UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
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 December 31, 2005
Commission file number 002-90519
APPLIED DNA SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Nevada 59-2262718
------------------------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
----------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(631) 444-6862
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the last 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes __X___ No _____
The number of shares of Common Stock, $0.001 par value, outstanding on February
14 2006, was 114,772,385 shares, held by approximately 1,380 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 December 31, 2005
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet:
December 31, 2005 (Unaudited) 3
Condensed Consolidated Statements of Losses:
Three Months Ended December 31, 2005 and 2004 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through December
31, 2005 (Unaudited) 4
Condensed Consolidated Statement of Stockholder's Equity (Deficiency):
For the Period from September 16, 2002 (Date) of Inception Through
December 31 2005 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows:
Three Months Ended December 31, 2005 and 2004 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through December
31, 2005 (Unaudited) 19
Notes to Unaudited Condensed Consolidated Financial Information:
December 31, 2005 21-42
Item 2. Management Discussion and Analysis 43
Item 3. Controls and Procedures 59
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 60
Item 3. Defaults Upon Senior Securities 60
Item 4. Submission of Matters to a Vote of Security Holders 60
Item 5. Other Information 60
Item 6. Exhibits 60
Signatures 61
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
December 31, 2005
------------------
Current assets:
Cash and cash equivalents $ 164,526
Current other receivables, related party (Note F) 17,404
------------------
Total current assets 181,930
Property, plant and equipment - Net of accumulated depreciation of $3,084 3,563
Other Assets:
Deposits and prepaid expenses 23,659
Intangible assets:
Patents (net of accumulated amortization of $13,490) (Note B) 20,767
Intellectual Property (net of accumulated amortization of $673,636) (Note B) 8,757,264
------------------
Total Other Assets 8,801,690
------------------
Total Assets $ 8,987,183
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,144,078
Accrued liabilities due related parties (Note F) 53,805
Note payable (Note C) 960,429
------------------
Total current liabilities 4,158,312
Commitments and contingencies(Note G)
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; 112,926,246 shares
issued and outstanding 112,926
Common stock subscription (Note D) (200,000)
Additional said-in-capital 82,785,842
Deficit accumulated during development stage (77,869,903)
------------------
Total stockholders' equity 4,828,871
------------------
Total liabilities and stockholders' equity $ 8,987,183
==================
See accompanying notes to unaudited condensed consolidated financial statements
3
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(Unaudited)
For The Three Months Ended September 16, 2002,
December 31 (Date of Inception)
through
2005 2004 December 31, 2005
-------------- -------------- --------------
Operating expenses:
Selling, general and administrative $ 2,078,727 $ 10,754,248 $ 65,562,416
Research and development 16,270 38,673 893,678
Depreciation and amortization 342,699 4,721 702,126
-------------- -------------- --------------
Total operating expenses 2,437,696 10,797,642 67,158,220
Operating loss (2,437,696) (10,797,642) (67,158,220)
Other income (expense) 13,013 315 44,355
Interest (expense) (19,806) (1,567,809) (10,756,038)
Income (taxes) benefit - - -
-------------- -------------- --------------
Net loss $ (2,444,489) $ (12,365,136) $ (77,869,903)
============== ============== ==============
-
Loss per common share
(basic and assuming dilution) $ (0.02) $ (0.45) $ (1.94)
============== ============== ==============
Weighted average shares outstanding 112,535,514 27,402,160 40,068,155
============== ============== ==============
See accompanying notes to unaudited condensed consolidated financial statements
4
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share - $ - 100,000 $ 10 $ 990 - $ - $ - $ 1,000
Net Loss - - - - - - - (11,612) (11,612)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at September 30,
2002 - - 100,000 10 990 - - (11,612) (10,612)
Issuance of common stock
in connection with merger
with Prohealth Medical
Technologies , Inc on
October 1, 2002 - - 10,178,352 1,015 - - - - 1,015
Cancellation of Common
stock in connection with
merger with Prohealth
Medical Technologies ,
Inc on October
21, 2002 - - (100,000) (10) (1,000) - - - (1,010)
Issuance of common stock
in exchange for services
in October 2002 at $ 0.65
per share - - 602,000 60 39,070 - - - 39,130
Issuance of common stock in
exchange for subscription
in November and December
2002 at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - -
Cancellation of common
stock in January 2003
previously issued in
exchange for consulting
services - - (836,000) (84) (54,264) - 54,340 - (8)
Issuance of common stock
in exchange for licensing
services valued
at $ 0.065 per share in
January 2003 - - 1,500,000 150 97,350 - - - 97,500
Issuance of common stock
in exchange
for consulting services
valued at $ 0.13 per share
in January 2003 - - 586,250 58 76,155 - - - 76,213
Issuance of common stock
in exchange
for consulting services
at $ 0.065 per
share in February 2003 - - 9,000 1 584 - - - 585
Issuance of common stock
to Founders in exchange
for services valued at
$0.0001 per share in
March 2003 - - 10,140,000 1,014 - - - - 1,014
Issuance of common stock
in exchange for consulting
services valued at
$2.50 per share in March 2003 - - 91,060 10 230,624 - - - 230,634
See accompanying notes to unaudited condensed consolidated financial statements
5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Issuance of common stock in
exchange for consulting
services valued at $
0.065 per share in March 2003 - - 6,000 1 389 - - - 390
Common stock subscribed in
exchange for cash at $1 per
share in March 2003 - - - - 18,000 - - - 18,000
Common stock issued in
exchange for consulting
services at $ 0.065 per
share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900
Common stock issued in
exchange for
cash at $ 1.00 per share
on April 9, 2003 - - 18,000 2 - - - - 2
Common stock issued in
exchange for
consulting services at $
0.065 per
share on April 9, 2003 - - 9,000 1 584 - - - 585
Common stock issued in
exchange for
consulting services at
$ 2.50 per
share on April 23, 2003 - - 5,000 1 12,499 - - - 12,500
Common stock issued in
exchange for
consulting services at
$ 2.50 per
share, on June 12, 2003 - - 10,000 1 24,999 - - - 25,000
Common stock issued in
exchange for
cash at $ 1.00 per share
on June 17, 2003 - - 50,000 5 49,995 - - - 50,000
Common stock subscribed
in exchange
for cash at $ 2.50 per
share pursuant
to private placement
on June 27, 2003 - - - - 24,000 - 24,000
Common stock retired in
exchange for note payable
at $0.0118 per share,
on June 30, 2003 - - (7,500,000) (750) 750 - - - -
Common stock issued in
exchange for
consulting services at
$0.065 per
share, on June 30, 2003 - - 270,000 27 17,523 - - - 17,550
Common stock subscribed
in exchange for cash at
$ 1.00 per share pursuant
to private placement on
June 30, 2003 - - - - - 10,000 - - 10,000
Common stock subscribed
in exchange for cash at
$ 2.50 per share pursuant
to private placement on
June 30, 2003 - - - - - 24,000 - - 24,000
Common stock issued in
exchange for consulting
services at approximately
$2.01 per share, July 2003 - - 213,060 21 428,798 - - - 428,819
See accompanying notes to unaudited condensed consolidated financial statements
6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock canceled
in July 2003,
previously issued for
services rendered at
$2.50 per share - - (24,000) (2) (59,998) - - - (60,000)
Common stock issued
in exchange for
options exercised at
$1.00 in July 2003 - - 20,000 2 19,998 - - - 20,000
Common stock issued
in exchange for
exercised of options
previously
subscribed at $1.00 in
July 2003 - - 10,000 1 9,999 (10,000) - - -
Common stock issued in
exchange for
consulting services at
approximately
$2.38 per share,
August 2003 - - 172,500 17 410,915 - - - 410,932
Common stock issued in
exchange for
options exercised at
$1.00 in August 2003 - - 29,000 3 28,997 - - - 29,000
Common stock issued
in exchange for
consulting services
at approximately
$2.42 per share,
September 2003 - - 395,260 40 952,957 - - - 952,997
Common stock issued
in exchange for
cash at $2.50 per
share-subscription
payable-September 2003 - - 19,200 2 47,998 (48,000) - - -
Common stock issued in
exchange for
cash at $2.50 per
share pursuant to
private placement
September 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for
options exercised at
$1.00 in September 2003 - - 95,000 10 94,991 - - - 95,001
Common stock subscription
receivable reclassification
adjustment - - - - - - 2,600 -
2,600 Common Stock subscribed to
at $2.50 per share in
September 2003 - - - - - 300,000 - - 300,000
Net Loss for the year
ended September 30, 2003 - - - - - - - (3,445,164) (3,445,164)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at September 30,
2003 - $ - 17,811,082 $ 1,781 $2,577,568 $ 300,000 $ - $(3,456,776)$ (577,427)
========= =========== =========== =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Preferred shares issues
in exchange for services
at $25.00 per share,
October 2003 15,000 15 - - - - - - 15
Common stock issued in
exchange for consulting
services at
approximately $2.85 per
share, October 2003 287,439 29 820,389 - - - 820,418
Common stock issued in
exchange for cash at
$2.50 per
share-subscription
payable-October 2003 120,000 12 299,988 (300,000) - - -
Common stock canceled
in October 2003,
previously issued for
services rendered at
$2.50 per share (100,000) (10) (249,990) - - - (250,000)
Common stock issued in
exchange for consulting
services at approximately
$3 per share,
November 2003 100,000 10 299,990 - - - 300,000
Common stock subscribed
in exchange for cash at
$2.50 per share pursuant
to private placement,
November, 2003 100,000 10 249,990 - - - 250,000
Common stock subscribed
in exchange for cash at
$2.50 per share pursuant
to private placement,
December, 2003 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for consulting
services at approximately
$2.59 per share,
December 2003 2,125,500 213 5,504,737 - - - 5,504,950
Common Stock subscribed to
at $2.50 per share in
December 2003 - - - 104,000 - - 104,000
Beneficial conversion
feature relating
to notes payable - - 1,168,474 - - - 1,168,474
Beneficial conversion
feature relating
to warrants - - 206,526 - - - 206,526
Adjust common stock par
value from $0.0001 to
$0.50 per share, per
amendment of articles
dated Dec 2003 - 10,223,166 (10,223,166) - - - -
Common Stock issued
pursuant to subscription
at $2.50 share in Jan 2004 41,600 20,800 83,200 (104,000) - - -
Common stock issued in
exchange for consulting
services at $2.95 per
share, Jan 2004 13,040 6,520 31,948 - - - 38,468
Common stock issued in
exchange for consulting
services at $2.60 per
share, Jan 2004 123,000 61,500 258,300 - - - 319,800
See accompanying notes to unaudited condensed consolidated financial statements
8
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued in
exchange for consulting
services at $3.05 per
share, Jan 2004 1,000 500 2,550 - - - 3,050
Common stock issued in
exchange for employee
services at $3.07 per
share, Feb 2004 6,283 3,142 16,147 - - - 19,289
Common stock issued in
exchange for consulting
services at $3.04 per
share, Mar 2004 44,740 22,370 113,640 - - - 136,010
Common Stock issued for
options exercised at
$1.00 per share in Mar
2004 55,000 27,500 27,500 - - - 55,000
Common stock issued in
exchange for employee
services at $3.00 per
share, Mar 2004 5,443 2,722 13,623 - - - 16,345
Common stock issued in
exchange for employee
services at $3.15 per
share, Mar 2004 5,769 2,885 15,292 - - - 18,177
Preferred shared
converted to common
shares for consulting
services at $3.00 per
share, Mar 2004 (5,000) (5) 125,000 62,500 312,500 - - - 374,995
Common stock issued in
exchange for employee
services at $3.03 per
share, Mar 2004 8,806 4,400 22,238 - - - 26,639
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 (4,000) (4) 100,000 50,000 51,250 - - - 101,246
Common stock issued per
subscription May 2004 10,000 5,000 (4,000) - (1,000) - -
See accompanying notes to unaudited condensed consolidated financial statements
9
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued in
exchange for consulting
services at $0.86 per
share in May 2004 137,000 68,500 50,730 - - - 119,230
Common stock issued in
exchange for consulting
services at $1.15 per
share in May 2004 26,380 13,190 17,147 - - - 30,337
Common stock returned to
treasury at $0.065 per
share, Jun 2004 (5,000) (2,500) 2,175 - - - (325)
Common stock issued in
exchange for consulting
services at $0.67 per
share in June 2004 270,500 135,250 45,310 - - - 180,560
Common stock issued in
exchange for consulting
services at $0.89 per
share in June 2004 8,000 4,000 3,120 - - - 7,120
Common stock issued in
exchange for consulting
services at $0.65 per
share in June 2004 50,000 25,000 7,250 - - - 32,250
Common stock issued
pursuant to private
placement at $1.00
per share in June 2004 250,000 125,000 125,000 - - - 250,000
Common stock issued in
exchange for consulting
services at $0.54 per
share in July 2004 100,000 50,000 4,000 - - - 54,000
Common stock issued in
exchange for consulting
services at $0.72 per
share in July 2004 5,000 2,500 1,100 - - - 3,600
Common stock issued in
exchange for consulting
services at $0.47 per
share in July 2004 100,000 50,000 (2,749) - - - 47,251
Common stock issued in
exchange for consulting
services at $0.39 per
share in August 2004 100,000 50,000 (11,000) - - - 39,000
Preferred stock converted
to common stock for
consulting services at
$0.39 per share in
August 2004 (2,000) (2) 50,000 25,000 (5,500) - - - 19,498
Common stock issued in
exchange for consulting
services at $0.50 per
share in August 2004 100,000 50,000 250 50,250
Common stock issued in
exchange for consulting
services at $0.56 per
share in August 2004 200,000 100,000 12,500 - - - 112,500
Common stock issued in
exchange for consulting
services at $0.41 per
share in August 2004 92,500 46,250 (8,605) - - - 37,645
Common stock issued in
exchange for consulting
services at $0.52 per
share in September 2004 1,000,000 500,000 17,500 - - - 517,500
See accompanying notes to unaudited condensed consolidated financial statements
10
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued in
exchange for consulting
services at $0.46 per
share in September 2004 5,000 2,500 (212) - - - 2,288
Common stock issued
pursuant to subscription
at $0.50 per share in
September 2004 40,000 20,000 - - - - 20,000
Preferred shares
converted to common
stock for consulting
services at $0.41
per share in September
2004 (4,000) (4) 100,000 50,000 4,000 - - - 53,996
Preferred shares issued
in exchange for service
at $25 per share in
September 2004 60,000 6 1,499,994 1,500,000
Warrants issued to
consultants in the
fourth quarter 2004 2,019,862 2,019,862
Net Loss - - - - - (19,358,259)(19,358,259)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
September 30, 2004 60,000 6 23,981,054 11,990,527 6,118,993 - (1,000)(22,815,034) (4,706,508)
========= =========== =========== =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
11
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued
in exchange for
consulting services
at $0.68 per share
in October 2004 - - 200,000 100,000 36,000 - - - 136,000
Common stock returned
to treasury at $0.60
per share, Oct 2004 - - (1,069,600) (534,800) (107,298) - - - (642,098)
Common stock issued
in exchange for
consulting services at
$0.60 per share in
October 2004 - - 82,500 41,250 8,250 - - - 49,500
Common Stock issued
pursuant to subscription
at $0.60 share in
October 2004 - - 500,000 250,000 50,000 (300,000) - - -
Common stock issued in
exchange for consulting
services by noteholders
at $0.50 per share
in October 2004 - - 532,500 266,250 - - - - 266,250
Common Stock issued
pursuant to subscription
at $0.50 share in
October 2004 - - 500,000 250,000 - - - - 250,000
Common Stock issued pursuant
to subscription at $0.45
share in October 2004 - - 1,000,000 500,000 (50,000) (450,000) - - -
Common stock issued in
exchange for consulting
services by noteholders
at $0.45 per share
in October 2004 - - 315,000 157,500 (15,750) - - - 141,750
Common Stock issued in
exchange for consulting
services at $0.47 share
in November 2004 - - 100,000 50,000 (3,000) - - - 47,000
Common Stock issued in
exchange for consulting
services at $0.80 share
in November 2004 - - 300,000 150,000 90,000 - - - 240,000
Common Stock issued in
exchange for consulting
services at $1.44 share
in November 2004 - - 115,000 57,500 108,100 - - - 165,600
Common Stock issued in
exchange for employee
services at $1.44 share
in November 2004 - - 5,000 2,500 4,700 - - - 7,200
See accompanying notes to unaudited condensed consolidated financial statements
12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common Stock issued in
exchange for employee
services at $0.60 share
in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000
Beneficial Conversion
discount relating to
Notes Payable - - - - 936,541 - - - 936,541
Beneficial Conversion
Feature relating to
Warrants - - - - 528,459 - - - 528,459
Common stock issued at
$0.016 in exchange for
note payable in December
2004 5,500,000 2,750,000 (2,661,500) 88,500
Common Stock issued in
exchange for consulting
services at $1.44 share
in December 2004 - - 5,796,785 2,898,393 5,418,814 - - - 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
December 2004 - - 394,698 394,698
Warrants exercised at
$0.10 per share in January
2005 - - 25,000 12,500 (10,000) - - - 2,500
Common Stock issued in
settlement of debt at
$0.33 per share in January
2005 - - 1,628,789 814,395 (276,895) - - - 537,500
Warrants exercised at
$0.10 per share in January
2005 - - 17,500 8,750 (7,000) - - - 1,750
Common Stock issued in
settlement of debt at
$0.33 per share in January
2005 - - 2,399,012 1,199,503 (407,830) - - - 791,673
Common Stock issued in
exchange for consulting
services at $1.30 per share
in January 2005 - - 315,636 157,818 252,509 - - 410,327
Common Stock issued in
settlement of debt at
$0.33 per share in February
2005 - - 75,757 37,879 (12,879) - - - 25,000
See accompanying notes to unaudited condensed consolidated financial statements
13
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Warrants exercised at
$0.10 per share in February
2005 - - 20,000 10,000 (8,000) - - - 2,000
Common Stock issued in
settlement of debt at
$0.33 per share in February
2005 - - 606,060 303,030 (103,030) - - - 200,000
Warrants exercised at
$0.10 per share in February
2005 - - 45,000 22,500 (18,000) - - - 4,500
Common Stock issued in
settlement of debt at
$0.40 per share in February
2005 - - 1,500,000 750,000 (150,000) - - - 600,000
Common Stock issued in
settlement of debt at
$0.33 per share in February
2005 - - 278,433 139,217 (47,334) - - - 91,883
Common Stock issued in
exchange for consulting
services at $1.17 per share
in February 2005 - - 17,236 8,618 11,548 - - 20,166
Common stock issued
pursuant to subscription
at $0.50 per share
in February 2005 - - 300,000 150,000 - - - - 150,000
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 716,500 358,250 322,425 - - 680,675
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 10,500 5,250 4,725 - - 9,975
Common stock issued
pursuant to subscription
at $0.50 per share
in March 2005 - - 13,202,000 6,601,000 - - - - 6,601,000
Common Stock issued in
exchange for consulting
services at $1.19 per share
in March 2005 - - 185,000 92,500 127,650 - - 220,150
Options exercised at
$0.60 per share in March
2005 - - 100,000 50,000 10,000 - - - 60,000
Common Stock issued in
exchange for consulting
services at $0.98 per share
in March 2005 - - 1,675,272 837,636 804,131 - - 1,641,767
See accompanying notes to unaudited condensed consolidated financial statements
14
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common Stock issued in
exchange for consulting
services at $0.92 per share
in March 2005 - - 24,333 12,167 10,219 - - 22,386
Common Stock issued in
exchange for consulting
services at $0.99 per share
in March 2005 - - 15,000 7,500 7,350 - - 14,850
Common stock issued
pursuant to subscription
at $0.50 per share
in March 2005 - - 1,240,000 620,000 - - - - 620,000
Common stock canceled
For shares issued in
exchange of debt
in March 2005 - - (500,000) (250,000) - - - - (250,000)
Common stock subscribed
Canceled in March 2005 - - - - - 750,000 - - 750,000
Common Stock issued in
exchange for consulting
services at $0.89 per share
in March 2005 - - 10,000 5,000 3,900 - - - 8,900
Adjust common stock par
value from $0.50 to
$0.001 per share, per
amendment of articles
dated March 2005 - - - (32,312,879) 32,312,879 - - - -
Beneficial Conversion
discount relating to
Notes Payable in March
2005 - - - - 4,179,554 - - - 4,179,554
Beneficial Conversion
Feature relating to
Warrants in March 2005 - - - - 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
in March 2005 - - - - 180,000 - - - 180,000
Common Stock issued in
exchange for consulting
services at $0.80 per share
in April 2005 - - 160,000 160 127,840 - - - 128,000
Common Stock issued in
exchange for consulting
services at $0.80 per share
in April 2005 - - 40,000 40 31,960 - - - 32,000
See accompanying notes to unaudited condensed consolidated financial statements
15
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common Stock issued in
exchange for consulting
services at $0.75 per share
in April 2005 - - 850,000 850 636,650 - - - 637,500
Common Stock issued in
exchange for consulting
services at
$0.33 per share in April
2005 - - 500,000 500 164,500 - - - 165,000
Common Stock canceled during
April 2005, previously
issued for services
rendered at $3.42 per share - - (10,000) (10) (34,190) - - - (34,200)
Common Stock issued in
settlement of debt at
$0.33 per share in April
2005 - - 75,758 77 24,923 (25,000) - - -
Common Stock issued in
exchange for consulting
services at $0.68 per share
in April 2005 - - 50,000 50 33,950 - - - 34,000
Proceeds received against
subscription Payable in
June 2005 - - - - - 118,000 - - 118,000
Common Stock canceled in
June 2005, previously
issued for services
rendered at $0.50 per share - - (10,000) (10) (4,990) - - - (5,000)
Cancellation of previously
granted stock options granted
to employees for services
rendered, at exercise price
below fair value of common stock - - - - (180,000) - - - (180,000)
Warrants issued to consultants
and Employees during the quarter
ended June 30, 2005 - - - - 849,046 - - - 849,046
Common Stock issued in
exchange for consulting
services at $0.60 per share
in July 2005 - - 157,000 157 94,043 - - - 94,200
Common Stock issued in
exchange for intellectual
property at $0.67 per share
in July 2005 - - 36,000,000 36,000 24,084,000 - - - 24,120,000
Common Stock issued in
exchange for consulting
services at $0.60 per share
in July 2005 - - 640,000 640 383,360 - - - 384,000
Common Stock issued in
exchange for employee
services at$0.48 per share in July
2005 - - 8,000,000 8,000 3,832,000 - - - 3,840,000
See accompanying notes to unaudited condensed consolidated financial statements
16
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common Stock issued in
exchange for consulting
services at $0.94 per share
in September 2005 - - 121,985 122 168,217 - - - 168,339
Common Stock issued in
exchange for consulting
services at$0.48 per share in August
2005 - - 250,000 250 119,750 - - - 120,000
Common Stock penalty shares
issued pursuant to pending
SB-2 registration
at $0.62 per share in
September 2005 - - 814,158 814 501,858 - - - 502,672
Common Stock penalty shares
issued pursuant to pending
SB-2 registration
at $0.70 per share in
September 2005 - - 391,224 391 273,466 - - - 273,857
Common Stock issued in
exchange for consulting
services at $0.94 per share
in September 2005 - - 185,000 185 173,715 - - - 173,900
Common Stock returned in
September 2005, previously
issued for services
rendered at $0.40 per share - - (740,000) (740) (353,232) 56,000 1,000 - (296,972)
Adjustment to
warrants previously issued
and canceled during the year
ended Sept 30, 2005 - - - - (287,440) - - - (287,440)
Net Loss - - - - - - - (52,610,380)(52,610,380)
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance as of September
30, 2005 60,000 $ 6 112,230,392 $ 112,230 $81,879,801 $ 20,000 $ - $(75,425,414)$ 6,586,623
========= =========== =========== =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
17
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 2005 (Unaudited)
(Continued)
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Common stock issued
pursuant to subscription
at $0.50 per share
in October 2005 - - 400,000 400 199,600 (200,000) - - -
Common Stock issued in
exchange for consulting
services at $0.75 per share
in October 2005 - - 100,000 100 74,900 - - - 75,000
Common Stock returned in
October 2005, previously
issued for services
rendered at $0.60 per share - - (350,000) (350) (209,650) - - - (210,000)
Common stock issued
pursuant to subscription
at $0.50 per share
in December 2005 - - 40,000 40 19,960 (20,000) - - -
Common Stock penalty shares
issued pursuant to pending
SB-2 registration
at $0.51 per share in
December 2005 - - 505,854 506 257,481 - - - 257,987
Fair value related to
warrants issued in
November 2005 - - - - 563,750 - - - 563,750
Net Loss - - - - - - - (2,444,489) (2,444,489)
--------- ---------- ------------ ----------- ----------- ---------- ----------- ----------- -----------
Balance as of December
31, 2005 60,000 $ 6 112,926,246 $ 112,926 $82,785,842 $(200,000) $ - $(77,869,903)$ 4,828,871
========= ========== ============ =========== =========== ========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
18
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
For the period
September 16,
2002 (date of
inception)
For The Three Months Ended through
December 31, December 31,
2005 2004 2005
---- ---- ----
Cash flows from operating activities:
Net loss from operating activities ........................................ $ (2,444,489) $(12,365,136) $(77,869,903)
Adjustments to reconcile net loss to net cash used in Operating activities:
Depreciation .............................................................. 336,942 4,721 690,210
Organizational Expenses ................................................... 88,500
Preferred Shares issued in exchange for service ........................... -- -- 1,500,000
Warrants issued to consultants and note holders............................ 563,750 394,698 3,539,916
Amortization of beneficial conversion feature-convertible notes............ -- 1,515,000 10,461,000
Common stock issued:
in exchange for consultant services rendered ............................. 75,000 9,366,507 30,681,373
in connection with costs of acquiring intangible assets ................. -- -- 14,689,100
in connection with issuance of penalty shares pursuant
to pending SB-2 registration............................................... 257,986 -- 1,034,515
Common stock canceled-previously issued for services rendered ............. (210,000) (642,605) (973,845)
Changes in Assets and Liabilities:
Other current receivables................................................. (4,975) -- (17,404)
Other assets.............................................................. -- -- (13,890)
Increase (decrease) in:
Restricted cash related to stock subscription escrow...................... -- (1,065,318) --
Increase in due related parties .......................................... 53,805 1,523 94,558
Accounts payable and accrued liabilities ................................. 958,611 1,203,816 2,993,416
------------ ------------ ------------
Net cash used in operating activities ..................................... (413,370) (1,586,794) (13,102,454)
Cash flows from investing activities:
Security deposits ........................................................ (9,397) (24,026) (23,659)
Capital expenditures ..................................................... 6,103 -- (6,647)
Payments for patent filing ............................................... -- (4,347) (25,698)
------------ ------------ ------------
Net cash used in investing activities ..................................... (3,294) (28,373) (56,004)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost ........................... -- -- 432,000
Proceeds from subscription of common stock ................................ -- 250,000 9,204,000
Proceeds from sale of options ............................................. -- 36,000 311,750
Proceeds from loans ....................................................... 550,000 1,390,000 3,300,000
Repayment of note payable.................................................. -- -- (24,854)
Advances from shareholders ................................................ -- 100,088
------------ ------------ ------------
Net cash provided by financing activities ................................. 550,000 1,676,000 13,322,984
Net increase in cash and cash equivalents ................................. 133,336 60,833 164,526
Cash and cash equivalents at beginning of period .......................... 31,190 1,832 --
Cash and cash equivalents at end of period ................................ $ 164,526 $ 62,665 $ 164,526
============ ============ ============
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 .......................................... 75,000 9,366,507 30,681,373
Common stock issued in exchange for intellectual property -- -- 9,430,900
Common stock issued in exchange for previously incurred debt -- -- 3,109,533
Common stock penalty shares issued pursuant to pending SB-2 registration 257,986 -- 1,034,515
19
Common stock canceled-previously issued for services rendered ............. (210,000) (642,605) (973,845)
Common stock retired ...................................................... -- -- --
Amortization of beneficial conversion feature.............................. -- 1,515,000 10,461,000
Preferred Shares in exchange for services.................................. -- -- 1,500,000
Warrants issued to consultants ............................................ 563,750 394,698 3,539,916
Acquisition:
Common stock retained ..................................................... -- 1,015
Assets acquired ........................................................... -- (135)
-------- ------------
Total consideration paid .................................................. -- 880
-------- ------------
Organization expenses - note issued in exchange of shares retired ......... -- 88,500
Common stock issued in exchange for note payable .......................... -- 88,500 88,500
See accompanying notes to unaudited condensed consolidated financial statements
20
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended December 31, 2005 is not
necessarily indicative of the results that may be expected for the year ended
September 30, 2006. The unaudited condensed consolidated financial statements
should be read in conjunction with September 30, 2005 financial statements.
Business and Basis of Presentation
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of Nevada. The Company is in the
development stage, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA
embedded biotechnology security solutions in the United States. To date, the
Company has generated nominal sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
inception through December 31, 2005, the Company has accumulated losses of
$77,869,903.
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.
21
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
The Company did not grant any stock options to employees during the period ended
December 31, 2005. Had compensation costs for the Company's stock options been
determined based on the fair value at the grant dates for the awards, the
Company's net loss and losses per share would have been as follows :
For the Period
September, 16
2002 (Date of
For The Three For The Three Inception
Months ended Months ended through
December 31, December 31, December 31,
2005 2004 2005
----------------------------------------------------
Net loss - as reported $ (2,444,489) $ (12,365,136) $ (77,869,903)
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) - - (1,836,222)
---------------- --------------- -------------------
Net loss - Pro Forma $ (2,444,489) $ (12,365,136) $ (79,706,125)
================ =============== ===================
Net loss attributable to common
stockholders - Pro Forma $ (2,444,489) $ (12,365,136) $ (79,706,125)
================ =============== ===================
Basic (and assuming dilution) loss
per share - as reported $ (0.02) $ (0.45) $ (1.94)
================ =============== ===================
Basic (and assuming dilution) loss
per share - Pro Forma $ (0.02) $ (0.45) $ (1.99)
================ =============== ===================
22
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 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.
SFAS 123R. On March 31, 2004 the Financial Accounting Standards Board ("FASB")
issued its exposure draft, "Share-Based Payments", which is a proposed amendment
to SFAS 123. The exposure draft would require all share-based payments to
employees, including grants of employee stock options and purchases under
employee stock purchase plans, to be recognized in the statement of operations
based on their fair value. The FASB issued the final standard in December 2004
that is effective for small business issuers for annual periods beginning after
December 15, 2005. The Company has not yet assessed the impact of adopting this
new standard.
SFAS 151. In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This
Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company does not anticipate that
23
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
the implementation of this standard will have a material impact on its financial
position, results of operations or cash flows.
SFAS 152. In December 2004, the FASB issued SFAS No.152, "Accounting for Real
Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67"
("SFAS 152) The amendments made by Statement 152 This Statement amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to real
estate time-sharing transactions. The accounting for those operations and costs
is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. with
earlier application encouraged. The Company does not anticipate that the
implementation of this standard will have a material impact on its financial
position, results of operations or cash flows.
SFAS 153. On December 16, 2004, FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions (" SFAS 153"). This statement
amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. Under SFAS 153, if
a nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
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
24
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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 - INTANGIBLE ASSET AMORTIZATION
The Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets,
whereby the Company periodically test its intangible assets for impairment. On
an annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.
On July 12, 2005, the Company acquired certain intellectual properties from
Biowell Technology, Inc. ("Biowell") through an Asset Purchase Agreement
("Agreement") in exchange for 36 million shares of the Company's restricted
common stock having an aggregate fair value at the date of issuance of
$24,120,000. The value of the acquired intangible assets was $9,430,900, with
the balance of the purchase price, or $14,689,100, charged to operations as a
cost of the transaction.
The identifiable intangible assets acquired and their carrying value at December
31, 2005 are:
Weighted
Average
Gross Amortization
Carrying Accumulated Residual Period
Amount Amortization Net Value (Years)
------------- --------------- ------------ ---------- ----------
Amortizable
Intangible
Assets:
Trade secrets
and developed
technologies $9,430,900 $673,636 $8,757,264 - 7
Patents 34,257 13,490 20,767 - 5
---------- ---------- ----------
Total
Amortized
Identifiable
Intangible $9,465,157 $687,126 $8,778,031 - 6.99
========== ========= ========== -
Assets
Total amortization expense charged to operations for the three months ended
December 31, 2005 and 2004 were $ 338,545 and $4,370 respectively.
Estimated amortization expense as of September 30, 2005 is as follows:
2006 $ 1,357,279
2007 1,357,279
2008 1,349,748
2009 1,349,271
2010 and after 3,704,998
Total $ 9,116,575
============
25
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE C - NOTES PAYABLE
At December 31, 2005, notes payable are as follows:
(Unaudited)
-----------
Note payable, unsecured, currently in default, payable from August 1, 2005,
right to convert to 180,000 shares of restricted stock in lieu of cash, rate of
interest
4%. $ 410,429
Note payable, secured by all Company assets , payable from November 3, 2005,
repayment due upon the earlier of $750,000 in new financing or by April 1, 2006,
rate of interest 16% per annum (see Note E)%. 550,000
-----------
960,429
Less: current portion 960,429
-----------
Note Payable - long-term $ -
===========
NOTE D - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 250,000,000 shares
of common stock, with a $0.001 par value per share as the result of a
shareholder meeting conducted on February 14, 2005. Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares with a par value of $0.50. In February 2005, the Company passed a
resolution authorizing change in the par value per common shares from $0.50 per
share to $0.001 per share.
During the period September 16, 2002 through September 30, 2003, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately $1,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc (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.
26
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In November and December 2002, the Company issued 876,000 shares of common stock
in exchange for subscription at $0.065 per share. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
In January 2003, the Company canceled 836,000 shares of common stock previously
issued in exchange for consulting services.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement . The Company valued the shares issued at
approximately $.065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In January 2003, the Company issued 586,250 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.13 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In February 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.065 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In March 2003, the Company issued 91,060 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $2.53
per share, which represents the fair value of the services received which did
not differ materially from the value of the stock issued.
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
27
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
reached. The Company valued the shares issued at approximately $0.065 per share,
which presents the fair value of the services received which did not differ
materially from the value of the stock issued.
On April 9, 2003, the Company issued 18,000 shares of common stock in exchange
for previously issued options to purchase the Company's common stock at $1.00
per share.
On April 9, 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 23, 2003, the Company issued 5,000 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 12, 2003, the Company issued 10,000 shares common stock in exchange for
consulting services provided to the Company. The Company valued the shares
issued at approximately $2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 17 2003, the Company issued 50,000 shares of common stock in exchange
for cash at $1.00 per share.
On June 30, 2003, the Company issued 270,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
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.
28
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In July 2003, the Company canceled 24,000 shares of common stock, previously
issued for services valued at $2.50 per share.
In July 2003, the Company received $20,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
In July 2003, the Company issued 10,000 shares of common stock for cash
previously subscribed at $1.00 per share.
In August 2003, the Company issued 172,500 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.38 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued
In August 2003, the Company received $29,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
In September 2003, the Company issued 395,260 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.42 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
In September 2003, the Company issued 6,400 shares of common stock issued in
exchange for cash at $2.50 per share pursuant to private placement.
In September 2003, the Company received $95,000 in exchange for previously
issued options to purchase the Company's common stock at $1.00 per share.
In September 2003, the Company received $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.
29
APPLIED DNA SCIENCES, INC
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In November 2003, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$3.00 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued.
In November 2003, the Company sold 100,000 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
In December 2003, the Company sold 6,400 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
In December 2003, the Company issued 2,125,500 shares of common stock in
exchange for consulting services. . The Company valued the shares issued at
approximately $2.59 per share, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In December 2003, the Company received $104,000 in exchange for a common stock
subscription at $2.50 per share pursuant to private placement.
In January 2004, the Company issued 41,600 shares of common stock at $2.50 share
pursuant to a subscription made on December 2003.
In January 2004, the Company issued 13,040 shares of common stock at $2.95 per
share in exchange for consulting services valued at $38,468.
In January 2004, the Company issued 123,000 shares of common stock at $2.60 per
share in exchange for consulting services valued at $319,800.
In January 2004, the Company issued 1,000 shares of common stock at $3.05 per
share in exchange for consulting services valued at $3,050.
In February 2004, the Company issued 6,283 shares of common stock at $3.07 per
share in exchange for employee services valued at $19,288.
In March 2004, the Company issued 44,740 shares of common stock at $3.04 per
share in exchange for consulting services valued at $136,010.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
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.
30
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In March 2004, the Company converted 5,000 preferred shares into 125,000 shares
of common stock at $3.00 per share in exchange for employee services valued at
$375,000.
In March 2004, the Company issued 8,806 shares of common stock at $3.03 per
share in exchange for employee services valued at $26,639.
In April 2004, the Company issued 22,500 shares of common stock at $0.10 for
subscription of warrants to be exercised.
In April 2004, the Company issued 9,860 shares of common stock at $2.58 per
share in exchange for employee services valued at $25,441.
In April 2004, the Company issued 11,712 shares of common stock at $2.35 per
share in exchange for consulting services valued at $27,523.
In April 2004, the Company issued 367,500 shares of common stock at $1.50 per
share in exchange for consulting services valued at $551,250.
In April 2004, the Company retired 50,000 shares of common stock previously
issued for consulting services at $0.065 per share or $3,250.
In May 2004, the Company converted 4,000 preferred shares into 100,000 shares of
common stock at $1.01 per share in exchange for consulting services valued at
$101,250.
In May 2004, the Company issued 10,000 shares of common stock at $0.10 per share
in a stock subscription for $1,000.
In May 2004, the Company issued 137,000 shares of common stock at $0.86 per
share in exchange for consulting services valued at $119,233.
In May 2004, the Company issued 26,380 shares of common stock at $1.15 per share
in exchange for consulting services valued at $30,337.
In June 2004, the Company retired 5,000 shares of common stock previously issued
for consulting services at $0.065 per share or $325.
In June 2004, the Company issued 270,500 shares of common stock at $0.67 per
share in exchange for consulting services valued at $180,560.
In June 2004, the Company issued 8,000 shares of common stock at $0.89 per share
in exchange for consulting services valued at $7,120.
In June 2004, the Company issued 50,000 shares of common stock at $0.645 per
share in exchange for consulting services valued at $32,250.
31
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share
for total proceeds of $250,000 pursuant to private placement.
In July 2004, the Company issued 100,000 shares of common stock at $0.54 per
share in exchange for consulting services valued at $54,000.
In July 2004, the Company issued 5,000 shares of common stock at $0.72 per share
in exchange for consulting services valued at $3,600.
In July 2004, the Company issued 100,000 shares of common stock at $0.47 per
share in exchange for consulting services valued at $47,250.
In August 2004, the Company converted 2,000 preferred shares into 50,000 shares
of common stock at $0.39 in exchange for consulting services valued at $19,500.
In August 2004, the Company issued 100,000 shares of common stock at $0.39 in
exchange for consulting services valued at $39,000.
In August 2004, the Company issued 100,000 shares of common stock at $0.50 in
exchange for consulting services valued at $50,250.
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.
32
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In October 2004, shareholders returned 1,069,600 shares to treasury issued
earlier in exchange for services valued at $642,098.
In October 2004, the Company issued 82,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.60 per share for a total of $49,500, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.60 per share pursuant to private placement.
In October 2004, the Company issued 532,500 shares of common stock to existing
noteholders. The Company valued the shares issued at approximately $0.50 per
share for a total of $266,250.
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.50 per share pursuant to private placement.
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.
33
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
In December 2004, the Company issued 5,796,785 shares of common stock in
exchange for consulting services. The Company valued the shares issued at
approximately $1.44 per share for a total of $8,317,207, which represents the
fair value of the services received which did not differ materially from the
value of the stock issued.
In December 2004, the Company issued 2,930,000 shares of common stock subscribed
for cash at $0.50 per share pursuant to the exercise terms of a promissory note
payable.
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.
In January 2005, we issued 25,000 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.
In January 2005, we retired $537,500 of convertible notes payable for 1,628,789
shares of common stock. The Notes are convertible into shares of our common
stock at a price of $0.33 per share.
In January 2005, we issued 17,500 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.
In January 2005, we retired $791,673 of convertible notes payable for 2,399,012
shares of common stock. The Notes are convertible into shares of our common
stock at a price of $0.33 per share.
In January, 2005, the Company issued 315,636 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$1.30 per share for a total of $410,327, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In February 2005, we retired $25,000 of convertible notes payable for 75,757
shares of common stock. The Notes are convertible into shares of our common
stock at a price of $0.33 per share.
In February 2005, we issued 20,000 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.
In February 2005, we retired $200,000 of convertible notes payable for 606,060
shares of common stock. The Notes are convertible into shares of our common
stock at a price of $0.33 per share.
In February 2005, we issued 45,000 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.
34
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In February 2005, we retired $600,000 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 $0.40 per share.
In February 2005, we retired $91,883 of convertible notes payable for 278,433
shares of common stock. The Notes are convertible into shares of our common
stock at a price of $0.33 per share.
In February, 2005, the Company issued 17,236 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$1.17 per share for a total of $20,166, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In February, 2005, the Company issued 300,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $150,000 pursuant to the exercise
terms of a promissory note payable. This issuance is considered exempt under
Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder.
In February, 2005, the Company issued 716,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.95 per share for a total of $680,675, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In February, 2005, the Company issued 10,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.95 per share for a total of $9,975, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In March, 2005, the Company issued 13,202,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $6,601,000 pursuant to the exercise
terms of a promissory note payable. This issuance is considered exempt under
Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder.
In March, 2005, the Company issued 185,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$1.19 per share for a total of $220,150, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In March 2005, we issued 100,000 shares of common stock for options exercised at
$0.60 share. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
In March, 2005, the Company issued 1,675,272 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.98 per share for a total of $1,641,767, which represents the fair value of
the services received which did not differ materially from the value of the
stock issued.
In March, 2005, the Company issued 24,333 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.92
per share for a total of $22,386, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In March, 2005, the Company issued 15,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.99
per share for a total of $14,850, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
35
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In March, 2005, the Company issued 1,240,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $620,000 pursuant to the exercise
terms of a promissory note payable. This issuance is considered exempt under
Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder.
In March, 2005, the Company canceled shares previously issued within the quarter
for exchange of debt valued at $250,000.
In March, 2005, the Company issued 10,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.89
per share for a total of $8,900, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
The Company recognized an imbedded beneficial conversion feature present in the
January/February Offering note ("January/February PPM"). The Company allocated a
portion of the proceeds equal to the intrinsic value of that feature to
additional paid in capital. The Company recognized and measured an aggregate of
4,179,554 of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and a discount
against the Bridge Offering. The debt discount attributed to the beneficial
conversion feature was fully amortized over the fiscal first quarter period as
interest expense.
The Company recognized the value attributable to the warrants in the amount of
$3,191,446 to additional paid in capital and a discount against the
January/February 2005 PPM.
In March, 2005, the Company granted an aggregate of 300,000 stock options to
employees that vested immediately. The exercise prices of the stock options
granted were below the fair value of the Company's common stock at the grant
date. Compensation expense of $180,000 and $0 was charged to operations during
the period ended March 31, 2005 and 2004, respectively.
In April, 2005, the Company issued 160,000 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 $128,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In April, 2005, the Company issued 40,000 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 $32,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In April, 2005, the Company issued 850,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.75 per share for a total of $637,500, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In April 2005, we retired $165,000 of convertible notes payable for 500,000
shares of common stock. The Notes are convertible into shares of our common
stock at a price of $0.33 per share.
In April, 2005, a shareholder returned 10,000 shares previously issued for
services valued at $34,200 in exchange for a cash settlement.
36
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
In April 2005, we retired convertible notes payable for 75,758 shares of common
stock. The Notes are convertible into shares of our common stock at a price of
$0.33 per share.
In April 2005, the Company issued 50,000 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 $34,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In June 2005, a shareholder returned 10,000 shares previously issued for
services valued at $5,000.
In June 2005, the Company cancelled 300,000 stock options previously granted
valued at $180,000. In accordance with EITF 96-18 the measurement date to
determine fair value was the date at which a commitment for performance by the
counter party to earn the equity instrument was reached. The Company valued the
shares issued for consulting services at the rate which represents the fair
value of the services received which did not differ materially from the value of
the stock issued.
In July 2005, the Company issued 157,000 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 $94,200, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In July 2005, the Company issued 36 million shares in exchange for intellectual
property at approximately $0.67 per share for a total of $24,120,000.
In July 2005, the Company issued 640,000 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 $384,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In July 2005, the Company issued 8,000,000 shares of its common stock without
restriction to employees in exchange for services rendered. . The Company valued
the shares issued at approximately $0.48 per share for a total of $3,840,000,
which represents the fair value of the services received which did not differ
materially from the value of the stock issued. Since the Company issued the
shares without restriction , the Company may have violated federal and state
securities laws in connection with the issuance of those shares (see Note G).
In July 2005, the Company issued 121,985 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $0.94
per share for a total of $168,339, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In July 2005, the Company issued 250,000 shares of its common stock to
consultants in exchange for services rendered. The Company valued the shares
issued at approximately $0.48 per share for a total of $120,000, which
represents the fair value of the services received which did not differ
materially from the value of the stock issued. Such shares are exempt from
registration under Rule 701 for the Securities Act of 1933
In September 2005, the Company issued 814,158 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing
37
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE D - CAPITAL STOCK (continued)
at the rate of 3.5% per month on the face value of the Notes for the month of
July and August 2005. The Company valued the shares issued at approximately
$0.62 per share for a total of $502,672.
In September 2005, the Company issued 391,224 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of September 2005. The
Company valued the shares issued at approximately $0.70 per share for a total of
$273,857.
In September 2005, the Company issued 185,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.94 per share for a total of $173,900, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In September, 2005, the Company cancelled 740,000 shares previously issued for
services valued at $296,972.
In September, 2005, the Company cancelled warrants previously issued valued at
$287,440.
In October, 2005, the Company issued 400,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $200,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
In October 2005, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.75 per share for a total of $75,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2005, the Company cancelled 350,000 shares previously issued for
services valued at $210,000.
In December, 2005, the Company issued 40,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $20,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
In December 2005, the Company issued 505,854 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 31, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of September 2005. The
Company valued the shares issued at approximately $0.51 per share for a total of
$257,985. Upon the one year anniversary of the investor proceeds receipt date,
all penalty shares will terminate. No additional penalty shares shall accrue
subsequent to February 15, 2006.
In December 2005, the Company recognized the value attributable to the warrants
in the amount of $563,750 to additional paid in capital related to the November
2005 Note Payable (see Note C).
38
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE E - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
shareholders 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 and placement of convertible debentures..
Warrants Outstanding Warrants Exercisable
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
$0.10 105,464 3.54 $ 0.10 105,464 $ 0.10
$0.20 5,000 2.88 $ 0.20 5,000 $ 0.20
$0.50 5,550,000 4.85 $ 0.50 5,550,000 $ 0.50
$0.60 9,132,000 3.38 $ 0.60 9,132,000 $ 0.60
$0.70 750,000 1.58 $ 0.70 750,000 $ 0.70
$0.75 17,727,000 3.75 $ 0.75 17,727,000 $ 0.75
$1.00 100,000 0.79 $ 1.00 100,000 $ 1.00
------- -------
33,369,464 33,369,46429,464
39
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE E - STOCK OPTIONS AND WARRANTS (continued)
Transactions involving warrants are summarized as follows:
Weighted Average Price
Number of Shares Per Share
Balance, September 30, 2003 383,500 $ 1.38
------------ ----
Granted 4,574,753 0.58
Exercised (88,000) 1.00
Canceled or expired - -
------------ -
Balance, September 30, 2004 4,870,253 $ 0.63
------------ ----
Granted 24,453,000 0.71
Exercised (207,500) 0.34
Canceled or expired (1,033,786) 0.65
------------ ----
Balance, September 30, 2005 28,081,967 $ 0.70
----
Granted 5,500,000 0.50
Exercised - -
Canceled or expired (212,503) 1.31
----------- ----
Balance, December 31, 2005 33,369,464 $ 0.67
----
In the quarter ended December 31, 2005, the Company issued 5,500,000 warrants to
the holders of the Company's $550,000 notes payable (see Note C) with a $0.50
exercise price and a five year life. For the first 36 months, the warrants
include anti dilution protection assuming no adjustment in the exercise price
per share of Common Stock upon any reverse split of the Company's common stock.
The estimated value of the warrants granted to Note holders was determined using
the Black-Scholes pricing model and the following assumptions: contractual term
of 5 years, a risk free interest rate of 4.55%, a dividend yield of 0% and
volatility of 42.8%. The amount of the expense charged to operations for
warrants was $563,750 and $394,698, respectively, for the three months ended
December 31, 2005 and 2004.
Employee Stock Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Weighted
Exercise Prices Number Remaining Contractual Average Number Average
---------------
Outstanding Life (Years) Exercise Price Exercisable Exercise Price
----------- ------------ -------------- ----------- --------------
$ .68 3,660,000 3.75 $ .68 3,660,000 $.68
Transactions involving stock options issued to employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
Outstanding at October 1, 2003 - $ -
Granted 3,660,000 .68
Exercised - -
Cancelled or expired - -
----------------- ----------------
Outstanding at September 30, 2005 3,660,000 $.68
================= ================
Granted - -
Exercised - -
Cancelled or expired - -
----------------- ----------------
Outstanding at September 30, 2005 3,660,000 $.68
================= ================
40
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE F- RELATED PARTY TRANSACTIONS
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 October 2005, Biowell waived all accrued
and future consulting charges and receive only travel reimbursements from the
company. Messrs. Sheu, Liang or Chen anticipate becoming employees at a later
date in 2006. Travel costs totaled $39,000 for the three months ended December
31, 2005.
The Company owes Biowell Technology, Inc., $15,000 for unpaid previous research
and development costs.
In July 2005, the Company entered into a license agreement with Biowell, whereby
the Company granted Biowell an exclusive license to sell, market, and
sub-license the Company's products in selected Asian countries. The exclusive
license for such selected territories is for an initial period of until December
31, 2010, and if Biowell meets its performance goals, the license agreement will
extend for an additional five year term. The license agreement gives Biowell the
initial rights to future anti-fraud biotechnologies developed by the Company and
also new applications for the existing technology that may be developed for the
marketplace as long as the license agreement remains in effect. In the event
that Biowell shall sub-license the products within its territories, Biowell
shall pay the Company 50% of all fees, payments or consideration or any kind
received in connection with the grant of the sublicense. Biowell is required to
pay a royalty of 10% on all net sales made and is required to meet certain
minimum annual net sales in its various territories. Cumulative royalties earned
from the period July 2005 through December 31, 2005 totaled $17,404 with $14,274
occurring in the three months ended December 31, 2005.
NOTE G- COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment agreements with some of the Company's officers and
certain employees. These employment agreements provide for salaries and
benefits, including stock options. In June of 2005, an Addendum was made to
several employment agreements providing defined commitments should the Company
terminate the employee with or without cause. It is the Company's position that
the form of Addendum was not approved by the Board of Directors, and is
therefore null and void, ab initio, as of the date that each one was executed by
an officer of the Company.
The Company has consulting agreements with two outside contractors to provide
marketing and financial advisory services. The Agreements are generally for a
term of 12 months from inception and renewable
41
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
NOTE G- COMMITMENTS AND CONTINGENCIES (continued)
automatically from year to year unless either the Company or consultant
terminates such engagement by written notice.
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. We answered the
complaint on May 12, 2005, denying Stern & Co.'s allegations and we asserted a
number of defenses. In January 2006, the Company settled the action by issuing
100,000 options with a three year life and with a $0.70 exercise price.
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
Plaintiff Oceanic Consulting, S.A. commenced this action on or about November
24, 2004 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. 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. Management
believes the ultimate outcome of this matter will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
Crystal Research Associates, LLC v. Applied DNA Sciences, Inc., Docket No.:
L-7947-04
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us for $13,000 in the Superior Court of New Jersey, Middlesex County. We
intend to move to vacate the default judgment on various grounds. We dispute the
allegations of the complaint and we intend to vigorously defend this matter.
Franchising and Distribution Agreements
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.
In connection with the closing of, Biowell agreement 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.
The Company has entered into a Distribution and Franchising Agreement
("Franchise Agreement") in July 2003. Under the terms of the Franchise
Agreement, the franchisee is obligated to pay the Company $3,000,000 payable
$25,000 upon execution of the Franchise Agreement and the balance of $2,975,000
payable over five (5) years with interest accruing at 8% per annum. Payments
under the Franchise Agreement are subject to franchisee's net profits, as
defined, under the Franchise Agreement.
Operating Lease Commitment
The Company leases office space under operating lease in Los Angeles, California
for its corporate use from an entity controlled by significant former
shareholder, expiring in November 2006. In November 2005, the Company closed its
Los Angeles facility and relocated to Stony Brook, New York.
Registration of Company's Shares of Common Stock
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 required liquidated damages in shares of
Company stock accruing at the rate of 3.5% per month on the face value of the
Notes. For the period ended January 15, 2006 and February 15, 2006, the Company
anticipates accruing approximately $257,985 and $228,725, respectively, in
penalty share damages (see Note H). Upon the one year anniversary of the
investor proceeds receipt date, all penalty shares will terminate. No additional
penalty shares shall accrue subsequent to February 15, 2006.
NOTE H- SUBSEQUENT EVENTS
In January 2006, Paul Reep, a former employee, filed a $230,000 employment
agreement claim against the Company. This action is in the early stages of
discovery and we intend to vigorously defend this matter. Management believes
the ultimate outcome of this matter will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
Also in January 2006, James Paul Brown filed an action against Applied DNA
Sciences, Inc. in the Superior Court of Los Angeles, Los Angeles County,
California on January 12, 2006 asserting breach of an alleged oral consulting
agreement. The relief sought includes monetary damages and attorneys' fees. The
parties have reached a settelement in principle, which the Company expects to
execute shortly. Management is confident that the parties will resolve this
matter without issue.
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 required liquidated damages in shares of
Company stock accruing at the rate of 3.5% per month on the face value of the
Notes. For the period ended January 15, 2006 and February 15, 2006, the Company
anticipates accruing approximately $257,985 and $228,725, respectively, in
penalty share damages (see Note G). Upon the one year anniversary of the
investor proceeds receipt date, all penalty shares will terminate. No additional
penalty shares shall accrue subsequent to February 15, 2006.
42
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 OPERATIONS
Sales and Marketing
Our revenues will come from three sources:
1) direct sales to manufacturer,
2) sales through our OEM relationships, and,
3) authentication (laboratory) services.
We employ a multi-tier sales and marketing strategy involving our marketing
and sales staff working together with high-level contacts in target industries
and our OEM base. We are attempting to develop strategic alliances and marketing
partners by setting up alliances with Biowell's technology partners, granting
licenses to existing anti-counterfeit suppliers and partner with industry
leaders for intellectual property development.
We are cognizant that no technology exists today to enable someone in the
street to ascertain, at the point of purchase, whether an expensive product, or
a child's foodstuff, or pharmaceutical product is genuine, worth the money being
paid and safe to use or ingest. No brand owner is able to rapidly determine
whether a product is real of fake. Many multi-billion dollar brands have no
technology to protect against counterfeiting, to detect its occurrence and to
interdict or prosecute the counterfeiter. No company has the capability to
determine with forensic certainty that it is subject to attack. Such companies
remain seriously exposed to product liability, loss of consumer confidence and
loss of revenues. Governments have no rapid detection system to determine at the
point of entry, inspection or seizure whether products are real or fake. A major
thrust of our marketing efforts is to work with consumer groups, media,
corporate officers, government departments, Customs, insurers and others to
bring home the message that, in a world of criminality and terrorism, no-one is
safe.
Business Strategy and Approach
We have established integrated business operations addressing and servicing
the needs of the global security marketplace on the part of corporations and
governments for; anti-counterfeiting, fraud prevention, product authentication,
brand protection, supply chain management and protection.
43
Intellectual Property Development, Product Operations & Partnerships
We have proprietary DNA security technology, and develop security solutions
that protect corporate and intellectual property from counterfeiting, fraud,
piracy and product diversion using botanical DNA as an encrypted/code molecule
that can be embedded in inks, paper, substrates, liquids, textiles, thread,
plastics, holograms and microchips.
We produce security solutions customized to our customer's needs. We market
and sell DNA anti-counterfeit and fraud prevention solutions that integrate
into, and layer with, existing security solutions. These DNA security features
are integrated at the original equipment manufacturer level with ink, paper,
liquids, thread and hologram producers, who in turn sell/supply finished
security products such as primary and secondary product packaging for
pharmaceuticals, beauty products, textiles, currency, passports, ID cards, etc.
We have strict protocols for specifying, integrating, testing, shipping and
confirming the presence of DNA in any given product.
We plan to develop new product lines that will address specific new
challenges in the security marketplace, and bring these advances to target
industries, customers and countries.
Additionally, we will identify strategic partnerships and co-marketing
ventures, and licensees to work with us to develop, market and sell our
biotechnological security products. This will include sub-licensing the
technology to key partners in specific sectors with an established base of
customers. These partners will be able to enhance their product lines and client
services by adding our technology to the existing security matrix in their
products, providing an enhanced solution to deter fraud and counterfeiting.
Management Strategy
We anticipate a period of rapid change as we begin commercialization of the
products now available subsequent to: a) the signing of our licenses with
Biowell, b) the establishment of our prototyping labs at Stony Brook, and c) the
availability of products that have recently been commercialized in Asia by
Biowell.
We have organized our resources to manage our commercialization
effectively, optimizing the delivery of new prototypes for customers, and
managing outsourcing especially through our OEMs. Our Chief Executive Officer is
responsible for the strategic direction, coordinating with our overseas
technology partner Biowell and scientific development as well as corporate
governance and operations. Our President is responsible for business
development, including relations with US and foreign government agencies,
developing business relationships with target corporations and OEM's, and
securing revenues. Our Chief Financial Officer covers overall financial
management, financial reporting, corporate administration, investors relations.
Our marketing department develops strategic awareness of our technologies across
target industry sectors, their associated media and lobbying companies and
liaises with regulatory bodies (EPA, FDA, etc) and industry Associations (CTFA,
PHARMA, etc). Our sales department covers specific industries, such as the
pharmaceutical, packaging, ink, cosmetic and comestible sectors and acts as our
media spokesperson, clarifying for the pharmaceutical and nutraceutical
industries, allied health professionals and consumers the advantages of our
anti-counterfeit, diversion and piracy applications and products. Our Chairman
oversees the Biowell and Stony Brook DNA production Laboratories and the
development of core DNA sciences for current and future applications. Our
Strategic Technology Development Officer is principally engaged in the
productization of DNA markers for specific industry applications, and for
liaison with corresponding scientists from our principal OEM partners, e.g.,
petroleum markers, chemical markers, markers for precious stones, DNA-encrypted
inks, DNA markers for the pharmaceutical industry, etc.
44
Consultant & Enforcement Operations
As nations are threatened by terrorism and corporations try to prevent
corporate fraud, counterfeiting, product diversion and industrial espionage, the
need for secure anti-counterfeiting and identification systems increases. Our
technology can provide important and cost-effective support for local, state,
and federal governments as well as corporations doing business with highly
sensitive information or products susceptible to counterfeit. Our
anti-counterfeiting technology can be used for the following types of
identification and important government documents:
o Passports
o Green cards
o Visas
o Driver's licenses
o Social Security cards
o Student visas
o Military ID's
o Other important Identity cards and official documents
We intend to work in collaboration with Biowell and other security
organizations in order to continue to research and develop new product lines
derived from, but not limited to, DNA technology. Research and development of
new product lines is an ongoing commitment and is currently underway in the
Biowell labs and will continue in the U.S. at our new facilities being
established at the Long Island High Technology Incubator (LIHTI) at Stony Brook
University in New York. Research and development objectives include the
development of a new line of detection technologies that will provide faster and
more convenient ways to authenticate DNA, continuous effort to incorporate our
DNA markers with various products for new applications, and establishment of a
leading DNA authentication service lab. We believe that we will obtain
commercial revenues for these efforts within 12-24 months, although no
assurances can be given that we will ever generate revenues. Our prototyping
laboratory will customize "off-the-shelf" products for new customers on a
case-by-case basis. These new products are typically newly configured labels,
inks or packing elements. We have identified several options for remote
detection and faster detection methodologies.
We will consult with our clients on a total security service offering; how
to protect their brands, intellectual property, products and physical security
access and how to reduce risk exposure, product liability exposure and product
recall liabilities. We plan to offer worldwide DNA analysis services supporting
the authentication of products and the detection, interdiction, deterrence and
prosecution of counterfeiters and related crimes, through our subcontractors,
sub-licensees and security industry collaborative partners.
International Sub-License Operations
Developing Technology - We have an in-depth understanding of DNA microchip
design and applications. We will jointly develop DNA-holograms and
DNA-Hologram-RFID devices, DNA-inks, DNA-dyes and DNA-security labels with
leading original equipment manufacturers in these specialist fields.
We will utilize our existing relationships and develop new ones to
introduce our anti-counterfeiting technology to generate business. Each industry
has unique requirements and needs for their anti-counterfeit solutions, and we
believe our DNA technology will provide maximum security technologies. For
example, our smart packaging solutions with DNA security markers in ink, paper
and holograms has widespread application in packaging for pharmaceuticals,
cosmetics, automotive markets, passports, ID's and currency. Our proprietary
technology offers immediate and affordable detection and security for their
brands and products.
45
Strong Technology Alliances - Our technology can also provide advanced
security dimensions to:
o Electronics security: access and physical/plant security (biometric
security cards enhanced with DNA)
o Security Holograms (DNA enhanced)
o Radio Frequency Identification systems (DNA + RFID)
o Security papers and printing
o Holograms (DNA holograms)
o Other security-related products and systems
Law Enforcement Expertise - The resources of our collaborative partners in
the security industry include former federal law enforcement, security, and
intelligence officers who provide the company with extensive contacts and
hands-on experience in:
o Intellectual property investigation
o Counter-intelligence
o Personal security services
o Anti-counterfeit technologies
o Secure communications and data management
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements; we believe the following
critical accounting policies involve the most complex, difficult and subjective
estimates and judgments:
o stock-based compensation
o fair value of intangible assets
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 -
Accounting for Stock-Based Compensation, providing alternative methods of
voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2003.
We elected to continue to account for stock-based compensation plans using
the intrinsic value-based method of accounting prescribed by APB No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
the provisions of APB No. 25, compensation expense is measured at the grant date
for the difference between the fair value of the stock and the exercise price.
46
From its inception, the Company has incurred significant costs in
connection with the issuance of equity- based compensation, which is comprised
primarily of our common stock and warrants to acquire our common stock, to
non-employees. The Company anticipates continuing to incur such costs in order
to conserve its limited financial resources. The determination of the
volatility, expected term and other assumptions used to determine the fair value
of equity based compensation issued to non-employees under SFAS 123 involves
subjective judgment and the consideration of a variety of factors, including our
historical stock price, option exercise activity to date and the review of
assumptions used by comparable enterprises.
We account for equity based compensation, issued to non-employees in
exchange for goods or services , in accordance with the provisions of SFAS No.
123 and EITF No. 96-18, "Accounting for Equity Instruments That are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services".
Fair Value of Intangible Assets
We have adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby
we periodically test our intangible assets for impairment. On an annual basis,
and when there is reason to suspect that their values have been diminished or
impaired, these assets are tested for impairment, and write-downs will be
included in results from operations.
On July 12, 2005, we acquired certain intellectual properties from Biowell
through an Asset Purchase Agreement in exchange for 36 million shares of our
restricted common stock having an aggregate fair value at the date of issuance
of $24,120,000. The value of the acquired intangible assets was $9,430,900, with
the balance of the purchase price, or $14,689,100, charged to operations as a
cost of the transaction.
Revenues
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 we transition from a development stage enterprise to that of
an active growth stage company, although no assurances can be given that we will
generate any revenues from operations.
Costs and Expenses
Selling, general and administrative expenses for the three months ended December
31, 2005 compared to December 31, 2004 decreased $8.676 million or 86% to $2.078
million from $10.754 million in the prior period. Included within the $8.676
million decrease compared to the three months ended December 31, 2005 was $9.807
million in lower expenses consisting of $9.292 million in fund raising and
consultant costs, $465,000 in royalties and $50,000 in lower travel costs.
Offsetting the decreases was $1.131 million in higher costs consisting of
$774,000 in accrued penalty shares pursuant to the pending SB-2 registration and
$357,000 in relocation, restructuring charges and other items.
Research and development expenses decreased $22,000 for the three months ended
December 31, 2005 compared to the same period in 2004 from $38,000 to $16,000
primarily due to lower development and testing costs.
In the three months ended December 31, 2005, depreciation and amortization
increased $338,000 for the period compared to the same period in 2004 from
$5,000 to $343,000. In the year ended September 30, 2005, the Company
capitalized $9.431 million related to an intellectual property asset
acquisition. As a result, the Company recorded amortization expense totaling
$336,000 for the quarter ended December 31, 2005 compared to no intangible asset
amortization in the three months ended December 31, 2004. The Company estimates
a seven year useful life that commenced during the fourth fiscal quarter of
2005.
47
Total operating expenses decreased to $2.438 million from $10.798 million, or a
decrease of $8.360 million as a result of the combination of factors listed
above.
Interest expense, for the three months ended December 31, 2005 decreased to
$20,000 from $1.568 million in the same period of 2004, a decrease of $1.548
million. In the three months ended December 2004, the Company expensed $1.515
million in beneficial conversion feature related to the sale of convertible debt
and attached warrants in the year ended December 31, 2005.
Net loss for the three months ended December 31, 2005 decreased to a loss of
$2.444 million from a loss of $12.365 million in the prior period as a result of
the combination of factors described above.
Liquidity and Capital Resources
Our liquidity needs will come from working capital requirements,
indebtedness payments and research and development expenditure funding.
Historically, we have financed our operations through the sale of equity and
convertible debt as well as borrowings from various credit sources. As of
December 31, 2005, we had $960,429 in outstanding notes payables. Please see
Note C in our Form 10-QSB for the quarter ended December 31, 2005 for the
agreement terms.
For the three months ended December 31, 2005, we obtained $550,000 in
bridge financing and we used the proceeds to fund financing fees, consultants
and public reporting costs, salaries and wages, research and development,
facility costs as well as and general working capital needs.
As of December 31, 2005, we had a working capital deficit of $3,976,382.
For the year ended December 31, 2005, we generated a net cash flow deficit from
operating activities of $413,000 consisting primarily of year to date losses of
$2,444,000. Non cash equity adjustments totaling a net $687,000 included
$564,000 in expensed warrants issued in connection with the November 2005
financing, $75,000 in net stock issued for consulting services, $258,000 in
penalty stock issued pursuant to the pending SB-2 registration and ($210,000) in
cancelled shares for services previously rendered. Finally, non cash
depreciation and amortization totaled $337,000 while net liabilities and other
increased by $1.008 million. Cash used in investing activities totaled $3,000
primarily for increased security deposits. Cash provided by financing activities
for the year ended December 31, 2005 resulted from the $550,000 bridge
financing.
We expect capital expenditures to be less than $500,000 fiscal 2006. Our
primary investments will be in laboratory equipment to support prototyping and
our authentication services.
Exploitation of potential revenue sources will be financed primarily
through the sale of securities and convertible debt, exercise of outstanding
warrants, issuance of notes payable and other debt or a combination thereof,
depending upon the transaction size, market conditions and other factors.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required within the next 12 months in
order to meet our current and projected cash flow deficits from operations and
development. We have sufficient funds to conduct our operations for several
months, but not for 12 months or more. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.
By adjusting our operations and development to the level of capitalization,
we believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial condition.
48
Our registered independent certified public accountants have stated in
their report dated October 21, 2005, that we have incurred operating losses in
the last two years, and that we are dependent upon management's ability to
develop profitable operations. These factors among others may raise substantial
doubt about our ability to continue as a going concern.
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
$500,000 of available cash towards research and development activities during
the next twelve (12) months.
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the sale of any material property, plant or equipment
during the next 12 months. We do not anticipate the acquisition of any material
property, plant or equipment during the next 12 months.
Number of Employees
From our inception through the period ended December 31, 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
49
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".
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 $52,610,380 for the year ended September 30,
2005. For the three months ended December 31, 2005, we incurred a net loss of
$2,444,489. 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
$500,000 to fund our anticipated research and development operations for the
next twelve months, depending on revenue from operations. Additional capital
50
will be required to effectively support the operations and to otherwise
implement our overall business strategy. Even if we do receive additional
financing, it may not be sufficient to sustain or expand our research and
development operations or continue our business operations.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our research and development plans. Any
additional equity financing may involve substantial dilution to our then
existing shareholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated October 21, 2005, our independent auditors stated
that our financial statements for the year ended September 30, 2005 were
prepared assuming that we would continue as a going concern. Our ability to
continue as a going concern is an issue raised due to our incurring net losses
of $75,425,414 during the period September 16, 2002 (date of inception) through
September 30, 2005. 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.
51
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
51
in selecting and learning to use new products, and are often reluctant to switch
products. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
We may experience delays in the development and introduction of products.
We cannot assure that we will keep pace with the rapid rate of change in life
sciences research or that our new products will adequately meet the requirements
of the marketplace or achieve market acceptance. Some of the factors affecting
market acceptance of new products include:
o Availability, quality and price relative to competitive products;
o The timing of introduction of the product relative to competitive
products;
o Customers' opinions of the products' utility;
o Ease of use;
o Consistency with prior practices;
o Scientists' opinions of the products' usefulness;
o Citation of the product in published research; and
o General trends in life sciences research.
We have not experienced any difficulties with the preceding factors,
however, there can be no assurance that we will not experience difficulties in
the future. The expenses or losses associated with unsuccessful product
development or lack of market acceptance of our new products could materially
adversely affect our business, operating results and financial condition.
A Manufacturer's Inability to Produce Our Goods on Time and to Our
Specifications Could Result in Lost Revenue and Net Losses
We do not own or operate any manufacturing facilities and therefore depend
upon independent third parties for the manufacture of all of our products. Our
products are manufactured to our specifications. The inability of a manufacturer
to ship orders of our products in a timely manner or to meet our quality
standards could cause us to miss the delivery date requirements of our customers
for those items, which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could have a material
adverse effect as our revenues would decrease and we would incur net losses as a
result of sales of the product, if any sales could be made. Because of our
business, the dates on which customers need and require shipments of our
security products from us are critical.
If We Need to Replace Manufacturers, Our Expenses Could Increase Resulting in
Smaller Profit Margins
We compete with other companies for the production capacity of our
manufacturers and import quota capacity. Some of these competitors have greater
financial and other resources than we have, and thus may have an advantage in
the competition for production and import quota capacity. If we experience a
significant increase in demand, or if an existing manufacturer of ours must be
replaced, we may have to expand our third-party manufacturing capacity. We
cannot assure you that this additional capacity will be available when required
on terms that are acceptable to us or similar to existing terms which we have
with our manufacturers, either from a production standpoint or a financial
standpoint. We do not have long-term contracts with any manufacturer. None of
the manufacturers we use produces our products exclusively.
52
Should we be forced to replace one or more of our manufacturers, we may
experience an adverse financial impact, or an adverse operational impact, such
as being forced to pay increased costs for such replacement manufacturing or
delays upon distribution and delivery of our products to our customers, which
could cause us to lose customers or lose revenues because of late shipments.
If a Manufacturer of Ours Fails to Use Acceptable Labor Practices, We Might Have
Delays in Shipments or Face Joint Liability for Violations, Resulting in
Decreased Revenue and Increased Expenses
While we require our independent manufacturers to operate in compliance
with applicable laws and regulations, we have no control over the ultimate
actions of our independent manufacturers. While our internal and vendor
operating guidelines promote ethical business practices and our staff and buying
agents periodically visit and monitor the operations of our independent
manufacturers, we do not control these manufacturers or their labor practices.
The violation of labor or other laws by an independent manufacturer of ours, or
by one of our licensing partners, or the divergence of an independent
manufacturer's or licensing partner's labor practices from those generally
accepted as ethical in the United States, could interrupt, or otherwise disrupt
the shipment of finished products to us or damage our reputation. Any of these,
in turn, could have a material adverse effect on our financial condition and
results of operations, such as the loss of potential revenue and incurring
additional expenses.
The Failure To Manage Our Growth In Operations And Acquisitions Of New Product
Lines And New Businesses Could Have A Material Adverse Effect On Us.
The expected growth of our operations (as to which no representation can be
made) will place a significant strain on our current management resources. To
manage this expected growth, we will need to improve our:
o operations and financial systems;
o procedures and controls; and
o training and management of our employees.
Our future growth may be attributable to acquisitions of and new product
lines and new businesses. We expect that future acquisitions, if successfully
consummated, will create increased working capital requirements, which will
likely precede by several months any material contribution of an acquisition to
our net income.
Our failure to manage growth or future acquisitions successfully could
seriously harm our operating results. Also, acquisition costs could cause our
quarterly operating results to vary significantly. Furthermore, our stockholders
would be diluted if we financed the acquisitions by incurring convertible debt
or issuing securities.
Although we currently only have operations within the United States, if we
were to acquire an international operation; we will face additional risks,
including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o Different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
If We Are Unable to Retain the Services of Messrs. Sheu, Hayward or Liang, or If
We Are Unable to Successfully Recruit Qualified Managerial and Sales Personnel
Having Experience in Business, We May Not Be Able to Continue Our Operations.
53
Our success depends to a significant extent upon the continued service of
Mr. Jun-Jei Sheu, our Chairman of the Board of Directors, Dr. James Hayward, our
Chief Executive, Dr. Benjamin Liang, our Secretary and Strategic Technology
Development Officer. We do not have employment agreements with Drs. Sheu,
Hayward or Liang Loss of the services of Drs. Sheu, Hayward or Liang could have
a material adverse effect on our growth, revenues, and prospective business. We
do not maintain key-man insurance on the life of Drs. Sheu, Hayward or Liang We
are not aware of any other named executive officer or director who has plans to
leave us or retire. In addition, in order to successfully implement and manage
our business plan, we will be dependent upon, among other things, successfully
recruiting qualified managerial and sales personnel having experience in
business. Competition for qualified individuals is intense. There can be no
assurance that we will be able to find, attract and retain existing employees or
that we will be able to find, attract and retain qualified personnel on
acceptable terms.
Failure to Attract and Retain Qualified Scientific or Production Personnel Could
Have a Material Adverse Effect On Us.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing is critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining a qualified personnel base.
Although we believe we have been and will be able to attract and retain these
personnel, there is no assurance that we will be able to continue to
successfully attract qualified personnel. In addition, our anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, government approvals, production, and marketing will require
the addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to attract and retain
these personnel or, alternatively, to develop this expertise internally would
adversely affect our business as our ability to conduct research and development
will be reduced or eliminated, resulting in fewer or no products for sale and
lower revenues. We generally do not enter into employment agreements requiring
these employees to continue in our employment for any period of time.
We Need to Expand Our Sales and Support Organizations to Increase Market
Acceptance of Our Products.
We currently have a small customer service and support organization and
will need to increase our staff to support new customers and the expanding needs
of existing customers. The employment market for sales personnel, and customer
service and support personnel in this industry is very competitive, and we may
not be able to hire the kind and number of sales personnel, customer service and
support personnel we are targeting. Our inability to hire qualified sales,
customer service and support personnel may materially adversely affect our
business, operating results and financial condition.
The Biomedical Research Products Industry is Very Competitive, and We may be
Unable to Continue to Compete Effectively in this Industry in the Future.
We are engaged in a segment of the biomedical research products industry
that is highly competitive. We compete with many other suppliers and new
competitors continue to enter the market. Many of our competitors, both in the
United States and elsewhere, are major pharmaceutical, chemical and
biotechnology companies, and many of them have substantially greater capital
resources, marketing experience, research and development staff, and facilities
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
54
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:
Inksure - $1.0 million
DNA Technologies, Inc. - $22.6 million
November AG - $5.8 million
We expect this competition to continue and intensify in the future.
Competition in our markets is primarily driven by:
o Product performance, features and liability;
o Price;
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.
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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.
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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 closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and
$0.20 for our common stock on July 15, 2005, August 15, 2005, September 15,
2005, October 17, 2005, November 15, 2005 and December 15, 2005, respectively,
we issued approximately 390,887, 444,802, 368,550, 526,500, 806,204 and
1,289,927 shares of common stock per month, respectively, in liquidated damages.
The issuance of shares upon payment of liquidated damages will have the effect
of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
Liquidated damages will be paid through the one year anniversary of the
investment, ranging in time from December of 2005 through February 21, 2006. All
underlying shares being registered in the pending SB-2 become eligible for sale
under Rule 144, and issuance of further liquidated damages shares will cease.
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 February 14, 2006, we had 114,772,385 shares of common stock issued
and outstanding and outstanding options and warrants to purchase 37,029,464
shares of common stock. All of the shares issuable upon exercise of our warrants
may be sold without restriction. The sale of these shares may adversely affect
the market price of our common stock. The issuance of shares upon exercise of
warrants will cause immediate and substantial dilution to the interests of other
stockholders since the selling stockholders may convert and sell the full amount
issuable on exercise.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Prior to May 2001 and new management, we were delinquent in our reporting
requirements, having failed to file our quarterly and annual reports for the
years ended 1998 - 2000 (except the quarterly reports for the first two quarters
of 1999). We have been current in our reporting requirements for the last three
years, however, there can be no assurance that in the future we will always be
current in our reporting requirements.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
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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.
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Item 3. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures: As of December 31,
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: Except as described below, there were no
changes in internal controls over financial reporting that occurred
during the period covered by this report that have materially
affected, or are reasonably likely to materially effect, our internal
control over financial reporting. As described below, as a result of
our evaluation of our disclosure controls and procedures as of
December 31, 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
As previously reported, on July 11, 2005, we determined there were errors in
accounting for the valuation of equity consulting service transactions during
the January through March 2005 time period. The valuation resulted in the
overstatement of approximately $2.9 million in services provided. The errors
were discovered in connection with a comment raised by the 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. During the
quarter ended December 31, 2005, we implemented the following changes in our
internal controls 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.
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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. In January 2006, we
settled the action by issuing options to purchase 100,000 shares of our common
stock, exercisable for a period of three years after issuance at an exercise
price of $0.70 per share.
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.
Paul Reep v. Applied DNA Sciences, Inc., Case No. BC 345702
Plaintiff, Paul Reep, a former employee, filed this action against Applied
DNA Sciences, Inc. in the Superior Court of Los Angeles, Los Angeles County,
California, on January 10, 2006. The complaint asserts eight causes of action,
including breach of contract, negligent misrepresentation, fraud, interference
with economic advantage and defamation. The relief sought includes monetary
damages and attorneys' fees. The Company intends to vigorously defend this
matter.
James Paul Brown v. Applied DNA Case No. BC 3457814
Plaintiff, James Paul Brown filed this action against Applied DNA Sciences,
Inc. in the Superior Court of Los Angeles, Los Angeles County, California on
January 12, 2006. The complaint asserts a single cause of action for breach of
an alleged oral consulting agreement. The relief sought includes monetary
damages and attorneys' fees. The parties have reached a settelement in
principle, which the Company expects to execute shortly.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In December, 2005, we issued 40,000 shares of common stock subscribed for
$200,000. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
In December 2005, we issued 505,854 penalty shares pursuant to the pending
SB-2 registration statement. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, we were
obligated to have an effective resale registration statement by July 2005. Since
the registration statement was not effective by July 2005, we paid the required
$257,985 of liquidated damages in shares of our common stock accruing at the
rate of 3.5% per month on the face value of the outstanding notes for the month
of September 2005. The Company valued the shares issued at approximately $0.51
per share for a total of $257,985.
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
10.1 Promissory Note dated November 3, 2005, between Applied DNA
Sciences Inc. and Allied International Fund
10.2 Letter dated February 3, 2006 amending Promissory Note dated
November 3, 2005, between Applied DNA Sciences Inc. and Allied
International Fund
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)
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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: February 21, 2006 By: /s/ Dr. James Hayward
----------------------
Chief Executive Officer
Principal Executive Officer,
Principal Financial Officer
and Principal Accounting Officer).
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