 (13) 0 *
Marcovich Tibo 100,000 * 100,000 (3) 0 *
Doron Rafael Toledano 56,735 * 56,735 0 *
Ester Tuman 67,500 * 67,500 (4) 0 *
Alex Verjovski 200,000 * 200,000 (3) 0 *
Vertical Capital Partners, Inc. 165,750 * 165,750 0 *
Vestal Venture Capital 67,500 * 67,500 (4) 0 *
Sem Victori 240,000 * 240,000 (3) 0 *
Whalehaven 1,150,000 1.74% 1,150,000 (23) 0 *
Phil Westridge 33,750 * 33,750 (15) 0 *
Peter Wieser 200,000 * 200,000 (3) 0 *
Wolfson Trust 16,875 * 16,875 (11) 0 *
Franchesca Wolfson 16,875 * 16,875 (11) 0 *
Eric Yaoz 320,000 * 320,000 (3) 0 *
Harry/Temy/Ark Zelcer 200,000 * 200,000 (3) 0 *
* Less than 1%
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options or warrants currently exercisable or convertible, or exercisable
or convertible within 60 days of April 26, 2005 are deemed outstanding
for computing the percentage of the person holding such option or warrant
but are not deemed outstanding for computing the percentage of any other
person.
(2) Percentage prior to offering is based on 65,621,025 shares of common
stock outstanding; percentage after offering is based on 85,968,025 shares
of common stock outstanding, which assumes that all shares registered in
the offering will be sold.
(3) Of which 50% of such number of shares are issuable upon exercise of
currently exercisable warrants.
(4) Includes 60,000 shares of common stock underlying warrants.
(5) Includes 85,000 shares of common stock underlying warrants.
(6) Includes 90,000 shares of common stock underlying warrants.
(7) Includes 115,000 shares of common stock underlying warrants.
(8) Includes 55,000 shares of common stock underlying warrants.
(9) Includes 80,000 shares of common stock underlying warrants.
(10) Includes 15,000 shares of common stock underlying warrants.
(11) Includes 52,500 shares of common stock underlying warrants.
(12) Includes 27,500 shares of common stock underlying warrants.
48
(13) Includes 120,000 shares of common stock underlying warrants.
(14) Includes 30,000 shares of common stock underlying warrants.
(15) Includes 220,000 shares of common stock underlying warrants.
(16) Includes 160,000 shares of common stock underlying warrants.
(17) Includes 232,000 shares of common stock underlying warrants.
(18) Includes 35,000 shares of common stock underlying warrants.
(19) Includes 65,000 shares of common stock underlying warrants.
(20) Includes 1,720,000 shares of common stock underlying warrants.
(21) Includes 120,000 shares of common stock underlying warrants.
(22) Includes 600,000 shares of common stock underlying warrants.
(23) Includes 650,000 shares of common stock underlying warrants.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby. Sichenzia Ross Friedman Ference LLP is also the owner of 112,000 shares
of our common stock, which are included in this registration statement. Andrea
Cataneo, a partner of Sichenzia Ross Friedman Ference LLP is the owner of
250,000 shares of our common stock, which are included in this registration
statement.
EXPERTS
Russell Bedford Stefanou Mirchandani LLP, independent registered public
accounting firm, have audited, as set forth in their report thereon appearing
elsewhere herein, our financial statements at September 30, 2004 and 2003 and
for the years then ended that appear in the prospectus. The financial statements
referred to above are included in this prospectus with reliance upon the
independent registered public accounting firm's opinion based on their expertise
in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Applied DNA Sciences, Inc., filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
49
INDEX TO FINANCIAL STATEMENTS
APPLIED DNA SCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
For the Years Ended September 30, 2004 and September 30, 2003
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet F-2
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-3
Consolidated Statement of Deficiency in Stockholders' Equity
for the period September 16, 2002 (date of inception) to
September 30, 2004 F-4 to F-11
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-12
Notes to Consolidated Financial Statements F-13 to F-34
For the Three Months Ended December 31, 2004 and December 31, 2003
Condensed Balance Sheets December 31, 2004 (Unaudited)
and December 31, 2003 F-35
Condensed Statements of Losses for the three months ended
December 31, 2004 and 2003 (Unaudited) F-36
Condensed Statements of Deficiency in Stockholders' Equity
for the date of inception through December 31, 2004 (Unaudited) F-37 to F-46
Condensed Statements of Cash Flows For the three months
ended December 31, 2004 and 2003 (Unaudited) F-47
Notes to the Condensed Financial Statements (Unaudited) F-48 to F-65
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-1
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-2
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-3
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-4
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-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
(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-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
--------- ------- ---------- ------- ------ ---------- ---------- ------- --------
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-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
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-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
--------- ------- ---------- ------- ------ ---------- ---------- ------- --------
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-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
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ------- ---------- ------- ------ ---------- ---------- ------- --------
Common stock issued in
exchange for consulting
services at $0.67 per
share in June 2004 270,500 135,250 45,310 - - - 180,560
Common stock issued in
exchange for consulting
services at $0.89 per
share in June 2004 8,000 4,000 3,120 - - - 7,120
Common stock issued in
exchange for consulting
services at $0.65 per
share in June 2004 50,000 25,000 7,250 - - - 32,250
Common stock issued
pursuant to private
placement at $1.00
per share in June 2004 250,000 125,000 125,000 - - - 250,000
Common stock issued in
exchange for consulting
services at $0.54 per
share in July 2004 100,000 50,000 4,000 - - - 54,000
Common stock issued in
exchange for consulting
services at $0.72 per
share in July 2004 5,000 2,500 1,100 - - - 3,600
Common stock issued in
exchange for consulting
services at $0.47 per
share in July 2004 100,000 50,000 (2,749) - - - 47,251
Common stock issued in
exchange for consulting
services at $0.39 per
share in August 2004 100,000 50,000 (11,000) - - - 39,500
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-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 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-11
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-12
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-13
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)
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
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-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 (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-15
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-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)
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
===========
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)
New 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
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-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)
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-19
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-20
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE C - RELATED PARTY TRANSACTIONS (continued)
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-21
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-22
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-23
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-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 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-25
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 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-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 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-27
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-28
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)
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-29
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)
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-30
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
F-31
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
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. We follow the policy of charging the costs of
consulting services expenses incurred.
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.
F-32
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
NOTE I- COMMITMENTS AND CONTINGENCIES (continued)
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.
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-33
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-34
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS (Unaudited)
December 31, September 30,
2004 2004
----------- -----------
Current assets:
Cash and Equivalents ............................. $ 62,665 $ 1,832
----------- -----------
Total Current Assets ............................. 62,665 1,832
Property, Plant and Equipment:
Furniture and Equipment .......................... 29,507 29,507
Less: Accumulated Depreciation ................... (1,756) (1,405)
----------- -----------
27,751 28,102
Other Assets:
Deposits and Prepaid Expenses .................... 47,585 23,559
Patent Filing .................................... 34,257 29,910
Less: Accumulated Amortization ................... (6,126) (1,756)
----------- -----------
Net Patents ...................................... 28,131 28,154
Restricted Cash .................................. 1,065,318 --
----------- -----------
Total Other Assets ............................... 1,141,034 51,713
----------- ----------
Total Assets ..................................... $ 1,231,450 $ 81,647
=========== ===========
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities ......... $ 2,973,686 $ 1,770,379
Accrued Liabilities Due Related Parties .......... 168,857 117,333
Convertible Notes Payable ........................ 1,675,000 1,625,000
Due to Related Parties ........................... 61,943 111,943
Note Payable ..................................... 1,125,000 1,163,500
----------- -----------
Total Current Liabilities ........................ 6,004,486 4,788,156
Long Term Liabilities:
Note Payable ..................................... -- --
----------- -----------
Deficiency in Stockholders' Equity:
Preferred Stock, par value $.0001 per share;
10,000,000 shares authorized;
60,000 issued at December 31, 2004 and
September 30, 2004 ............................... 6 6
Common Stock, par value $.50 per share;
100,000,000 shares authorized; 40,848,239
shares and 23,981,054 shares issued and
outstanding at December 31, 2004 and
September 30, 2004, respectively ................. 20,424,120 11,990,527
Common Stock Subscription ....................... (880,000) (1,000)
Additional Paid-In-Capital ...................... 10,863,008 6,118,993
Accumulated Deficit ............................. (35,180,170) (22,815,034)
----------- -----------
(4,773,036) (4,706,508)
----------- -----------
Total Liabilities and Deficiency in
Stockholders' Equity $ 1,231,450 $ 81,647
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
F-35
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(Unaudited)
For the Period,
For The Three For The Three September 16, 2002,
Months Ended Months Ended (Date of Inception)
December 31, December 31, through
2004 2003 December 31, 2004
---- ---- ----------
Revenues:
Sales ............................. $ -- $ -- $ --
COGS .............................. $ -- $ -- $ --
Operating expenses:
Selling, general and administrative 10,792,921 7,407,750 31,852,994
Depreciation and amortization ..... 4,721 351 7,882
------------ ------------ ------------
Total operating expenses .......... 10,797,642 7,408,101 31,860,876
Operating loss .................... (10,797,642) (7,408,101) (31,860,876)
Other Income (expense) ............ 315 685 26,700
Interest (expense) ................ (1,567,809) (135,074) (3,345,995)
Income (taxes) benefit ............ -- -- --
------------ ------------ ------------
Net loss .......................... $(12,365,136) $ (7,542,490) $(35,180,171)
============ ============ ============
Loss per common share
(basic and assuming dilution) ..... $ (0.45) $ (0.41) $ (1.28)
============ ============ ============
Weighted average shares outstanding 27,402,160 18,503,162 27,402,160
See accompanying notes to unaudited condensed consolidated financial statements
F-36
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 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 unaudited condensed consolidated financial statements
F-37
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 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 unaudited condensed consolidated financial statements
F-38
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 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 unaudited condensed consolidated financial statements
F-39
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 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 unaudited condensed consolidated financial statements
F-40
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 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 $3.07 per
share, Feb 2004 6,283 3,142 16,147 - - - 19,288
Common stock issued in
exchange for consulting
services at $3.04 per
share, Mar 2004 44,740 22,370 113,640 - - - 136,010
Common Stock issued for
options exercised at
$1.00 per share in Mar
2004 55,000 27,500 27,500 - - - 55,000
Common stock issued in
exchange for employee
services at $3.00 per
share, Mar 2004 5,443 2,722 13,623 - - - 16,344
See accompanying notes to unaudited condensed consolidated financial statements
F-41
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 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 unaudited condensed consolidated financial statements
F-42
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 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 (11,000) - - - 39,000
Preferred stock converted
to common stock for
consulting services at
$0.39 per share in
August 2004 (2000) (2) 50,000 25,000 (5,500) - - - 19,498
See accompanying notes to unaudited condensed consolidated financial statements
F-43
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 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)
====== == ========== ========== ========= ======== ======= ============ ===========
See accompanying notes to unaudited condensed consolidated financial statements
F-44
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 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
--------- ------- ---------- ------- ------ ---------- ---------- ------- --------
Common stock issued
in exchange for
consulting services
at $0.68 per share
in October 2004 - - 200,000 100,000 36,000 - - - 136,000
Common stock returned
to treasury at $0.60
per share, Oct 2004 - - (1,069,600) (534,800) (107,298) - - - (642,098)
Common stock issued
in exchange for
consulting services at
$0.60 per share in
October 2004 - - 82,500 41,250 8,250 - - - 49,500
Common Stock issued
pursuant to subscription
at $0.60 share in
October 2004 - - 500,000 250,000 50,000 (300,000) - - -
Common stock issued in
exchange for consulting
services by noteholders
at $0.50 per share
in October 2004 - - 532,500 266,250 - - - - 266,250
Common Stock issued
pursuant to subscription
at $0.50 share in
October 2004 - - 500,000 250,000 - - - - 250,000
Common Stock issued pursuant
to subscription at $0.45
share in October 2004 - - 1,000,000 500,000 (50,000) (450,000) - - -
Common stock issued in
exchange for consulting
services by noteholders
at $0.45 per share
in October 2004 - - 315,000 157,500 (15,750) - - - 141,750
Common Stock issued in
exchange for consulting
services at $0.47 share
in November 2004 - - 100,000 50,000 (3,000) - - - 47,000
Common Stock issued in
exchange for consulting
services at $0.80 share
in November 2004 - - 300,000 150,000 90,000 - - - 240,000
Common Stock issued in
exchange for consulting
services at $1.44 share
in November 2004 - - 115,000 57,500 108,100 - - - 165,600
Common Stock issued in
exchange for employee
services at $1.44 share
in November 2004 - - 5,000 2,500 4,700 - - - 7,200
See accompanying notes to unaudited condensed consolidated financial statements
F-45
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
DECEMBER 31, 2004
Common Stock issued in
exchange for employee
services at $0.60 share
in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000
Beneficial Conversion
discount relating to
Notes Payable - - - - 936,541 - - - 936,541
Beneficial Conversion
Feature relating to
Warrants - - - - 528,459 - - - 528,459
Common stock issued at
$0.016 in exchange for
note payable in December
2004 5,500,000 2,750,000 (2,661,500) 88,500
Common Stock issued in
exchange for consulting
services at $1.44 share
in December 2004 - - 5,796,785 2,898,393 5,418,815 - - - 8,317,207
Common stock issued
pursuant to subscription
at $0.50 per share in
December 2004 - - 2,930,000 1,465,000 - (125,000) - - 1,340,000
Warrants issued to
consultants in
Dec. 2004 - - 394,698 394,698
Net Loss - - - - - - - (12,365,136)(12,365,136)
--------- ------- ---------- ---------- ---------- ----------- --------- ------------ -----------
60,000 6 40,848,239 20,424,120 10,863,008 (879,000) (1,000)(35,180,171) (4,773,035)
========= ======= =========== ========== ========== =========== ========= ============ ===========
See accompanying notes to unaudited condensed consolidated financial statements
F-46
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the period
September 16,
2002 (date of
For The Three Months Ended inception) through
December 31, December 31,
2004 2003 2004
---- ---- ----
Cash flows from operating activities:
Net loss from operating activities ........................................ $(12,365,136) $(7,542,490) $(35,180,170)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation .............................................................. 4,721 351 7,882
Organizational Expenses ................................................... 88,500
Preferred Shares issued in exchange for service ........................... -- -- 1,500,000
Warrants issued to consultants .......................... ................. 394,698 -- 2,414,560
Amortization of beneficial conversion feature-convertible notes............ 1,515,000 133,273 3,140,000
Common stock issued in exchange for consultant services rendered .......... 9,366,507 6,625,368 21,764,239
Common stock canceled-previously issued for services rendered ............. (642,605) (282,000) (928,180)
Changes in Assets and Liabilities:
Increase in-other assets .................................................. (1,065,318) -- (1,079,208)
Increase in due related parties ................................ 1,523 -- 154,219
Increase (decrease) in accounts payable and accrued liabilities ........... 1,203,816 (61,589) 2,959,525
------------ ------------ ------------
Net cash used in operating activities ..................................... (1,586,794) (1,127,087) (5,158,633)
------------
Cash flows from investing activities:
Payments for patent filing ................................................ (4,347) -- (25,698)
Payments for security deposits ............................................ (24,026) (23,559) (47,585)
Capital expenditures ...................................................... (0) (29,507) (29,507)
------------ ------------ ------------
Net cash used in investing activities ..................................... (28,373) (53,066) (102,790)
------------
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost ........................... -- 266,000 432,000
Proceeds from subscription of common stock ................................ 250,000 104,000 375,000
Proceeds from sale of options ............................................. 36,000 32,000 277,000
Advances from shareholders ................................................ -- 34,004 100,088
Proceeds from notes payablele.............................................. 1,390,000 1,175,030 4,140,000
------------ ------------ ------------
Net cash provided by financing activities ................................. 1,676,000 1,611,034 5,324,088
------------
Net increase in cash and cash equivalents ................................. 60,833 430,881 62,665
Cash and cash equivalents at beginning of period .......................... 1,832 193,471 --
Cash and cash equivalents at end of period ................................ $ 62,665 $ 624,352 $ 62,665
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest ...................................... -- -- --
Cash paid during period for taxes ......................................... -- -- --
Non-cash transaction
Common stock issued for services .......................................... 9,366,507 6,625,368 21,765,239
Common stock canceled-previously issued for services rendered ............. (642,605) (282,000) (928,180)
Common stock retired ...................................................... -- -- --
Deferred financing costs ................................................. 200,000.00 --
Beneficial conversion feature related to notes payable .................... 936,541 1,168,474.00 2,321,812
Beneficial conversion feature related to warrants ......................... 528,459 206,526.00 818,188
Preferred Shares in exchange for services.................................. 1,500,000
Warrants issued to consultants ............................................ 394,698 -- 2,414,560
Acquisition:
Common stock retained ..................................................... 1,015
Assets acquired ........................................................... (135)
------------
Total consideration paid .................................................. 880
------------
Organization expenses - note issued in excahnge of shares retired ......... 88,500
Common stock issued in exchange for note payable .......................... 88,500 -- 88,500
See accompanying notes to unaudited condensed consolidated financial statements
F-47
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended December 31, 2004 is not
necessarily indicative of the results that may be expected for the year ended
September 30, 2005. The unaudited condensed consolidated financial statements
should be read in conjunction with September 30, 2004 financial statements.
Business and Basis of Presentation
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of Nevada. The Company is in the
development stage , as defined by Statement of Financial Accounting Standards
No. 7 ("SFAS No. 7") and its efforts have been principally devoted to developing
DNA embedded biotechnology security solutions in the United States. To date, the
Company has generated nominal sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
inception through December 31, 2004, the Company has accumulated losses of
$35,180,171
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary ProHealth Medical Technologies, Inc. Significant
inter-company transactions have been eliminated in Consolidation.
Reclassification
Certain prior period amounts have been reclassified for comparative purposes.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives of 3 to 5 years using the straight line method. At December 31,
2004 property and equipment consist of:
December 31, 2004
-----------------
Furniture $ 29,507
Accumulated depreciation 1,756
=================
Net $ 27,751
Advertising
The Company will follow a policy of charging the costs of advertising to
expenses incurred. The Company incurred advertising costs of $4,490 and $0,
respectively during the three months ended December 31, 2004.
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.
F-48
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
Intangible Assets
At December 31, 2004, intangible assets consist of:
December 31,
2004
Intangible assets $ 34,257
Accumulated amortization (6,126)
-----------
Net Intangible Assets $ 28,131
===========
Restricted Cash
Per terms of the December Promissory Note Payable agreement dated December 20,
2004, all proceeds received from note holders remain in escrow subject to (1)
the filing of a Definitive Information Statement that increases the authorized
Common Stock and reduces par value, and (2) the closing of a Private Placement
for $1 million or more and in the event of such occurrence the Note will
automatically without notice to the note holder, in to Common Stock of the
Company, at any time at $0.50 per share plus 100% warrant coverage with said
warrant being exerciseable at $0.75 per share for a period of three years and
callable at $1.25 after the underlying stock is registered if said stock trades
at above $1.25 per share for 10 days - See Note F.
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended September 30, 2003 and for
the subsequent periods.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note E):
F-49
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
Stock Based Compensation (Continued)
For the Period
September 16,
2002 (Date of
For The Three For The Three Inception)
Months ended Months ended through
December 31, December 31, December 31,
2004 2003 2004
Net loss - as reported $ (12,365,136) $(7,542,490) $(35,180,171)
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 $ (12,365,136)
$(7,542,490) $ (35,180,171)
Net loss attributable to common stockholders - Pro forma
$ (12,365,136) $(7,542,490) $ (35,180,171)
============== ============ ==============
Basic (and assuming dilution) loss per share - as reported $ (0.45) $ (0.40) $ (1.28)
============== ============ ==============
Basic (and assuming dilution) loss per share - Pro forma $ (0.45) $ (0.40) $ (1.28)
============== ============ ==============
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
F-50
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE B - MERGER (Continued)
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.
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.
NOTE C - RELATED PARTY TRANSACTIONS
At December 31, 2004, notes payable are as follows:
December
31, 2004
----------
Note payable , related party, together with interest at 8% per annum, unsecured.
Upon default, the Company issued noteholder 7.5 million shares of the Company's
common stock. The noteholder retained 2 million shares and set aside 3.5 million
in escrow as third party deferred compensation for a future transaction $ -
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 $100,000 upon first funding, 20%
rate of interest, or 100,000 shares at par value of $0.001 100,000
----------
1,125,000
Less: current portion 1,125,000
----------
Note payable - long-term $ -
----------
Included in current liabilities is $61,943 at December 31, 2004, which
represents advances from the stockholders of the Company. No formal agreements
or repayment terms exist.
Also, the Company owed $168,857 at December 31, 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 significant former shareholder of the Company.
The Company has entered into long term employment and consulting agreements with
Company's President and Chief Executive Officer and an entity controlled by a
former significant Company shareholder, respectively.
F-51
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE D - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 100,000,000 shares
of common stock, with a $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 December 31, 2004, the Company has
issued and outstanding 40,848,239 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.
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.
F-52
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In March 2003, the Company issued 91,060 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $2.53
per share, which represents the fair value of the services received which did
not differ materially from the value of the stock issued.
In March 2003, the Company issued 6,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $
0.065 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued.
In March 2003, the Company received subscription for 18,000 shares of common
stock in exchange for cash at $1 per share.
On April 1, 2003, the Company issued 860,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 9, 2003, the Company issued 18,000 shares of common stock in exchange
for previously issued options to purchase the Company's common stock at $1.00
per share.
On April 9, 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 23, 2003, the Company issued 5,000 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 12, 2003, the Company issued 10,000 shares common stock in exchange for
consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 17 2003, the Company issued 50,000 shares of common stock in exchange
for cash at $1.00 per share
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-53
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
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.
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
7subscription to purchase the Company's common stock pursuant to a private
placement.
F-54
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
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.
F-55
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
In March 2004, the Company issued 5,443 shares of common stock at $3.00 per
share in exchange for employee services valued at $16,344.
In March 2004, the Company issued 5,769 shares of common stock at $3.15 per
share in exchange for employee services valued at $18,177.
In March 2004, the Company converted 5,000 preferred shares into 125,000 shares
of common stock at $3.00 per share in exchange for employee services valued at
$375,000.
In March 2004, the Company issued 8,806 shares of common stock at $3.03 per
share in exchange for employee services valued at $26,639.
In April 2004, the Company issued 22,500 shares of common stock at $0.10 for
subscription of warrants to be exercised.
In April 2004, the Company issued 9,860 shares of common stock at $2.58 per
share in exchange for employee services valued at $25,441.
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.
F-56
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
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.
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 October 2004, the Company issued 200,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.68 per share for a total of $136,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, shareholders returned 1,069,600 shares to treasury issued
earlier in exchange for services valued at $642,098.
In October 2004, the Company issued 82,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.60 per share for a total of $49,500, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.60 per share pursuant to private placement.
In October 2004, the Company issued 532,500 shares of common stock to existing
noteholders. The Company valued the shares issued at approximately $0.50 per
share for a total of $266,250.
F-57
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.50 per share pursuant to private placement.
In October 2004, the Company sold 1,000,000 shares of common stock subscribed
for cash at $0.45 per share pursuant to private placement.
In October 2004, the Company issued 315,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.45 per share for a total of $141,750, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.47 per share for a total of $47,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 300,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.80 per share for a total of $240,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 115,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$1.44 per share for a total of $165,600, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 5,000 shares of common stock in exchange
for employee services. The Company valued the shares issued at approximately
$1.44 per share for a total of $7,200, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In November 2004, the Company issued 60,000 shares of common stock in exchange
for employee services. The Company valued the shares issued at approximately
$0.60 per share for a total of $36,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
In December 2004, the Company issued 5,796,785 shares of common stock in
exchange for consulting services. The Company valued the shares issued at
approximately $1.44 per share for a total of $8,317,207, which represents the
fair value of the services received which did not differ materially from the
value of the stock issued.
In December 2004, the Company issued 2,930,000 shares of common stock subscribed
for cash at $0.50 per share pursuant to the exercise terms of a promissory note
payable.
F-58
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE D - CAPITAL STOCK (Continued)
In accordance with EITF 96-18 the measurement date to determine fair value was
the date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued for
consulting services at the rate which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
NOTE 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 Exercisable
Remaining Weighted Weighted Weighted
Number Contractual Average Average Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- -------------- ----------- --------------
$0.10 335,000 4.54 $0.10 335,000 $0.10
$0.50 50,000 4.77 $0.50 50,000 $0.50
$0.60 6,322,750 4.30 $0.60 6,322,750 $0.60
$0.70 750,000 2.58 $0.70 750,000 $0.70
$0.75 2,830,000 2.98 $0.75 2,830,000 $0.75
$1.00 386,000 0.79 $1.00 386,000 $1.00
$3.00 62,503 1.00 $3.00 62,503 $3.00
---------- ----------
10,736,253 10,736,253
========== ==========
Transactions involving warrants are summarized as follows:
Number of Shares Weighted Average
Price Per Share
Outstanding at September 30, 2004 4,870,253 $ 0.63
Granted 5,866,000 0.68
Exercised - -
Canceled or expired - -
-------------------- -
Outstanding at December 31, 2004 10,736,253 $ 0.66
==================== ========
The estimated value of the compensatory warrants granted to non-employees
in exchange for services and financing expenses was determined using the
Black-Scholes pricing model and the following assumptions: contractual term
of 2 to 5 years, a risk free interest rate of 4.25%, a dividend yield of 0%
and volatility of 22.9%. The amount of the expense charged to operations
for compensatory warrants granted in exchange for services was $ 394,698
for the three months ended December 31, 2004.
F-59
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE
A summary of convertible promissory notes payable at December 31, 2004
(Unaudited) is as follows:
December 31, 2004
(Unaudited)
A) 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. 1,675,000
Debt Discount - beneficial conversion feature, net of accumulated
amortization of $1,290,837 as of December 31, 2004 -
Debt Discount - value attributable to warrants attached to notes,
net of accumulated amortization of $384,163 as of December 31,
2004 -
B) Convertible notes payable totaling $1,465,000 ("December
Promissory Notes"), at the earlier of Definitive Information
Statement that increases the authorized Common Stock and reduces
par value or the completion of any equity financing of $1M or
more bearing interest at 6% per annum. The Notes are convertible
into shares of common stock of the Company at a price of $0.50
per share.At December 31, 2004, convertible notes are converted
into common shares of the Company as per the terms -
Debt Discount - beneficial conversion feature, net of accumulated
amortization of $936,541 as of December 31, 2004. -
Debt Discount - value attributable to warrants attached to notes,
net of accumulated amortization of $528,459 as of December 31, -
2004. -----------
$ 1,675,000
===========
F-60
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued)
Convertible Debentures
During 2004, the Company sold 33.5 units (the "Units") to accredited investors
at a price of $50,000 per Unit (the "Bridge Offering") for a total of
$1,675,000. 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 $0.60 per share ("$0.60 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 $0.60 Warrant, the
"Warrants"). The Notes are convertible into shares of our common stock at a
price of $0.33 per share.
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 $1,290,837 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.
In connection with the placement of the Bridge Offering notes, the Company
offered 100% warrant coverage for each dollar of promissory note, exercisable
for a period of three years at a price of $0.75 per share ("$0.75 Warrant"). In
accordance with EMERGING ISSUES TASK FORCE ISSUE 00-27, APPLICATION OF ISSUE NO.
98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS ("EITF - 0027"), the Company recognized
the value attributable to the warrants in the amount of $384,163 to additional
paid in capital and a discount against the Bridge Offering. The Company valued
the warrants in accordance with EITF 00-27 using the Black-Scholes pricing model
and the following assumptions: contractual terms of 5 years, an average risk
free interest rate of 4.25%, a dividend yield of 0.00%, and volatility of 42%.
The debt discount attributed to the value of the warrants issued is amortized
over the Bridge Offering's earliest maturity period of 9 months from the date of
issue as interest expense.
In December 2004, the Company sold convertible promissory notes to accredited
investors in the aggregate of $1,465,000. Each $1.00 is convertible into common
stock at $0.50 and includes 100% warrant coverage to purchase our common stock,
exercisable for a period of three years at a price of $0.75 per share ("$0.75
Warrant") and callable at $1.25 after the underlying stock is registered if said
stock trades at above $1.25 per share for 10 days - See Note A, Restricted Cash.
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 $936,541 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and a
discount against the Bridge Offering. The debt discount attributed to the
beneficial conversion feature was fully amortized over the fiscal first quarter
period as interest expense.
In connection with the placement of the Bridge Offering notes, the Company
offered 100% warrant coverage for each dollar of promissory note, exercisable
for a period of three years at a price of $0.75 per share ("$0.75 Warrant"). In
accordance with EMERGING ISSUES TASK FORCE ISSUE 00-27, APPLICATION OF ISSUE NO.
98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS ("EITF - 0027"), the Company recognized
the value attributable to the warrants in the amount of $528,459 to additional
paid in capital and a discount against the Bridge Offering. The Company valued
the warrants in accordance with EITF 00-27 using the Black-Scholes pricing model
and the following assumptions: contractual terms of 3 years, an average risk
free interest rate of 4.25%, a dividend yield of 0.00%, and volatility of
26.72%. The debt discount attributed to the value of the warrants issued was
fully amortized over the fiscal first quarter period as interest expense.
F-61
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
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 December 31, 2004, the Company has available for federal income tax purposes
a net operating loss carryforward of approximately $35,000,000, expiring in the
year 2023, that may be used to offset future taxable income. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, since in the opinion of management based upon the earnings history of
the Company, it is more likely than not that the benefits will not be realized.
Due to significant changes in the Company's ownership, the future use of its
existing net operating losses may be limited.
Components of deferred tax assets as of December 31, 2004 are as follows:
Non current:
Net operating loss carryforward
$12,000,000
Valuation allowance (12,000,000)
-----------
Net deferred tax asse $ -
===========
F-62
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE H-LOSSES PER SHARE
The following table presents the computation of basic and diluted losses per
share:
For the Three Months Ended For the Three Months Ended
December 31, 2004 December 31, 2003
----------------- -----------------
Loss available for common shareholders $ (12,365,136) $ (7,542,590)
================= =================
Basic and fully diluted loss per share $ (0.45) $ (0.41)
================= =================
Weighted average common shares outstanding 27,402,160 18,503,162
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
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. We follow the policy of charging the costs of
consulting services expenses incurred.
F-63
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE I- COMMITMENTS AND CONTINGENCIES (Continued)
Consulting Agreements (continued)
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.
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.
Note Payable Settlement
In October 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 had the right to demand that his outstanding
note be converted back into 7,500,000 shares. The Company subsequently settled
the matter for 5,500,000 shares with the noteholder. Included within the
5,500,000 shares are 3,500,000 shares retained in escrow for negotiated on
behalf of another party for future deferred compensation. We account for
extinguishment of debt with related parties as capital transactions and gains
and/or losses are not recognized upon extinguishment.
Litigation
Ex-officer was named as a defendant in a lawsuit brought by an outside party in
the United States District Court for the Central District of California, and in
that action, Applied DNA was named as a "nominal defendant." The plaintiff is
alleging that the ex-officer violated the short swing rule. The Company believes
it has meritorious defenses and will prevail in this matter.
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
three months ended on December 31, 2004 was $47,194.
Commitments for minimum rentals under non-cancelable lease at September 30, 2004
were as follows:
F-64
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(UNAUDITED)
NOTE I- COMMITMENTS AND CONTINGENCIES (continued)
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.
NOTE J- SUBSEQUENT EVENTS
In January 2005, the Company arranged a $5.970 million private placement of
11.940 million shares at $0.50 per share along with 11.940 million attached
warrants with an exercise price of $0.75 that expires in 5 years.
In January 2005, holders of 1,675,000 of convertible notes payable elected to
convert their notes to common stock at $0.33 per share (See Note F).
On January 2005, the Company entered into a stock purchase agreement with
Biowell Technology Inc., a Taiwan corporation ("Biowell"), whereby a
to-be-formed wholly- owned subsidiary of the Company would acquire a company to
be formed which would own all of the intellectual property of Biowell in
exchange for 36,000,000 shares of the Company's common stock to be issued to the
shareholders of Biowell. The Acquisition Shares represent 50% of the total
shares issued and outstanding on a fully diluted basis on the date of execution
of the Agreement. The acquisition of the Biowell assets has not consummated as
defined by SEC Accounting Disclosure Rules and Practices Official Text. If and
when the transaction is consummated, we will account for and disclose the
transaction in accordance with generally accepted accounting standards,
including but not limited to FAS No 141.
In February 2005, the Company in a private placement, sold an aggregate of
$1,391,000 in secured convertible promissory notes and 2,782,000 warrants. The
notes bear interest at 10% per annum, mature one year from the date of issuance,
and are convertible: into shares of common stock of the Company at a price of
$0.50 per share (i) at the holder's option; or (ii) automatically upon the
Company's filing of a registration statement registering the shares underlying
the notes and Warrants.
F-65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers. In addition, we have entered into indemnification agreements with our
officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 6,571.87
Accounting fees and expenses 10,000.00*
Legal fees and expenses 40,000.00*
Miscellaneous 3,428.13
-----------
TOTAL $60,000.00*
===========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On September 16, 2002, our predecessor issued 100,000 unregistered shares of
common stock to its founders in exchange for services rendered, which we valued
at $1,000.
On October 21, 2002, we issued 10,178,352 unregistered shares of common stock in
connection with the merger with Applied DNA Sciences, Inc. We valued the shares
at $1,018. our predecessor cancelled the previously issued and outstanding
100,000 shares of common stock in October, 2002.
In October 2002, we issued 602,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $39,130.
In October 2002, we issued 876,000 unregistered shares of common stock in
connection with a subscription agreement, which we valued at $56,940.
In January 2003, we issued 1,500,000 unregistered shares of common stock to
Biowell Technology, Inc. as consideration for technology licensing agreement,
which we valued at $97,500.
In January 2003, we issued 586,250 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $76,213.
In February 2003, we issued 9,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $585.
In March 2003, we issued 10,140,000 unregistered shares of common stock to its
Founders as consideration for services rendered, which we valued at $1,014.
In March 2003, we issued 91,060 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $230,634.
In March 2003, we issued 6,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $390.
In March 2003, we issued 860,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $55,900.
In April 2003, we issued 18,000 unregistered shares of common stock in exchange
for $18,000.
In April 2003, we issued 9,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $585.
In April 2003, we issued 5,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $12,500.
In June 2003, we issued 10,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $25,000.
In June 2003, we issued 50,000 unregistered shares of common stock in exchange
for $50,000.
In June 2003, we issued 270,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $17,550.
In July 2003, we issued 213,060 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $428,818.
In July 2003, we issued 20,000 unregistered shares of common stock in exchange
for $20,000.
II-2
In July 2003, we issued 10,000 unregistered shares of common stock in exchange
for $10,000.
In August 2003, we issued 172,500 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $410,930.
In August 2003, we issued 29,000 unregistered shares of common stock in exchange
for $29,000.
In September 2003, we issued 395,260 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $952,997.
In September 2003, we sold 16 units at $4,000 a unit, for a total of $64,000.
Each Unit consisted of 1,600 shares of our Common Stock plus 500 Common Stock
Purchase Warrants, exercisable for a period of two years at a price of $3.50 a
share.
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. In
September, 2003, we issued 95,000 unregistered shares of common stock in
exchange for $95,000.
Between October and December 2003, we sold 167.5 units for a total of $670,000.
Each Unit consisted of 1,600 shares of our Common Stock plus 500 Common Stock
Purchase Warrants, exercisable for a period of two years at a price of $3.50 a
share.
From November through December 2003, we sold 23.25 units to accredited investors
at a price of $50,000 per Unit for a total of $1,162,500. Each Unit consists of
(i) a $50,000 Principal Amount 10% Secured Convertible Promissory Note, (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 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. The Notes are convertible into shares of our common
stock at a price of $2.50 per share.
From October 7 through to October 30, 2003, we issued a total of 255,439 shares
of our Common Stock to eight consultants for their marketing, investor relations
and advisory services. These issuances are considered exempt from registration
by reason of the Section 4(2) of the Securities Act of 1933.
On October 9, 2003, we issued 120,000 shares to an investor in our 2003 Private
Placement of Units for total proceeds of $300,000. This issuance is considered
exempt from registration by reason of Section 4(2) of the Securities Act of 1933
as well as Regulation D of the Act, and Rule 506 promulgated thereunder.
In October 2003, the Company issued 32,000 shares of common stock in exchange
for previously issued non-compensatory warrants exercised at $1.00 per share.
This issuance is considered exempt from registration by reason of Section 4(2)
of the Securities Act of 1933.
On November 3, 2003, we issued 100,000 shares to an employee as a signing bonus
and for sales and marketing services in lieu of salary. This issuance is
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
From November 18, 2003 through December 5, 2003, we issued a total of 106,400
shares of our Common Stock to two investors in our 2003 Private Placement of
Units for total proceeds of $266,000. These issuances are considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933 as well as
Regulation D of the Act, and Rule 506 promulgated thereunder.
From December 5, 2003 through December 24, 2004, we issued a total of 275,500
shares of our Common Stock to consultants and employees for their investor
relations, sales, marketing and advisory services. These issuances are
considered exempt from registration by reason of the Section 4(2) of the
Securities Act of 1933.
II-3
On December 17, 2003, we issued a total of 1,850,000 shares to ten consultants
in connection with our agreement with the company's investment bankers, Vertical
Capital Partners, Inc.. These issuances are considered exempt from registration
by reason of the Section 4(2) of the Securities Act of 1933.
In January 2004, the Company issued a total of 41,600 shares of Common Stock at
$2.50 per share in fulfillment of a stock subscription made in December 2003 to
various consultants in exchange for administrative, marketing, financial
advisory and legal consulting services. These issuances are considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
To conserve capital, in February 2004, the Company issued 6,283 shares of Common
Stock to employees in lieu of their cash salaries. Such issuances were
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
In March 2004, the Company issued 44,740 shares of Common Stock in exchange for
consulting services. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
In March 2004, the Company issued 125,018 shares of Common Stock in exchange for
employee services. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
In March 2004, the Company issued 22,500 of common stock at $0.10 for
subscription of warrants to be exercised. This issuance is considered exempt
under Regulation D of the Securities Act of 1933 and Rule 506 promulgated
thereunder, as well as Section 4(2) of the Act.
In March 2004, the Company issued 5,443 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 of common stock at $3.15 per share in
exchange for employee services valued at $18,177.
In March 2004, the Company issued 8,806 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 issued 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.
II-4
In May 2004, the Company issued 137,000 shares of common stock at $0.86 per
share in exchange for consulting services valued at $119,413.
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 $0.64 1/2 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.
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.
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.
II-5
To obtain funding for our ongoing operations, we sold $1,465,000 in convertible
promissory notes to 13 investors in December 2004. Each promissory note was
automatically convertible into shares of our common stock, at a price of $0.50
per share, upon the closing of a private placement for $1 million or more. In
connection with the sale of the convertible promissory notes, we issued
2,930,000 warrants to purchase shares of common stock. The warrants are
exercisable until three years from the date of issuance at a purchase price of
$0.75 per share. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
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. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
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. This issuance is considered exempt under
Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder.
To obtain funding for our ongoing operations, we conducted a private placement
offering in January and February 2005, in which we sold $7,361,000 of 10%
Secured Convertible Promissory Notes to 61 investors. The 10% Secured
Convertible Promissory Notes automatically convert into shares of our common
stock, at a price of $0.50 per share, upon the filing of this registration
statement. In connection with the private placement offering, we have issued
15,222,000 warrants. The warrants are exercisable until five years from the date
of issuance at a purchase price of $0.75 per share. This issuance is considered
exempt under Regulation D of the Securities Act of 1933 and Rule 506 promulgated
thereunder.
On January 28, 2005, we closed upon a private placement transaction in excess of
$1 million, and on February 2, 2005, the promissory notes issued in December
2004 were converted into an aggregate of 2,930,000 shares of common stock. This
issuance is considered exempt under Regulation D of the Securities Act of 1933
and Rule 506 promulgated thereunder.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of Applied DNA Sciences or
executive officers of Applied DNA Sciences, and transfer was restricted by
Applied DNA Sciences in accordance with the requirements of the Securities Act
of 1933. In addition to representations by the above-referenced persons, we have
made independent determinations that all of the above-referenced persons were
accredited or sophisticated investors, and that they were capable of analyzing
the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
II-6
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Applied DNA Sciences, Inc., a Nevada
corporation.
Exhibit No. Description
2.1 Articles of Merger of Foreign and Domestic Corporations, filed
December 19, 1998 with the Nevada Secretary of State, filed as an
exhibit to the annual report on Form 10-KSB filed with the
Commission on December 29, 2003 and incorporated herein by
reference.
3.1 Articles of Incorporation of DCC Acquisition Corporation, filed
April 20, 1998 with the Nevada Secretary of State, filed as an
exhibit to the annual report on Form 10-KSB filed with the
Commission on December 29, 2003 and incorporated herein by
reference.
3.2 Articles of Amendment of Articles of Incorporation of DCC
Acquisition Corp. changing corporation name to ProHealth Medical
Technologies, Inc.
3.3 Certificate of Designations, Powers, preferences and Rights of
the Founders' Series of Convertible Preferred Stock, filed as an
exhibit to the annual report on Form 10-KSB filed with the
Commission on December 29, 2003 and incorporated herein by
reference.
3.4 Articles of Amendment of Articles of Incorporation of Applied DNA
Sciences, Inc. increasing the par value of the company's common
stock, filed on December 3, 2003 with the Nevada Secretary of
State, filed as an exhibit to the annual report on Form 10-KSB
filed with the Commission on December 29, 2003 and incorporated
herein by reference.
3.5 By-Laws of Applied DNA Sciences, Inc., filed as an exhibit to the
annual report on Form 10-KSB filed with the Commission on
December 29, 2003 and incorporated herein by reference.
4.1 Form of Subscription Agreement, filed as an exhibit to the
current report on Form 8-K filed with the Commission on January
28, 2005 and incorporated herein by reference.
4.2 Form of 10% Secured Convertible Promissory Note, filed as an
exhibit to the current report on Form 8-K filed with the
Commission on January 28, 2005 and incorporated herein by
reference.
4.3 Form of Warrant Agreement, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 28, 2005
and incorporated herein by reference.
4.4 Registration Rights Agreement, dated January 28, 2005, between
the Company and Vertical Capital Partners, Inc., on behalf of the
investors, filed as an exhibit to the current report on Form 8-K
filed with the Commission on January 28, 2005 and incorporated
herein by reference.
4.5 Security Agreement, dated January 28, 2005, between the Company
and Vertical Capital Partners, Inc., on behalf of the investors,
filed as an exhibit to the current report on Form 8-K filed with
the Commission on January 28, 2005 and incorporated herein by
reference.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent, filed as
an exhibit to the registration statement on Form SB-2 filed with
the Commission on February 15, 2005 and incorporated herein by
reference.
10.1 Exclusive License Agreement between Biowell Technology Corp. and
Applied DNA Sciences, Inc. executed on October 8, 2002, filed as
an exhibit to the registration statement on Form SB-2 filed with
the Commission on February 15, 2005 and incorporated herein by
reference.
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10.2 Sub-License Agreement with G. A. Corporate Finance Ltd. Applied
DNA Sciences, Inc., executed on July 29, 2003, as amended, filed
as an exhibit to the current report on Form 8-K filed with the
Commission on September 29, 2003 and incorporated herein by
reference.
10.3 Indemnification Agreement with Larry Lee, filed as an exhibit to
the registration statement on Form SB-2 filed with the Commission
on February 15, 2005 and incorporated herein by reference.
10.4 Indemnification Agreement with Robin Hutchison, filed as an
exhibit to the registration statement on Form SB-2 filed with the
Commission on February 15, 2005 and incorporated herein by
reference.
10.5 Indemnification Agreement with Michael Hill, filed as an exhibit
to the registration statement on Form SB-2 filed with the
Commission on February 15, 2005 and incorporated herein by
reference.
10.6 Indemnification Agreement with Peter Brocklesby, filed as an
exhibit to the registration statement on Form SB-2 filed with the
Commission on February 15, 2005 and incorporated herein by
reference.
10.7 Indemnification Agreement with Adrian Botash, filed as an exhibit
to the registration statement on Form SB-2 filed with the
Commission on February 15, 2005 and incorporated herein by
reference.
10.8 Indemnification Agreement with Karin Klemm, filed as an exhibit
to the registration statement on Form SB-2 filed with the
Commission on February 15, 2005 and incorporated herein by
reference.
10.9 Indemnification Agreement with Ron Erickson, filed as an exhibit
to the registration statement on Form SB-2 filed with the
Commission on February 15, 2005 and incorporated herein by
reference.
10.10 Giuliani Partners Strategic Marketing Partnership Agreement,
filed as an exhibit to the registration statement on Form SB-2
filed with the Commission on February 15, 2005 and incorporated
herein by reference
10.11 Stock Purchase Agreement, dated as of January 28, 2005, by and
between Applied DNA Sciences, Inc. and Biowell Technology, Inc.,
filed as an exhibit to the current report on Form 8-K filed with
the Commission on February 2, 2005 and incorporated herein by
reference.
10.12 Investment Advisory Agreement, dated as of February 14, 2005, by
and between Applied DNA Sciences, Inc. and First London Finance,
Ltd., filed as an exhibit to the registration statement on Form
SB-2 filed with the Commission on February 15, 2005 and
incorporated herein by reference.
23.1 Consent of Russell Bedford Stefanou Mirchandani LLP (filed
herewith).
23.2 Consent of legal counsel (see Exhibit 5.1).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
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prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Los
Angeles, State of California, on April 29, 2005.
APPLIED DNA SCIENCES, INC.
By:/s/ ROB HUTCHISON
------------------
Rob Hutchison, Chief Executive Officer, Principal Executive
Officer and Chairman of the Board of Directors
By:/s/ KARIN KLEMM
---------------
Karin Klemm, Interim Chief Financial Officer, Principal Financial
Officer, Principal Accounting Officer and Secretary
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ ROB HUTCHISON Chief Executive Officer and April 29, 2005
-------------------- Chairman of the Board of Directors
Rob Hutchison
/s/ PETER BROCKLESBY President and Director April 29, 2005
--------------------
Peter Brocklesby
/s/ LAWRENCE LEE Chief Technology Strategist April 29, 2005
-------------------- and Director
Lawrence Lee
/s/ MICHAEL HILL Director April 29, 2005
--------------------
Michael Hill
/s/ RON ERICKSON Director April 29, 2005
--------------------
Ron Erickson
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