UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 2005
Commission file number 002-90519
APPLIED DNA SCIENCES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Nevada 59-2262718
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9229 West Sunset Blvd., Suite 830
Los Angeles, California 90069
----------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(310) 860-1362
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the last 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes __X___ No _______
The number of shares of Common Stock, $0.001 par value, outstanding on August 9,
2005, was 110,653,025 shares, held by approximately 1,182 shareholders.
Transitional Small Business Disclosure Format (check one):
Yes ______ No ___X___
APPLIED DNA SCIENCES, INC
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending June 30, 2005
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet:
June 30, 2005 (Unaudited) 3
Condensed Consolidated Statements of Losses:
Three and Nine Months Ended June 30, 2005 and 2004 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through June
30, 2005 (Unaudited) 4
Condensed Consolidated Statement of Stockholder's Equity:
For the Period from September 16, 2002 (Date) of Inception Through June
30, 2005 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended June 30, 2005 and 2004 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through June
30, 2005 (Unaudited) 17
Notes to Unaudited Condensed Consolidated Financial Information:
June 30, 2005 19-35
Item 2. Management Discussion and Analysis 36
Item 3. Controls and Procedures 48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 50
Item 3. Defaults Upon Senior Securities 50
Item 4. Submission of Matters to a Vote of Security Holders 50
Item 5. Other Information 50
Item 6. Exhibits 50
Signatures 51
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, 2005
------------------
Current assets:
Cash and cash equivalents $ 1,192,465
-------------------
Total current assets 1,192,465
Property, plant and equipment - Net of accumulated depreciation of $8,844 as of June 30, 2005 20,663
Deposits and prepaid expenses 56,850
Patent Filing - Net 24,753
-------------------
Total Assets $ 1,294,731
===================
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 933,074
Accrued liabilities due related parties 95,162
Due to related parties 91,312
Note payable (Note C) 425,000
-------------------
Total current liabilities 1,544,548
Commitments and contingencies(Note E)
Deficiency in stockholders' equity:
Preferred stock, par value $.001 per share; 10,000,000 shares authorized;
60,000 issued and outstanding 6
Common stock, par value $.001 per share; 250,000,000 shares authorized; 66,411,025 shares
issued and outstanding 66,412
Common stock subscription (Note B) (37,000)
Additional said-in-capital 54,355,065
Deficit sccumulated during development stage (54,634,300)
------------------
Total deficiency in stockholders' equity (249,817)
------------------
Total liabilities and deficiency in stockholders' equity $ 1,294,731
==================
See accompanying notes to unaudited consolidated financial statements
3
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(Unaudited)
September 16, 2002,
For The Three Months Ended June 30 For The Nine Months Ended June 30 (Date of Inception)
through
2005 2004 2005 2004 June 30, 2005
-------------- -------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative $ 2,659,727 $ 1,672,449 $22,236,607 $ 10,989,349 $ 43,296,679
Research and Development 88,870 - 345,958 - 345,958
Depreciation and amortization 3,160 351 15,187 1,053 18,348
-------------- -------------- -------------- -------------- --------------
Total operating expenses 2,751,757 1,672,800 22,597,752 10,990,402 43,660,985
Operating loss (2,751,757) (1,672,800) (22,597,752) (10,990,402) (43,660,985)
Other Income (expense) 241 - 3,415 1,385 29,800
Interest (expense) (21,557) (558,333) (9,224,929) (1,221,245) (11,003,115)
Income (taxes) benefit - - - - -
-------------- -------------- -------------- -------------- --------------
Net loss $ (2,773,073) $ (2,231,133) $ (31,819,266) $ (12,210,262) $ (54,634,300)
============== ============== ============== ============== ==============
-
Loss per common share
(basic and assuming dilution) $ (0.04) $ (0.10) $ (0.65) $ (0.61) $ (2.04)
============== ============== ============== ============== ==============
Weighted average shares outstanding 66,298,115 21,350,449 48,806,398 20,164,783 26,793,544
============== ============== ============== ============== ==============
See accompanying notes to unaudited condensed consolidated financial statements
4
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
JUNE 30, 2005 (Unaudited)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share - $ - 100,000 $ 10 $ 990 - $ - $ - $ 1,000
Net Loss - - - - - - - (11,612) (11,612)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at September 30,
2002 - - 100,000 10 990 - - (11,612) (10,612)
Issuance of common stock
in connection with merger
with Prohealth Medical
Technologies , Inc on
October 1, 2002 - - 10,178,352 1,015 - - - - 1,015
Cancellation of Common
stock in connection with
merger with Prohealth
Medical Technologies ,
Inc on October
21, 2002 - - (100,000) (10) (1,000) - - - (1,000)
Issuance of common stock
in exchange for services
in October 2002 at $ 0.65
per share - - 602,000 60 39,070 - - - 39,130
Issuance of common stock in
exchange for subscription
in November and December
2002 at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - -
Cancellation of common
stock in January 2003
previously issued in
exchange for consulting
services - - (836,000) (84) (54,264) - 54,340 - -
Issuance of common stock
in exchange for licensing
services valued
at $ 0.065 per share in
January 2003 - - 1,500,000 150 97,350 - - - 97,500
Issuance of common stock
in exchange
for consulting services
valued at $ 0.13 per share
in January 2003 - - 586,250 58 76,155 - - - 76,213
Issuance of common stock
in exchange
for consulting services
at $ 0.065 per
share in February 2003 - - 9,000 1 584 - - - 585
Issuance of common stock
to Founders in exchange
for services valued at
$0.0001 per share in
March 2003 - - 10,140,000 1,014 - - - - 1,014
Issuance of common stock
in exchange for consulting
services valued at
$2.50 per share in March 2003 - - 91,060 9 230,625 - - - 230,634
See accompanying notes to unaudited condensed consolidated financial statements
5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Issuance of common stock in
exchange for consulting
services valued at $
0.065 per share in March 2003 - - 6,000 1 389 - - - 390
Common stock subscribed in
exchange for cash at $1 per
share in March 2003 - - - - 18,000 - - - 18,000
Common stock issued in
exchange for consulting
services at $ 0.065 per
share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900
Common stock issued in
exchange for
cash at $ 1.00 per share
on April 9, 2003 - - 18,000 2 - - - - 2
Common stock issued in
exchange for
consulting services at $
0.065 per
share on April 9, 2003 - - 9,000 1 584 - - - 585
Common stock issued in
exchange for
consulting services at
$ 2.50 per
share on April 23, 2003 - - 5,000 1 12,499 - - - 12,500
Common stock issued in
exchange for
consulting services at
$ 2.50 per
share, on June 12, 2003 - - 10,000 1 24,999 - - - 25,000
Common stock issued in
exchange for
cash at $ 1.00 per share
on June 17, 2003 - - 50,000 5 49,995 - - - 50,000
Common stock subscribed
in exchange
for cash at $ 2.50 per
share pursuant
to private placement
on June 27, 2003 - - - - 24,000 - 24,000
Common stock retired in
exchange for note payable
at $0.0118 per share,
on June 30, 2003 - - (7,500,000) (750) 750 - - - -
Common stock issued in
exchange for
consulting services at
$0.065 per
share, on June 30, 2003 - - 270,000 27 17,523 - - - 17,550
Common stock subscribed
in exchange for cash at
$ 1.00 per share pursuant
to private placement on
June 30, 2003 - - - - - 10,000 - - 10,000
Common stock subscribed
in exchange for cash at
$ 2.50 per share pursuant
to private placement on
June 30, 2003 - - - - - 24,000 - - 24,000
Common stock issued in
exchange for consulting
services at approximately
$2.01 per share, July 2003 - - 213,060 21 428,798 - - - 428,819
See accompanying notes to unaudited condensed consolidated financial statements
6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock canceled
in July 2003,
previously issued for
services rendered at
$2.50 per share - - (24,000) (2) (59,998) - - - (60,000)
Common stock issued
in exchange for
options exercised at
$1.00 in July 2003 - - 20,000 2 19,998 - - - 20,000
Common stock issued
in exchange for
exercised of options
previously
subscribed at $1.00 in
July 2003 - - 10,000 1 9,999 (10,000) - - -
Common stock issued in
exchange for
consulting services at
approximately
$2.38 per share,
August 2003 - - 172,500 17 410,915 - - - 410,933
Common stock issued in
exchange for
options exercised at
$1.00 in August 2003 - - 29,000 3 28,997 - - - 29,000
Common stock issued
in exchange for
consulting services
at approximately
$2.42 per share,
September 2003 - - 395,260 40 952,957 - - - 952,997
Common stock issued
in exchange for
cash at $2.50 per
share-subscription
payable-September 2003 - - 19,200 2 47,998 (48,000) - - -
Common stock issued in
exchange for
cash at $2.50 per
share pursuant to
private placement
September 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for
options exercised at
$1.00 in September 2003 - - 95,000 10 94,991 - - - 95,000
Common stock subscription
receivable reclassification
adjustment - - - - 2,600 - 2,600 - -
Common Stock subscribed to
at $2.50 per share in
September 2003 - - - - - 300,000 - - 300,000
Net Loss for the year
ended September 30, 2003 - - - - - - - (3,445,164) (3,445,164)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at September 30,
2003 - $ - 17,811,082 $ 1,781 $2,577,568 $ 300,000 $ - $(3,456,776) $ (577,427)
========= =========== =========== =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Preferred shares issues
in exchange for services
at $25.00 per share,
October 2003 15,000 15 15
Common stock issued in
exchange for consulting
services at
approximately $2.85 per
share, October 2003 287,439 29 820,389 - - - 820,418
Common stock issued in
exchange for cash at
$2.50 per
share-subscription
payable-October 2003 120,000 12 299,988 (300,000) - - -
Common stock canceled
in October 2003,
previously issued for
services rendered at
$2.50 per share (100,000) (10) (249,990) - - - (250,000)
Common stock issued in
exchange for consulting
services at approximately
$3 per share,
November 2003 100,000 10 299,990 - - - 300,000
Common stock subscribed
in exchange for cash at
$2.50 per share pursuant
to private placement,
November, 2003 100,000 10 249,990 - - - 250,000
Common stock subscribed
in exchange for cash at
$2.50 per share pursuant
to private placement,
December, 2003 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for consulting
services at approximately
$2.59 per share,
December 2003 2,125,500 213 5,504,737 - - - 5,504,950
Common Stock subscribed to
at $2.50 per share in
December 2003 - - - 104,000 - - 104,000
Beneficial conversion
feature relating
to notes payable - - 1,168,474 - - - 1,168,474
Beneficial conversion
feature relating
to warrants - - 206,526 - - - 206,526
Adjust common stock par
value from $0.0001 to
$0.50 per share, per
amendment of articles
dated Dec 2003 - 10,223,166 (10,223,166) - - - -
Common Stock issued
pursuant to subscription
at $2.50 share in Jan 2004 41,600 20,800 83,200 (104,000) - - -
Common stock issued in
exchange for consulting
services at $2.95 per
share, Jan 2004 13,040 6,520 31,948 - - - 38,468
Common stock issued in
exchange for consulting
services at $2.60 per
share, Jan 2004 123,000 61,500 258,300 - - - 319,800
Common stock issued in
exchange for consulting
services at $3.05 per
share, Jan 2004 1,000 500 2,550 - - - 3,050
Common stock issued in
exchange for employee
8
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
9
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
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued in
exchange for employee
services at $3.15 per
share, Mar 2004 5,769 2,885 15,292 - - - 18,177
Preferred shared
converted to common
shares for consulting
services at $3.00 per
share, Mar 2004 (5000) (5) 125,000 62,500 312,500 - - - 374,995
Common stock issued in
exchange for employee
services at $3.03 per
share, Mar 2004 8,806 4,403 22,236 - - - 26,639
Common Stock issued
pursuant to
subscription at $2.50
per share in Mar. 2004 22,500 11,250 (9,000) - - - 2,250
Beneficial Conversion
Feature relating
to Notes Payable - - 122,362 - - - 122,362
Beneficial Conversion
Feature relating
to Warrants - - 177,638 - - - 177,638
Common stock issued in
exchange for consulting
services at $2.58 per
share, Apr 2004 9,860 4,930 20,511 - - - 25,441
Common stock issued in
exchange for consulting
services at $2.35 per
share, Apr 2004 11,712 5,856 21,667 - - - 27,523
Common stock issued in
exchange for consulting
services at $1.50 per
share, Apr 2004 367,500 183,750 367,500 - - - 551,250
Common stock returned
to treasury at
$0.065 per share,
Apr 2004 (50,000) (25,000) 21,750 - - - (3,250)
Preferred stock
converted to common
stock for consulting
services at $1.01
per share in May 2004 (4000) (4) 100,000 50,000 51,250 - - - 101,246
Common stock issued per
subscription May 2004 10,000 5,000 (4,000) - (1,000) - -
Common stock issued in
exchange for consulting
services at $0.86 per
share in May 2004 137,000 68,500 50,733 - - - 119,223
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
10
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
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued in
exchange for consulting
services at $0.67 per
share in June 2004 270,500 135,250 45,310 - - - 180,560
Common stock issued in
exchange for consulting
services at $0.89 per
share in June 2004 8,000 4,000 3,120 - - - 7,120
Common stock issued in
exchange for consulting
services at $0.65 per
share in June 2004 50,000 25,000 7,250 - - - 32,250
Common stock issued
pursuant to private
placement at $1.00
per share in June 2004 250,000 125,000 125,000 - - - 250,000
Common stock issued in
exchange for consulting
services at $0.54 per
share in July 2004 100,000 50,000 4,000 - - - 54,000
Common stock issued in
exchange for consulting
services at $0.72 per
share in July 2004 5,000 2,500 1,100 - - - 3,600
Common stock issued in
exchange for consulting
services at $0.47 per
share in July 2004 100,000 50,000 (2,749) - - - 47,251
Common stock issued in
exchange for consulting
services at $0.39 per
share in August 2004 100,000 50,000 (11,000) - - - 39,000
Preferred stock converted
to common stock for
consulting services at
$0.39 per share in
August 2004 (2000) (2) 50,000 25,000 (5,500) - - - 19,498
See accompanying notes to unaudited condensed consolidated financial statements
11
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
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued in
exchange for consulting
services at $0.50 per
share in August 2004 100,000 50,000 250 50,250
Common stock issued in
exchange for consulting
services at $0.56 per
share in August 2004 200,000 100,000 12,500 - - - 112,500
Common stock issued in
exchange for consulting
services at $0.41 per
share in August 2004 92,500 46,250 (8,605) - - - 37,645
Common stock issued in
exchange for consulting
services at $0.52 per
share in September 2004 1,000,000 500,000 17,500 - - - 517,500
Common stock issued in
exchange for consulting
services at $0.46 per
share in September 2004 5,000 2,500 (212) - - - 2,288
Common stock issued
pursuant to subscription
at $0.50 per share in
September 2004 40,000 20,000 - - - - 20,000
Preferred shares
converted to common
stock for consulting
services at $0.41
per share in September
2004 (4000) (4) 100,000 50,000 4,000 - - - 53,996
Preferred shares issued
in exchange for service
at $25 per share in
September 2004 60,000 6 1,499,994 1,500,000
Warrants issued to
consultants in the
fourth quarter 2004 2,019,862 2,019,862
Net Loss - - - - - (19,358,259)(19,358,259)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
September 30, 2004 60,000 6 23,981,054 11,990,527 6,118,993 - (1,000)(22,815,034) (4,706,508)
========= =========== =========== =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued
in exchange for
consulting services
at $0.68 per share
in October 2004 - - 200,000 100,000 36,000 - - - 136,000
Common stock returned
to treasury at $0.60
per share, Oct 2004 - - (1,069,600) (534,800) (107,298) - - - (642,098)
Common stock issued
in exchange for
consulting services at
$0.60 per share in
October 2004 - - 82,500 41,250 8,250 - - - 49,500
Common Stock issued
pursuant to subscription
at $0.60 share in
October 2004 - - 500,000 250,000 50,000 (300,000) - - -
Common stock issued in
exchange for consulting
services by noteholders
at $0.50 per share
in October 2004 - - 532,500 266,250 - - - - 266,250
Common Stock issued
pursuant to subscription
at $0.50 share in
October 2004 - - 500,000 250,000 - - - - 250,000
Common Stock issued pursuant
to subscription at $0.45
share in October 2004 - - 1,000,000 500,000 (50,000) (450,000) - - -
Common stock issued in
exchange for consulting
services by noteholders
at $0.45 per share
in October 2004 - - 315,000 157,500 (15,750) - - - 141,750
Common Stock issued in
exchange for consulting
services at $0.47 share
in November 2004 - - 100,000 50,000 (3,000) - - - 47,000
Common Stock issued in
exchange for consulting
services at $0.80 share
in November 2004 - - 300,000 150,000 90,000 - - - 240,000
Common Stock issued in
exchange for consulting
services at $1.44 share
in November 2004 - - 115,000 57,500 108,100 - - - 165,600
Common Stock issued in
exchange for employee
services at $1.44 share
in November 2004 - - 5,000 2,500 4,700 - - - 7,200
See accompanying notes to unaudited condensed consolidated financial statements
13
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
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common Stock issued in
exchange for employee
services at $0.60 share
in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000
Beneficial Conversion
discount relating to
Notes Payable - - - - 936,541 - - - 936,541
Beneficial Conversion
Feature relating to
Warrants - - - - 528,459 - - - 528,459
Common stock issued at
$0.016 in exchange for
note payable in December
2004 5,500,000 2,750,000 (2,661,500) 88,500
Common Stock issued in
exchange for consulting
services at $1.44 share
in December 2004 - - 5,796,785 2,898,393 5,418,815 - - - 8,317,207
Common stock issued
pursuant to subscription
at $0.50 per share in
December 2004 - - 2,930,000 1,465,000 - (125,000) - - 1,340,000
Warrants issued to
consultants in
Dec. 2004 - - 394,698 394,698
Net Loss - - - - - - - (12,365,136)(12,365,136)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance as of
December 31, 2004 60,000 6 40,848,239 20,424,120 10,863,008 (879,000) (1,000)(35,180,171) (4,773,037)
14
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
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Warrants exercised at
$0.10 share during the
three months ended
June 30, 2005 - - 107,500 53,750 (43,000) - - - 10,750
Common Stock issued in
settlement of debt at
$0.33 share during the
three months ended
March 31, 2005 - - 4,998,551 2,499,274 (843,243) - - - 1,656,033
Common Stock issued in
settlement of debt at
$1.38 share during the
three months ended
March 31, 2005 - - 1,500,000 750,000 1,315,000 750,000 - - 2,815,000
Common Stock issued in
exchange for consulting
services at $1.01 share
during the three months
ended March 31, 2005 - - 2,758,977 1,379,489 1,404,732 - - 2,784,221
Common stock issued
pursuant to subscription
at $0.50 per share
during the three months
ended March 31, 2005 - - 14,742,000 7,371,000 - - - - 7,371,000
Common stock canceled
For shares issued in
exchange of debt
during the three months
ended March 31, 2005 - - (500,000) (250,000) - - - - (250,000)
Common Stock issued in
exchange for consulting
services at $1.18 share
during the three months
ended March 31, 2005 - - 200,000 100,000 135,000 - - - 235,000
Warrants exercised at
$0.60 share during the
three months ended
March 31, 2005 - - 100,000 50,000 10,000 - - - 60,000
Adjust common stock par
value from $0.50 to
$0.001 per share, per
amendment of articles
dated March 2005 - - - (32,312,879) 32,312,879 - - - -
Beneficial Conversion
discount relating to
Notes Payable - - - - 4,179,554 - - - 4,179,554
Beneficial Conversion
Feature relating to
Warrants - - - - 3,191,446 - - - 3,191,446
Stock options granted
to employees in exchange
for services rendered,
at exercise price below
fair value of common stock - - - - 180,000 - - - 180,000
March 31, 2005 Net Loss - - - - - - - (16,681,057) (16,681,057)
15
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
JUNE 30, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common Stock issued in
exchange for consulting
services at $0.76 share
during the three months
ended June 30, 2005 - - 1,100,000 1,100 830,400 - - - 831,500
Common Stock issued in
Settlement of debt at $0.33 share
during the three months
ended June 30, 2005 - - 575,758 576 189,424 [25,000] - - 165,000
Common Stock canceled during the
three months ended
June 30, 2005, previously
issued for services
rendered at $3.42 per share - - (10,000) (10) (34,190) - - - (34,200)
Proceeds received against
subscription Payable during
the three months
Ended June 30, 2005 - - - - - 118,000 - - 118,000
Common Stock canceled during the
three months ended
June 30, 2005, previously
issued for services
rendered at $0.50 per share - - (10,000) (10) (4,990) - - - (5,000)
Cancellation of previously
granted stock options granted
to employees for services
rendered, at exercise price
below fair value of common stock - - - - (180,000) - - - (180,000)
Warrants issued to consultants
and Employees during the quarter
ended June 30, 2005 - - - - 849,046 - - - 849,046
Net Loss - - - - - - - (2,773,073) (2,773,073)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance as of June
30, 2005 60,000 $ 6 66,411,025 $ 66,412 $54,355,065 $ (36,000) $ (1,000)$(54,634,300)$ (249,817)
========= =========== =========== =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
16
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Continued)
For the period
September 16,
2002 (date of
inception)
For The Nine Months Ended through
June 30, June 30,
2005 2004 2005
---- ---- ----
Cash flows from operating activities:
Net loss from operating activities ........................................ $(31,819,266) $(12,210,262) $(54,634,300)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation .............................................................. 15,187 1,054 18,348
Organizational Expenses ................................................... 88,500
Preferred Shares issued in exchange for service ........................... -- -- 1,500,000
Warrants issued to consultants .......................... ................. 1,243,744 -- 3,263,606
Amortization of beneficial conversion feature-convertible notes............ 8,836,000 1,219,444 10,461,000
Common stock issued in exchange for consultant services rendered .......... 12,471,727 8,918,032 24,819,459
Common stock canceled-previously issued for services rendered ............. (642,098) (285,575) (927,673)
Changes in Assets and Liabilities:
Increase in-other assets .................................................. -- -- (13,890)
Increase in due related parties .......................................... (20,631) -- 132,065
Increase (decrease) in accounts payable and accrued liabilities ........... (983,197) 101,439 822,512
Cash disbursed in excess of available funds -- 17,870 --
------------ ------------ ------------
Net cash used in operating activities ..................................... (10,898,534) (2,237,998) (14,470,373)
Cash flows from investing activities:
Payments for patent filing ................................................ (4,347) (18,758) (25,698)
Payments for security deposits ............................................ (33,291) (23,559) (56,850)
Capital expenditures ...................................................... (0) (29,507) (29,507)
------------ ------------ ------------
Net cash used in investing activities ..................................... (37,638) (71,824) (112,055)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost ........................... 8,141,055 -- 8,573,055
Proceeds from subscription of common stock ................................ 2,340,000 354,000 2,465,000
Proceeds from notes converted to stock .................................... 1,575,000 -- 1,575,000
Proceeds from sale of options ............................................. 70,750 87,000 311,750
Proceeds from loans ....................................................... -- 1,675,000 2,750,000
Advances from shareholders ................................................ 34,004 100,088
Proceeds from related party advance ....................................... -- (33,653) -
------------ ------------ ------------
Net cash provided by financing activities ................................. 12,126,805 2,116,351 15,774,893
Net increase in cash and cash equivalents ................................. 1,190,633 (193,471) 1,192,465
Cash and cash equivalents at beginning of period .......................... 1,832 193,471 --
Cash and cash equivalents at end of period ................................ $ 1,192,465 $ -- $ 1,192,465
============ ============ ============
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 .......................................... 12,421,727 8,918,032 24,820,459
Common stock canceled-previously issued for services rendered ............. (642,098) (285,575) (927,673)
Common stock retired ...................................................... -- -- --
Beneficial conversion feature related to notes payable .................... 5,116,095 1,041,806 6,741,095
Beneficial conversion feature related to warrants ......................... 3,719,905 177,638 3,719,905
Preferred Shares in exchange for services.................................. 1,500,000
17
Warrants issued to consultants ............................................ 1,243,744 -- 3,263,606
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
Common stock issued in exchange for note payable .......................... -- -- 88,500
See accompanying notes to unaudited condensed consolidated financial statements
18
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
-------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 2005 is not
necessarily indicative of the results that may be expected for the year ended
September 30, 2005. The unaudited condensed consolidated financial statements
should be read in conjunction with September 30, 2004 financial statements.
Business and Basis of Presentation
----------------------------------
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of Nevada. The Company is in the
development stage, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA
embedded biotechnology security solutions in the United States. To date, the
Company has generated nominal sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
inception through June 30, 2005, the Company has accumulated losses of
$54,634,300.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary ProHealth Medical Technologies, Inc. Significant
inter-company transactions have been eliminated in consolidation.
Reclassification
----------------
Certain prior period amounts have been reclassified for comparative purposes.
Stock Based Compensation
------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended September 30, 2003 and for
the subsequent periods.
19
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005 (UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note C):
For the Period
September, 16
2002 (Date of
For The Three For The Three For The Nine For The Nine Inception
Months ended Months ended Months ended Months ended through
June 30, June 30, June 30, June 30, June 30,
2005 2004 2005 2004 2005
------------- ---------------- ---------------- ---------------- ----------------
Net loss - as reported $ (2,773,073) $ (2,231,133) $ (31,819,266) $ (12,210,262) $ (54,634,300)
Add: Total stock based employee
compensation expense as reported under
intrinsic value method ( APB No. 25) - - - - -
Deduct: Total stock based employee
compensation expense as reported under
fair value method ( APB No. 123) (1,406,350) - (1,406,350) - (1,406,350)
------------- ---------------- ---------------- ---------------- ----------------
Net loss - Pro Forma $ (4,179,423) $ (2,231,133) $ (33,225,616) $ (12,210,262) $ (56,040,650)
============= ================ ================ ================ ================
Net loss attributable to common
stockholders - Pro Forma $ (4,179,423) $ (2,231,133) $ (33,225,616) $ (12,210,262) $ (56,040,650)
============= ================ ================ ================ ================
Basic (and assuming dilution) loss
per share - as reported $ (0.04) $ (0.10) $ (0.65) $ (0.61) $ (2.04)
============= ================ ================ ================ ================
Basic (and assuming dilution) loss
per share - Pro Forma $ (0.06) $ (0.10) $ (0.68) $ (0.61) $ (2.09)
============= ================ ================ ================ ================
20
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact that this statement will have on Company's consolidated
financial statements.
New Accounting Pronouncements
-----------------------------
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
does not expect the adoption of this Interpretation to have a material impact on
its consolidated financial position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
NOTE B - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 250,000,000 shares
of common stock, with a $0.001 par value per share as the result of a
shareholder meeting conducted on February 14, 2005. Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares with a par value of $0.50. In February 2005, the Company passed a
resolution authorizing change in the par value per common shares from $0.50 per
share to $0.001 per share.
21
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
During the period September 16, 2002 through September 30, 2003, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately $1,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc (see Note
B).
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
In October 2002 the Company issued 602,000 shares of common stock in exchange
for services valued at $0.065 per share. In accordance with EITF 96-18 the
measurement date to determine fair value was in October 2002. This was the date
at which a commitment for performance by the counter party to earn the equity
instrument was reached. The Company valued the shares issued at approximately
$0.065 per share, which presents the fair value of the services received which
did not differ materially from the value of the stock issued.
In November and December 2002, the Company issued 876,000 shares of common stock
in exchange for subscription at $0.065 per share. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
In January 2003, the Company canceled 836,000 shares of common stock previously
issued in exchange for consulting services.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement . The Company valued the shares issued at
approximately $.065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In January 2003, the Company issued 586,250 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.13 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In February 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.065 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
22
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In March 2003, the Company issued 91,060 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $2.53
per share, which represents the fair value of the services received which did
not differ materially from the value of the stock issued.
In March 2003, the Company issued 6,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately
$0.065 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued. In March 2003, the
Company received subscription for 18,000 shares of common stock in exchange for
cash at $1 per share.
On April 1, 2003, the Company issued 860,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 9, 2003, the Company issued 18,000 shares of common stock in exchange
for previously issued options to purchase the Company's common stock at $1.00
per share.
On April 9, 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 23, 2003, the Company issued 5,000 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 12, 2003, the Company issued 10,000 shares common stock in exchange for
consulting services provided to the Company. The Company valued the shares
issued at approximately $2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 17 2003, the Company issued 50,000 shares of common stock in exchange
for cash at $1.00 per share.
23
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
On June 30, 2003, the Company issued 270,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On June 30, 2003, the Company received $10,000 as subscription for options to
purchase the Company's common stock at $1.00 per share.
In June, 2003, the Company received $48,000 in connection with a subscription to
purchase the Company's common stock pursuant to a private placement.
In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth granted the Company an option to acquire up to 8,500,000 shares of
the Company's common stock in exchange for $100,000 (see Note B). The option
expires on December 10, 2004. On June 30, 2003, the Company exercised its option
and acquired 7,500,000 common shares under this agreement in exchange for an
$88,500 convertible promissory note payable to the former controlling owner. The
Company has an option through December 10, 2004 to acquire the remaining
1,000,000 shares from the former controlling owner in exchange for $11,500. On
June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant
to the option agreement.
In July 2003 the Company issued 213,060 shares of common stock for consulting
services provided to the Company. The Company valued the shares issued at
approximately $2.01 per share, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In July 2003, the Company canceled 24,000 shares of common stock, previously
issued for services valued at $2.50 per share.
In July 2003, the Company received $20,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
In July 2003, the Company issued 10,000 shares of common stock for cash
previously subscribed at $1.00 per share.
In August 2003, the Company issued 172,500 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.38 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued
In August 2003, the Company received $29,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
24
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In September 2003, the Company issued 395,260 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.42 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
In September 2003, the Company issued 6,400 shares of common stock issued in
exchange for cash at $2.50 per share pursuant to private placement.
In September 2003, the Company received $95,000 in exchange for previously
issued options to purchase the Company's common stock at $1.00 per share.
In September 2003, the Company received $2,600 in connection with a subscription
to purchase the Company's common stock pursuant to a private placement.
The Company valued the shares issued for consulting services at the rate which
represents the fair value of the services received which did not differ
materially from the value of the stock issued.
In October 2003, the Company issued 15,000 shares of convertible preferred stock
in exchange for services. The Company valued the shares issued at the $15 par
value and recorded the value for services when the shares were converted into
common shares as identified below.
In October 2003, the Company issued 287,439 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$2.85 per share for a total of $820,418, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2003, the Company issued 120,000 shares of common stock for shares
previously subscribed at $2.50 per share in September 2003. In October 2003, the
Company canceled 100,000 shares of common stock previously issued in exchange
for services at $2.50 per share.
In November 2003, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$3.00 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued.
In November 2003, the Company sold 100,000 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
In December 2003, the Company sold 6,400 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
25
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In December 2003, the Company issued 2,125,500 shares of common stock in
exchange for consulting services. . The Company valued the shares issued at
approximately $2.59 per share, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In December 2003, the Company received $104,000 in exchange for a common stock
subscription at $2.50 per share pursuant to private placement.
In January 2004, the Company issued 41,600 shares of common stock at $2.50 share
pursuant to a subscription made on December 2003.
In January 2004, the Company issued 13,040 shares of common stock at $2.95 per
share in exchange for consulting services valued at $38,468.
In January 2004, the Company issued 123,000 shares of common stock at $2.60 per
share in exchange for consulting services valued at $319,800.
In January 2004, the Company issued 1,000 shares of common stock at $3.05 per
share in exchange for consulting services valued at $3,050.
In February 2004, the Company issued 6,283 shares of common stock at $3.07 per
share in exchange for employee services valued at $19,288.
In March 2004, the Company issued 44,740 shares of common stock at $3.04 per
share in exchange for consulting services valued at $136,010.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
In March 2004, the Company issued 5,443 shares of common stock at $3.00 per
share in exchange for employee services valued at $16,344.
In March 2004, the Company issued 5,769 shares of common stock at $3.15 per
share in exchange for employee services valued at $18,177.
In March 2004, the Company converted 5,000 preferred shares into 125,000 shares
of common stock at $3.00 per share in exchange for employee services valued at
$375,000.
In March 2004, the Company issued 8,806 shares of common stock at $3.03 per
share in exchange for employee services valued at $26,639.
In April 2004, the Company issued 22,500 shares of common stock at $0.10 for
subscription of warrants to be exercised.
In April 2004, the Company issued 9,860 shares of common stock at $2.58 per
share in exchange for employee services valued at $25,441.
26
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In April 2004, the Company issued 11,712 shares of common stock at $2.35 per
share in exchange for consulting services valued at $27,523.
In April 2004, the Company issued 367,500 shares of common stock at $1.50 per
share in exchange for consulting services valued at $551,250.
In April 2004, the Company retired 50,000 shares of common stock previously
issued for consulting services at $0.065 per share or $3,250.
In May 2004, the Company converted 4,000 preferred shares into 100,000 shares of
common stock at $1.01 per share in exchange for consulting services valued at
$101,250.
In May 2004, the Company issued 10,000 shares of common stock at $0.10 per share
in a stock subscription for $1,000.
In May 2004, the Company issued 137,000 shares of common stock at $0.86 per
share in exchange for consulting services valued at $119,233.
In May 2004, the Company issued 26,380 shares of common stock at $1.15 per share
in exchange for consulting services valued at $30,337.
In June 2004, the Company retired 5,000 shares of common stock previously issued
for consulting services at $0.065 per share or $325.
In June 2004, the Company issued 270,500 shares of common stock at $0.67 per
share in exchange for consulting services valued at $180,560.
In June 2004, the Company issued 8,000 shares of common stock at $0.89 per share
in exchange for consulting services valued at $7,120.
In June 2004, the Company issued 50,000 shares of common stock at $0.645 per
share in exchange for consulting services valued at $32,250.
In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share
for total proceeds of $250,000 pursuant to private placement.
In July 2004, the Company issued 100,000 shares of common stock at $0.54 per
share in exchange for consulting services valued at $54,000.
In July 2004, the Company issued 5,000 shares of common stock at $0.72 per share
in exchange for consulting services valued at $3,600.
In July 2004, the Company issued 100,000 shares of common stock at $0.47 per
share in exchange for consulting services valued at $47,250.
27
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
In August 2004, the Company converted 2,000 preferred shares into 50,000 shares
of common stock at $0.39 in exchange for consulting services valued at $19,500.
In August 2004, the Company issued 100,000 shares of common stock at $0.39 in
exchange for consulting services valued at $39,000.
In August 2004, the Company issued 100,000 shares of common stock at $0.50 in
exchange for consulting services valued at $50,250.
In August 2004, the Company issued 200,000 shares of common stock at $0.56 in
exchange for consulting services valued at $112,500.
In August 2004, the Company issued 92,500 shares of common stock at $0.41 in
exchange for consulting services valued at $37,645
In September 2004, the Company issued 1,000,000 shares of common stock at $0.52
in exchange for consulting services valued at $517,500.
In September 2004, the Company issued 45,000 shares of common stock at $0.50 in
exchange for consulting services valued at $22,288.
In September 2004, the Company converted 4,000 preferred shares into 100,000
shares of common stock at $0.54 in exchange for consulting services valued at
$54,000.
In September 2004, the Company issued 60,000 convertible preferred shares at
$25.00, in exchange for consulting services valued at $1,500,000.
In October 2004, the Company issued 200,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.68 per share for a total of $136,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, shareholders returned 1,069,600 shares to treasury issued
earlier in exchange for services valued at $642,098.
In October 2004, the Company issued 82,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.60 per share for a total of $49,500, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.60 per share pursuant to private placement.
In October 2004, the Company issued 532,500 shares of common stock to existing
noteholders. The Company valued the shares issued at approximately $0.50 per
share for a total of $266,250.
28
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE B - 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.
29
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
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.
During the three months ended March 31, 2005, we issued 107,500 shares of common
stock for warrants exercised at $0.10 share. This issuance is considered exempt
under Regulation D of the Securities Act of 1933 and Rule 506 promulgated
thereunder.
During the three months ended March 31, 2005, we retired $1,656,032 of
convertible notes payable for 4,998,551 shares of common stock. The Notes are
convertible into shares of our common stock at a price of $0.33 per share.
During the three months ended March 31, 2005, we retired $2,815,000 of
convertible notes payable for 1,500,000 shares of common stock. The Notes are
convertible into shares of our common stock at a price of $0.86 per share.
During the three months ended March 31, 2005, the Company issued 2,758,977
shares of common stock in exchange for consulting services. The Company valued
the shares issued at approximately $1.01 per share for a total of $2,784,221,
which represents the fair value of the services received which did not differ
materially from the value of the stock issued.
During the three months ended March 31, 2005, the Company issued 200,000 shares
of common stock in exchange for consulting services. The Company valued the
shares issued at approximately $1.18 per share for a total of $235,000, which
represents the fair value of the services received which did not differ
materially from the value of the stock issued.
During the three months ended March 31, 2005, the Company issued 14,742,000
shares of common stock subscribed for cash at $0.50 per share for a total of
$7,371,000 pursuant to the exercise terms of a promissory note payable. This
issuance is considered exempt under Regulation D of the Securities Act of 1933
and Rule 506 promulgated thereunder.
During the three months ended March 31, 2005, the Company canceled shares
previously issued within the quarter for exchange of debt valued at $250,000.
In March 2005, the Company issued 100,000 shares of common stock in exchange for
services. The Company valued the shares issued at approximately $0.60 per share
for a total of $60,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
The Company recognized an imbedded beneficial conversion feature present in the
January/February Offering note ("January/February PPM"). The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured an aggregate of
4,179,554 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the Bridge Offering. The debt discount attributed to the beneficial
conversion feature was fully amortized over the fiscal first quarter period as
interest expense.
30
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005 (UNAUDITED)
NOTE B - CAPITAL STOCK (continued)
The Company recognized the value attributable to the warrants in the amount of
$3,191,446 to additional paid in capital and a discount against the
January/February PPM.
During the three months ended March 31, 2005, the Company granted an aggregate
of 300,000 stock options to employees that vested immediately. The exercise
prices of the stock options granted were below the fair value of the Company's
common stock at the grant date. Compensation expense of $180,000 and $0 was
charged to operations during the period ended March 31, 2005 and 2004,
respectively.
During the three months ended June 30, 2005, the Company issued 1,000,000 shares
of common stock in exchange for consulting services. The Company valued the
shares issued at approximately $0.76 per share for a total of $831,500, which
represents the fair value of the services received which did not differ
materially from the value of the stock issued.
During the three months ended June 30, 2005, the Company issued 575,758 shares
of common stock in exchange for debt. The Company valued the shares issued at
approximately $0.29 per share for a total of $165,000.
During the three months ended June 30, 2005, a shareholder returned 10,000
shares previously issued for services valued at $34,200 in exchange for a cash
settlement.
During the three months ended June 30, 2005, the Company cancelled 10,000 shares
previously issued for services valued at $5,000.
During the three months ended June 30, 2005, the Company cancelled 300,000 stock
options previously granted valued at $180,000.
In accordance with EITF 96-18 the measurement date to determine fair value was
the date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued for
consulting services at the rate which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
NOTE C - RELATED PARTY TRANSACTIONS
At June 30, 2005, notes payable are as follows:
June 30, 2005
(Unaudited)
-------------
Note payable, unsecured, related party, payable from August 1, 2005, right to
convert to restricted stock in lieu of cash, rate of interest 4%, 160,000 shares
prior to October 31, 2005 or 180,000 shares after that date.
$ 425,000
-------------
425,000
Less; current portion 425,000
-------------
Note Payable - long-term $ -
=============
31
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE D - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company. These warrants were granted in lieu of cash
compensation for services performed or financing expenses in connection with the
sale of the Company's common stock.
Warrants Outstanding Exercisable
Remaining Weighted Weighted Weighted
Number Contractual Average Average Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- -------------- -------------- -------------- -------------- --------------
$0.10 105,464 4.04 $0.10 105,464 $0.10
$0.20 5,000 3.39 $0.20 5,000 $0.20
$0.50 50,000 4.27 $0.50 50,000 $0.50
$0.60 9,337,750 3.89 $0.60 9,337,750 $0.60
$0.70 750,000 2.09 $0.70 750,000 $0.70
$0.75 17,727,000 4.25 $0.75 17,727,000 $0.75
$1.00 136,000 1.30 $1.00 136,000 $1.00
$3.00 62,503 0.50 $3.00 62,503 $3.00
-------------- --------------
28,173,717 28,173,717
============== ==============
Transactions involving warrants are summarized as follows:
Number of Shares Weighted Average
Price Per Share
Outstanding at September 30, 2004 4,870,253 $ 0.63
Granted 23,883,000 0.71
Exercised (329,536) 0.25
Canceled or expired (250,000) 1.00
-------------- --------------
Outstanding at June 30, 2005 28,173,717 $ 0.70
============== ==============
In the quarter ended December 31, 2004, the Company charged $394,698 to
operations for compensatory warrants granted in exchange for services. 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%..
In the quarter ended June 30, 2005, the Company charged $849,046 to operations
for compensatory warrants granted in exchange for services. 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 3.89%, a dividend yield of 0% and volatility of 55.9%.
During the three months ended March 31, 2005, the Company granted an aggregate
of 300,000 stock options to directors that vested immediately. The exercise
prices of the stock options granted were below the fair value of the Company's
common stock at the grant date. Compensation expense of $180,000 was charged to
operations during the period ended March 30, 2005. In the quarter ended June 30,
2005, the Company canceled the unexercised 300,000 stock options and credited
expense for the previously recorded $180,000 in compensation. In exchange for
the canceled options, the Company issued 50,000 warrants with a $0.50 exercise
price and a five year life during the quarter ended June 30, 2005.
32
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE D- STOCK OPTIONS AND WARRANTS (continued)
On February 14, 2005, the Company established an Employee Stock Ownership Plan
(ESOP), authorizing 16 million shares for the future issuance of incentive stock
options, non-statutory options and S-8 shares. Incentive options and S-8 shares
are issued at fair market value while non-statutory options are issued at 110%
of fair market value. 3.660 million shares were granted as incentive stock
options and vested as follows; 50% or 1.830 million shares vesting on April 1,
2005, 25% vesting on July 1, 2005 and the remaining 25% vesting on October 1,
2005. No ESOP shares were exercised as of June 30, 2005. ESOP grants must be
exercised within five (5) years. Had the Company charged these warrants to
operations, the resulting expense would have totaled $1,406,350.
NOTE E- COMMITMENTS AND CONTINGENCIES
Consulting Agreements
---------------------
On August 6, 2004 the Company retained Giuliani Partners, on a non-exclusive
basis, to provide advice and assistance to the Company regarding issues
associated with Applied DNA's proprietary DNA embedded security. On April 8,
2005 the Company terminated the agreement with Giuliani Partners, whereby both
parties agreed to discharge, waive and release one another from all obligations
under the consulting agreement. Total compensation paid to Giuliani Partners
through June 30, 2005 was $1,250,000.
On March 24, 2005, the Company amended its existing Cooperative Research and
Development Agreement ("CRADA") with Battelle Energy Alliance, LLC, the
Department of Energy's National Laboratory in Idaho Falls, Idaho (the
"Amendment"). The Amendment adds additional joint research projects, including
development of marker applications for textiles, inks, gasoline, and explosive
materials. Per the Amendment and at the Company's discretion, the Company can
spend up to $1,701,216 to further develop and refine selected DNA and related
applications.
Litigation
----------
Stern & Co. v. Applied DNA Sciences, Inc., Case No.: 05 CV 00202
Plaintiff Stern & Co. commenced this action against us in the United States
District Court for the Southern District of New York on or about January 10,
2005. In this action, Stern & Co. alleges that it entered into a contract with
us to perform media and investor relations for a monthly fee of $5,000 and stock
options. Stern & Co. claims that we failed to make certain payments pursuant to
the contract and seeks damages in the amount of $96,042.00. Although our time to
answer the complaint has not expired, we dispute the allegations of the
complaint in its entirety and intend on vigorously defending this matter.
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
Plaintiff Oceanic Consulting, S.A. commenced this action against us in the
Supreme Court of the State of New York, County of New York. Oceanic Consulting,
S.A. asserts a cause of action for breach of contract based upon the allegation
that we failed to make payments pursuant to a consulting agreement. Oceanic
Consulting, S.A.also asserts a causes of action in which it seeks reimbursement
of its expenses and attorneys' fees. Oceanic Consulting, S.A. seeks damages in
the amount of $137,500.00. Oceanic Consulting, S.A. moved for a default
judgment, which we have opposed based upon Oceanic Consulting, S.A.'s failure to
properly serve the complaint as well as our meritorious defenses. We intend on
vigorously defending this matter.
33
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE E- COMMITMENTS AND CONTINGENCIES (continued)
Crystal Research Associates, LLC v. Applied DNA Sciences, Inc., Docket No.:
L-7947-04
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us in the Superior Court of New Jersey, Middlesex County. We intend to
move to vacate the default judgment on various grounds. We dispute the
allegations of the complaint and we intend to vigorously defend this matter.
NOTE F- SUBSEQUENT EVENTS
On July 15, 2005, Applied DNA Sciences, Inc. (the "Company") closed upon the
stock purchase agreement (the "Agreement") with Biowell Technology Inc., a
Taiwan corporation ("Biowell") that was executed on January 28, 2005. Pursuant
to the Agreement, the Company, through its wholly-owned subsidiary, APDN
(B.V.I.) Inc., a British Virgin Islands company, acquired all of the issued and
outstanding shares of Rixflex Holdings Limited, a British Virgin Islands company
("Rixflex"). Pursuant to an asset purchase agreement, Biowell transferred all of
its intellectual property (the "Biowell Technology") to Rixflex prior to the
Company's acquisition of Rixflex. In exchange for all of the issued and
outstanding shares of Rixflex, we issued to the shareholders of Rixflex 36
million shares of our common stock. As of August 15, 2005, the Company has
received some of the intellectual property but is still awaiting the transfer of
certain intellectual property and related paperwork.
In connection with the closing, the Company terminated the October 2002 license
agreement with Biowell, replacing it with a new Biowell license agreement
granting an exclusive license in selected Asian countries for an initial period
through December 31, 2010. If Biowell meets its performance goals, the license
agreement extends for an additional five year term. Sub-license payments due to
the Company are 50% for all fees, payments and consideration received. Biowell
is required to pay a royalty of 10% on all net sales made and is required to
meet certain minimum annual net sales in its various territories.
On July 15, 2005, Mr. Robin Hutchison, resigned as Chief Executive Officer and
Chairman of the Board of Directors with Jun-Jei Sheu elected as Chairman of the
Board.
As part of the Biowell acquisition, the Company entered into a consulting
agreement with Timpix International Limited for the consulting services of three
former Biowell employees, Jun-Jei Sheu, Ben Liang and Johnson Chen. The
consulting agreement is for the shorter of two years, or until all of the
consultants have obtained a visa to work in the United States and execute
employment agreements with the Company. Such consulting agreement shall
automatically renew for one year periods until terminated. Pursuant to the
consulting agreement, the Company shall pay $47,000 per month, which is
apportioned at $20,000 per month for Mr. Sheu, $15,000 per month for Mr. Liang
and $12,000 per month for Mr. Chen. In the event that either of Messrs. Sheu,
Liang or Chen becomes employed by the Company, the monthly consulting fee shall
be reduced accordingly.
34
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE F- SUBSEQUENT EVENTS (continued)
On June 20, 2005, the Company entered into an agreement with Trilogy Capital
Partners, Inc. ("Trilogy") to provide marketing services to the Company for a
term of one year, and terminable thereafter by either party upon 30 days prior
written notice. In connection with the agreement, we agreed to pay Trilogy a
monthly fee of $12,500. The Company also issued to Trilogy a warrant to purchase
7.5 million shares of common stock at $0.55 per share, exercisable for a period
of three years from issuance. The warrant contains a "cashless" exercise
provision. The shares underlying the warrants contain registration rights. The
holder has contractually agreed to restrict its ability to convert or exercise
the warrants and receive shares of our common stock such that the number of
shares of common stock held by it after such conversion or exercise does not
exceed 5% of the then issued and outstanding shares of common stock.
In connection with the 7,371,000 million convertible debt financing in the
quarter ended March 30, 2005, the Company was obligated to complete a stock
registration by July 2005. Since the registration was not effective by July
2005, the Company anticipates paying the required $257,985 of liquidated damages
in shares of Company stock accruing at the rate of 3.5% per month on the face
value of the Notes. The Company will continue accruing liquidated damages until
the stock registration is declared effective
Subsequent to June 30, 2005, the Company issued 8 million S-8 shares to various
employees with an approximate market value of $4.8 million. These fully
registered shares are included within the total authorized 16 million Employee
Stock Ownership Plan shares, as approved on February 14, 2005.
35
Item 2. Management's Discussion and Analysis
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this report. The quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, including statements using
terminology such as "can", "may", "believe", "designated to", "will", "expect",
"plan", "anticipate", "estimate", "potential" or "continue", or the negative
thereof or other comparable terminology regarding beliefs, plans, expectations
or intentions regarding the future. Forward looking statements involve risks and
uncertainties and actual results could differ materially from those discussed in
forward-looking statements. All forward looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to the Company as of the date thereof, and the Company assumes no
obligations to update any forward-looking statement or risk factor, unless the
Company is required to do so by law.
Plan of Operation
Revenues
--------
From our inception on September 16, 2002, we have not generated revenues
from operations. We believe we will begin generating revenues from operations in
the fiscal year as the Company transitions from a development stage enterprise
to that of an active growth and acquisition stage company.
Costs and Expenses
------------------
From our inception through June 30, 2005, we have incurred losses of
$54,634,300. These expenses were associated principally with equity-based
compensation to employees and consultants, product development costs and
professional services.
Liquidity and Capital Resources
-------------------------------
From our inception to June 30, 2005 we have incurred an operating cash flow
deficit of $14,470,373. Cash flows used in investing activities was $112,055
during the period September 16, 2002 (date of our inception) through June 30,
2005. We met our cash requirements through the issuance of capital and other
notes payable (net of repayments); private placement of our common stock and
advances from our shareholders and officers of $15,774,893.
By adjusting our operations and development to the level of capitalization,
we believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial condition.
We presently do not have any available credit, bank financing or other
external sources of liquidity. Due to our brief history and historical operating
losses, our operations have not been a source of liquidity. We will need to
obtain additional capital in order to expand operations and become profitable.
We intend to pursue the building of a re-seller network outside the United
States, and if successful, the re-seller agreements would constitute a source of
liquidity and capital over time. In order to obtain capital, we may need to sell
additional shares of our common stock or borrow funds from private lenders.
There can be no assurance that we will be successful in obtaining additional
funding and execution of re-seller agreements outside the Unites States.
36
From our inception, our priorities were to recruit and build our team,
organize our new infrastructure and to develop a successful strategy how best to
exploit our exclusive Biowell license agreement. No revenues were generated.
Although our management is of the opinion that continuing to develop and finance
our present business of providing DNA anti-counterfeit technology may ultimately
be successful, management nevertheless expects that we will need substantial
additional capital before our operations can be fully implemented.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet our current
and projected cash flow deficits from operations and development. We currently
have no commitments for financing. There is no guarantee that we will be
successful in raising the funds required.
The effect of inflation on our operating results was not significant. Our
operations are located in North America and there are no seasonal aspects that
would have a material effect on our financial condition or results of
operations.
Our independent certified public accountant has stated in their report
included in our September 30, 2004 Form 10-KSB, that we have incurred operating
losses from our inception, and that we are dependent upon management's ability
to develop profitable operations. These factors among others may raise
substantial doubt about our ability to continue as a going concern.
To obtain funding for our ongoing operations, we conducted a private
placement offering in January and February 2005, in which we sold $7,371,000 of
10% Secured Convertible Promissory Notes to 61 investors. The 10% Secured
Convertible Promissory Notes automatically converted into shares of our common
stock, at a price of $0.50 per share, upon the filing of the registration
statement on February 15, 2005. In connection with the private placement
offering, we have issued 14,742,000 warrants. The warrants are exercisable until
five years from the date of issuance at a purchase price of $0.75 per share.
We will still need additional investments in order to continue operations
to cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Product Research and Development
As a result of the recent financings, the Company anticipates expending
$2,764,000 of available cash towards research and development activities during
the next twelve (12) months. The anticipated development programs consist of
Petro Chemical Marker, Ink/Substraits and Hologram projects with planned
spending of $1,245,000, $747,000 and $772,000, respectively.
37
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the sale of any material property, plant or equipment
during the next 12 months. We do not anticipate the acquisition of any material
property, plant or equipment during the next 12 months.
Number of Employees
From our inception through the period ended June 30, 2005, we have mainly
relied on the services of outside consultants for services. We currently have
eight employees. In order for us to attract and retain quality personnel, we
anticipate we will have to offer competitive salaries to future employees. We
anticipate that it may become desirable to add additional full and or part time
employees to discharge certain critical functions during the next 12 months.
This projected increase in personnel is dependent upon our ability to generate
revenues and obtain sources of financing. There is no guarantee that we will be
successful in raising the funds required or generating revenues sufficient to
fund the projected increase in the number of employees. As we continue to
expand, we will incur additional cost for personnel.
Going Concern
The financial statements included in this filing have been prepared in
conformity with generally accepted accounting principles that contemplate the
continuance of the Company as a going concern. The Company's cash position may
be inadequate to pay all of the costs associated with testing, production and
marketing of products. Management intends to use borrowings and security sales
to mitigate the effects of its cash position, however no assurance can be given
that debt or equity financing, if and when required will be available. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification of
liabilities that might be necessary should the Company be unable to continue
existence.
Trends, Risks and Uncertainties
We have sought to identify what we believe to be the most significant risks
to our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to the Company's
Common Stock.
RISK FACTORS
Much of the information included in this quarterly report includes or is
based upon estimates, projections or other "forward-looking statements". Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined below. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
38
Our common shares are considered speculative. Prospective investors should
consider carefully the risk factors set out below.
We Have a History Of Losses Which May Continue, Which May Negatively Impact
Our Ability to Achieve Our Business Objectives.
We incurred net losses of $19,358,259 for the year ended September 30, 2004
and $3,445,164 for the year ended December 31, 2003. For the nine months ended
June 30, 2005, we incurred a net loss of $31,819,266. 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
$2,800,000 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 $22,815,034
during the period September 16, 2002 (date of inception) through September 30,
2004. In addition, we have a deficiency in stockholder's equity of $249,817. 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.
39
Our Research and Development Efforts for New Products May be Unsuccessful.
We will incur significant research and development expenses to develop new
products and technologies. There can be no assurance that any of these products
or technologies will be successfully developed or that if developed they will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and this may materially and adversely affect our business
operations, which would result in loss of revenues and greater operating
expenses.
Our Acquired Technology Has Yet to be Independently Validated In July 2005, we
acquired certain intellectual property. Such intellectual property relating to
the botanical DNA, encapsulation methods, integrity of the technology and all
other stated claims by the seller need to be independently validated by a third
party. Satisfactory completion of this independent validation will be required
prior to their being available for commercial sale. In the event that some or
all of the technology cannot be independently validated, we will be unable to
commercially develop products utilizing such technology, which could have a
materially adverse effect on our business and results of operations.
Failure to License New Technologies Could Impair Our New Product Development.
To generate broad product lines, it is advantageous to sometimes license
technologies from third parties rather than depend exclusively on our own
employees. As a result, we believe our ability to license new technologies from
third parties is and will continue to be important to our ability to offer new
products.
In addition, from time to time we are notified or become aware of patents
held by third parties that are related to technologies we are selling or may
sell in the future. After a review of these patents, we may decide to seek a
license for these technologies from these third parties or discontinue our
products. There can be no assurance that we will be able to continue to
successfully identify new technologies developed by others. Even if we are able
to identify new technologies of interest, we may not be able to negotiate a
license on favorable terms, or at all. If we lose the rights to patented
technology, we may need to discontinue selling certain products or redesign our
products, and we may lose a competitive advantage. Potential competitors could
license technologies that we fail to license and potentially erode our market
share for certain products. Our licenses typically subject us to various
commercializations, sublicensing, minimum payment, and other obligations. If we
fail to comply with these requirements, we could lose important rights under a
license. In addition, certain rights granted under the license could be lost for
reasons beyond our control. We may not receive significant indemnification from
a licensor against third party claims of intellectual property infringement.
We Currently Have no or Limited Manufacturing, Sales, Marketing or Distribution
Capabilities.
We currently have no in-house manufacturing capability. We rely on
third-party vendors for this service. We do not currently have any arrangements
with any distributors and we may not be able to enter into arrangements with
qualified distributors on acceptable terms or at all. We currently have a
limited sales and marketing team. If we are not able to develop greater sales,
marketing or distribution capacity, we may not be able to generate revenue or
sufficient revenue to support our operations.
If We Fail to Introduce New Products, or Our existing Products are not Accepted
by Potential Customers, We May Not Gain or May Lose Market Share.
Rapid technological changes and frequent new product introductions are
typical for the markets we serve. Our future success will depend in part on
continuous, timely development and introduction of new products that address
evolving market requirements. We believe successful new product introductions
provide a significant competitive advantage because customers invest their time
in selecting and learning to use new products, and are often reluctant to switch
products. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
We may experience delays in the development and introduction of products.
We cannot assure that we will keep pace with the rapid rate of change in life
40
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.
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
41
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. Sheu, 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. Jun-Jei Sheu, our Chairman of the Board of Directors, 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. Sheu, Brocklesby, Botash or Klemm.
Loss of the services of Messrs. Sheu, 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. Sheu, Brocklesby, Botash
or Klemm. We are not aware of any other named executive officer or director who
42
has plans to leave us or retire. In addition, in order to successfully implement
and manage our business plan, we will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business. Competition for qualified individuals is intense. There
can be no assurance that we will be able to find, attract and retain existing
employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
Failure to Attract and Retain Qualified Scientific or Production Personnel Could
Have a Material Adverse Effect On Us.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining a qualified personnel base.
Although we believe we have been and will be able to attract and retain these
personnel, there is no assurance that we will be able to continue to
successfully attract qualified personnel. In addition, our anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, government approvals, production, and marketing will require
the addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to attract and retain
these personnel or, alternatively, to develop this expertise internally would
adversely affect our business as our ability to conduct research and development
will be reduced or eliminated, resulting in fewer or no products for sale and
lower revenues. We generally do not enter into employment agreements requiring
these employees to continue in our employment for any period of time.
We Need to Expand Our Sales and Support Organizations to Increase Market
Acceptance of Our Products.
We currently have a small customer service and support organization and
will need to increase our staff to support new customers and the expanding needs
of existing customers. The employment market for sales personnel, and customer
service and support personnel in this industry is very competitive, and we may
not be able to hire the kind and number of sales personnel, customer service and
support personnel we are targeting. Our inability to hire qualified sales,
customer service and support personnel may materially adversely affect our
business, operating results and financial condition.
The Biomedical Research Products Industry is Very Competitive, and We may be
Unable to Continue to Compete Effectively in this Industry in the Future.
We are engaged in a segment of the biomedical research products industry
that is highly competitive. We compete with many other suppliers and new
competitors continue to enter the market. Many of our competitors, both in the
United States and elsewhere, are major pharmaceutical, chemical and
biotechnology companies, and many of them have substantially greater capital
resources, marketing experience, research and development staff, and facilities
than we do. Any of these companies could succeed in developing products that are
more effective than the products that we have or may develop and may be more
successful than us in producing and marketing their products. It is impossible
to quantify the number of competitors since they include both the companies we
attempt to sell our products and services to through their use of internal
security and various other security product companies. Some of the
anti-counterfeiting and fraud protection competitors that we are aware of
include: Authentix, InkSure, DNA Technologies, Inc., Art Guard International,
Theft Protection Systems, Tracetag and November AG. Although it is impossible to
determine the total market size and market data information because companies
are secretive about what security methods they utilize and how much they spend
on such measures, we have determined that annual sales by some of our
competitors have been as follows:
43
Authentix - $4.7 million
Inksure - $2.0 million
DNA Technologies, Inc. - $26 million
Suretrace - $4.3 million
November AG - $7 million
We expect this competition to continue and intensify in the future.
Competition in our markets is primarily driven by:
o Product performance, features and liability;
o Price;
o Timing of product introductions;
o Ability to develop, maintain and protect proprietary products and
technologies; o Sales and distribution capabilities;
o Technical support and service;
o Brand loyalty; o Applications support; and
o Breadth of product line.
If a competitor develops superior technology or cost-effective alternatives
to our products, our business, financial condition and results of operations
could be materially adversely affected.
Our Trademark and Other Intellectual Property Rights May not be Adequately
Protected Outside the United States, Resulting in Loss of Revenue.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent, as do the laws of the United States.
Intellectual Property Litigation Could Harm Our Business.
Litigation regarding patents and other intellectual property rights is
extensive in the biotechnology industry. In the event of an intellectual
property dispute, we may be forced to litigate. This litigation could involve
proceedings instituted by the U.S. Patent and Trademark Office or the
International Trade Commission, as well as proceedings brought directly by
affected third parties. Intellectual property litigation can be extremely
expensive, and these expenses, as well as the consequences should we not
prevail, could seriously harm our business.
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.
44
Furthermore, a third party may claim that we are using inventions covered
by the third party's patent rights and may go to court to stop us from engaging
in our normal operations and activities, including making or selling our product
candidates. These lawsuits are costly and could affect our results of operations
and divert the attention of managerial and technical personnel. There is a risk
that a court would decide that we are infringing the third party's patents and
would order us to stop the activities covered by the patents. In addition, there
is a risk that a court will order us to pay the other party damages for having
violated the other party's patents. The biotechnology industry has produced a
proliferation of patents, and it is not always clear to industry participants,
including us, which patents cover various types of products or methods of use.
The coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent infringement, we
would need to demonstrate that our products or methods of use either do not
infringe the patent claims of the relevant patent and/or that the patent claims
are invalid, and we may not be able to do this. Proving invalidity, in
particular, is difficult since it requires a showing of clear and convincing
evidence to overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in the United States may be maintained in
secrecy until the patents are issued, because patent applications in the United
States and many foreign jurisdictions are typically not published until eighteen
months after filing, and because publications in the scientific literature often
lag behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our licensors' issued patents or
our pending applications or our licensors' pending applications or that we or
our licensors were the first to invent the technology. Our competitors may have
filed, and may in the future file, patent applications covering technology
similar to ours. Any such patent application may have priority over our or our
licensors' patent applications and could further require us to obtain rights to
issued patents covering such technologies. If another party has filed a United
States patent application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the United States Patent
and Trademark Office to determine priority of invention in the United States.
The costs of these proceedings could be substantial, and it is possible that
such efforts would be unsuccessful, resulting in a loss of our United States
patent position with respect to such inventions.
Some of our competitors may be able to sustain the costs of complex patent
litigation more effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the initiation and
continuation of any litigation could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.
Accidents Related to Hazardous Materials Could Adversely Affect Our Business.
Some of our operations require the controlled use of hazardous materials.
Although we believe our safety procedures comply with the standards prescribed
by federal, state, local and foreign regulations, the risk of accidental
contamination of property or injury to individuals from these materials cannot
be completely eliminated. In the event of an accident, we could be liable for
any damages that result, which could seriously damage our business and results
of operations.
Potential Product Liability Claims Could Affect Our Earnings and Financial
Condition.
We face a potential risk of liability claims based on our products and
services, and we have faced such claims in the past. We currently do not have
any product liability coverage but are attempting to obtain coverage which we
will believe to be adequate. We cannot assure, however, that we will be able to
obtain or maintain this insurance at reasonable cost and on reasonable terms. We
also cannot assure that this insurance, if obtained, will be adequate to protect
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.
45
We are Obligated to Pay Liquidated Damages As a Result of Our Failure to Have
this Registration Statement Declared Effective Prior to July 15, 2005, and the
Payment of Liquidated Damages Will Either Result in Depleting Our Working
Capital or Issuance of Shares of Common Stock Which Would Cause Dilution to Our
Existing Shareholders.
Pursuant to the terms of our private placement that closed in January and
February 2005, if we did not have a registration statement registering the
shares underlying the convertible notes and warrants declared effective on or
before July 15, 2005, we are obligated to pay liquidated damages in the amount
of 3.5% per month of the face amount of the notes, which equals $257,985, until
the registration statement is declared effective. At our option, these
liquidated damages can be paid in cash or restricted shares of our common stock.
We have currently decided to pay the liquidated damages due at this point in
common stock, although any future payments of liquidated damages could be made
in cash. If we decide to pay the liquidated damages in cash, we would be
required to use our limited working capital and potentially raise additional
funds. If we decide to pay the liquidated damages in shares of common stock, the
number of shares issued would depend on our stock price at the time that payment
is due. Based on the closing market price of $0.66 for our common stock on July
15, 2005, which is when our first payment of liquidate damages was due, a month
of liquidated damages would result in the issuance of approximately 390,887
shares of common stock. The issuance of shares upon payment of liquidated
damages will have the effect of further diluting the proportionate equity
interest and voting power of holders of our common stock, including investors in
this offering.
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 August 9, 2005, we had 110,653,025 shares of common stock issued and
outstanding and outstanding warrants to purchase 28,713,717 shares of common
stock. All of the shares issuable upon exercise of our warrants may be sold
without restriction. The sale of these shares may adversely affect the market
price of our common stock. The issuance of shares upon exercise of warrants will
cause immediate and substantial dilution to the interests of other stockholders
since the selling stockholders may convert and sell the full amount issuable on
exercise.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Prior to May 2001 and new management, we were delinquent in our reporting
requirements, having failed to file our quarterly and annual reports for the
years ended 1998 - 2000 (except the quarterly reports for the first two quarters
of 1999). We have been current in our reporting requirements for the last three
years, however, there can be no assurance that in the future we will always be
current in our reporting requirements.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
46
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.
47
Item 3. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures: As of June 30, 2005,
our management carried out an evaluation, under the supervision of our
Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of our system of disclosure
controls and procedures pursuant to the Securities and Exchange Act,
Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that
evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are not
effective to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules
and forms, and that such information is not accumulated and
communicated to our management, including our chief executive officer
and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure. Please see the subsection "Significant
Deficiencies In Disclosure Controls And Procedures Or Internal
Controls" below.
b) Changes in internal controls: There were no changes in internal
controls over financial reporting that occurred during the period
covered by this report that have materially affected, or are
reasonably likely to materially effect, our internal control over
financial reporting. As described below, as a result of our evaluation
of our disclosure controls and procedures as of June 30, 2005, we
determined that our controls and procedures are not effective and
subsequent to the period of this report, began to implement changes to
our internal controls.
Significant Deficiencies In Disclosure Controls And Procedures Or Internal
Controls
On July 11, 2005, we determined there were errors in accounting for the
valuation of equity consulting service transactions during the January
through March 2005 time period. The valuation resulted in the overstatement
of approximately $2.9 million in services provided. The errors were
discovered in connection with a comment raised by the Securities and
Exchange Commission ("SEC") in their review and comment on our registration
statement on Form SB-2. The SEC requested that we provided additional
disclosure regarding issuances of common stock to non-employees in exchange
for services. Upon reviewing and updating our disclosure, we discovered our
errors. We have implemented the following procedures and policies to
resolve these weaknesses and deficiencies:
1. Establish and maintain a separate binder of all board authorized activities
and a binder with forward looking "budget" of anticipated or contemplated
activity for each of the following:
a. shares issued for services;
b. shares issued for employees;
c. warrant exercises;
d. option exercises;
e. authorized shares and warrant re-pricing;
f. shares issued in exchange for debt; and
g. upcoming ESOP grants and exercises;
2. Require the signature of the principal executive and accounting officers
for all issuances of securities;
3. Require monthly review of share issuances compared to binders; and
4. Authorize our transfer agent to handle and track all warrants and ESOP
grants.
We believe that these actions will correct the material deficiencies and
significant weaknesses in our controls and procedures.
48
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
described below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
Stern & Co. v. Applied DNA Sciences, Inc., Case No.: 05 CV 00202
Plaintiff Stern & Co. commenced this action against us in the United States
District Court for the Southern District of New York on or about January 10,
2005. In this action, Stern & Co. alleges that it entered into a contract with
us to perform media and investor relations for a monthly fee of $5,000 and stock
options. Stern & Co. claims that we failed to make certain payments pursuant to
the contract and seeks damages in the amount of $96,042.00. We answered the
complaint on May 12, 2005, denying Stern & Co.'s allegations and we asserted a
number of defenses. This action is in the early stages of discovery and we
intend to vigorously defend this matter.
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
Plaintiff Oceanic Consulting, S.A. commenced this action against us in the
Supreme Court of the State of New York, County of New York. Oceanic Consulting,
S.A. asserts a cause of action for breach of contract based upon the allegation
that we failed to make payments pursuant to a consulting agreement. Oceanic
Consulting, S.A.also asserts a causes of action in which it seeks reimbursement
of its expenses and attorneys' fees. Oceanic Consulting, S.A. seeks damages in
the amount of $137,500.00. Oceanic Consulting, S.A. moved for a default
judgment, which we have opposed based upon Oceanic Consulting, S.A.'s failure to
properly serve the complaint as well as our meritorious defenses. Thereafter,
Oceanic Consulting, S.A. agreed to withdraw its motion for a default judgment
and accepted service of our answer on May 23, 2005. We dispute the allegations
of the complaint. This action is in the early stages of discovery and we intend
to vigorously defend this matter.
Crystal Research Associates, LLC v. Applied DNA Sciences, Inc., Docket No.:
L-7947-04
On April 29, 2005, Crystal Research Associates, LLC obtained a default
judgment against us in the Superior Court of New Jersey, Middlesex County. We
intend to move to vacate the default judgment on various grounds. We dispute the
allegations of the complaint and we intend to vigorously defend this matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2005, we issued 575,758 shares of
common stock in exchange for debt. We valued the shares issued at approximately
$0.29 per share for a total of $165,000. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
During the three months ended June 30, 2005, we issued 1,080,000 shares of
common stock in exchange for consulting services valued at $792,300, which
represents the fair value of the services received which did not differ
49
materially from the value of the stock issued. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
During the three months ended June 30, 2005, we granted 3,660,000 options
as part of the authorized Employee Stock Ownership Plan (ESOP) we adopted on
February 14, 2005. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and
Rule 15d-14(a), promulgated under the Securities and Exchange Act of
1934, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and
Rule 15d 14(a), promulgated under the Securities and Exchange Act of
1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLIED DNA SCIENCES, INC.
Date: August 15, 2005 By: /s/ PETER BROCKLESBY
---------------------
Peter Brocklesby
President
(Principal Executive Officer)
Date: August 15, 2005 By: /s/ KARIN KLEMM
----------------
Karin Klemm
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
51