UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB/A
Amendment No. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended December 31, 2004
Commissions file number 002-90519
APPLIED DNA SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Nevada 59-2262718
-------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Health Sciences Drive, Suite 113, Stony Brook, New York 11790
--------------------------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(631) 444-6862
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the last 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
The number of shares of Common Stock, $0.50 par value, outstanding on February
8, 2005, was 47,280,993 shares.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
EXPLANATORY NOTE
This Amendment No. 2 to Form 10-QSB/A ("Amendment No. 2") amends the amended
Quarterly Report of Applied DNA Sciences, Inc. (the "Company") on Form 10-QSB/A
for the quarter ended December 31, 2004, as filed with the Securities and
Exchange Commission on February 15, 2005 (the "Original Filing"). This Amendment
No. 2 is being filed for the purpose of correcting errors in accounting for and
disclosing the issuance by the Company of common stock, warrants and options for
services and in exchange for previously incurred debt
We have not updated the information contained herein for events occurring
subsequent to February 15, 2005, the filing date of the Original Filing.
APPLIED DNA SCIENCES, INC
Quarterly Report on Form 10-QSB/A for the
Quarterly Period Ending December 31, 2004
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet:
December 31, 2004 (Unaudited) 3
Condensed Consolidated Statements of Losses:
Three Months Ended December 31, 2004 and 2003 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through
December 31, 2004 (Unaudited) 4
Condensed Consolidated Statement of Stockholder's Equity:
For the Period from September 16, 2002 (Date of Inception)
Through December 31, 2004 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows:
Three Months Ended December 31, 2004 and 2003 (Unaudited) and
the Period from September 16, 2002 (Date of Inception)
Through December 31, 2004 (Unaudited) 14
Notes to Unaudited Condensed Consolidated Financial Information:
December 31, 2004 16-30
Item 2. Management Discussion and Analysis 31
Item 3. Controls and Procedures 43
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 3. Defaults Upon Senior Securities 44
Item 4. Submission of Matters to a Vote of Security Holders 45
Item 5. Other Information 45
Item 6. Exhibits 45
Signatures 46
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
RESTATED
(Unaudited)
ASSETS
December 31, 2004
------------------------
Current assets:
Cash and Equivalents $ 62,665
----------------------------
Total Current Assets 62,665
Property and Equipment - Net 27,751
Deposits 47,585
Patent Filing - Net 28,131
Restricted Cash 1,065,318
----------------------------
Total Assets $ 1,231,450
============================
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 2,973,686
Accrued Liabilities Due Related Parties (Note C) 168,857
Convertible Notes Payable (Note D) 3,140,000
Due to Related Parties (Note C) 61,943
Notes Payable-related parties (Note C) 1,125,000
----------------------------
Total Current Liabilities 7,469,486
Commitments and contingencies (Note F)
Deficiency in Stockholders' Equity:
Preferred Stock, par value $.0001 per share; 10,000,000 shares
authorized; 60,000 issued and outstanding 6
Common Stock, par value $.50 per share; 100,000,000 shares
authorized; 32,121,454 shares
issued and outstanding 16,060,727
Common Stock Subscription (755,000)
Additional Paid-In-Capital 8,218,548
Deficit Accumulated During Development Stage (29,762,317)
----------------------------
Total Deficiency in Stockholders' Equity (6,238,036)
----------------------------
Total Liabilities and Deficiency in Stockholders' Equity $ 1,231,450
============================
See accompanying notes to unaudited consolidated financial statements
3
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(Unaudited)
September 16, 2002,
For The Three Months Ended December 31 (Date of Inception)
through
2004 2003 December 31, 2004
RESTATED RESTATED
Operating expenses:
Selling, general and administrative $ 5,375,068 $ 7,407,750 $ 26,435,140
Depreciation and amortization 4,721 351 7,882
------ ---- -----
Total operating expenses 5,379,789 7,408,101 26,443,022
---------- ---------- ----------
Loss from operations (5,379,789) (7,408,101) (26,443,022)
Other Income (expense) 315 685 26,700
Interest (expense) (1,567,809) (135,074) (3,345,995)
Income (taxes) benefit -- -- --
----------- ----------- ------------
Net loss $ (6,947,283) $ (7,542,490) $ (29,762,317)
============ =========== ============
Loss per common share
(basic and assuming dilution) $ (0.37) $ (0.41) $ (1.57)
====== ====== ======
Weighted average shares outstanding 18,972,160 18,503,162 18,972,160
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, 2004
RESTATED
(Unaudited)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share - - 100,000 $ 10 $ 990 $ - $ - $ - $ 1,000
Net Loss - - - - - - - (11,612) (11,612)
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ---------
Balance at September 30, 2002 - $ - 100,000 $ 10 $ 990 $ - $ - $ (11,612) $(10,612)
========= ========= ========== =========== =========== ========== ============ =========== =========
Issuance of common stock in
connection with merger with
Prohealth Medical Technologies,
Inc on October 1, 2002 - - 10,178,352 1,015 - - - - 1,015
Cancellation of Common stock
in connection with merger with
Prohealth Medical
Technologies, Inc on October
21, 2002 - - (100,000) (10) (1,000) - - - (1,010)
Issuance of common stock in
exchange for services in
October 2002 at $ 0.65 per
share - - 602,000 60 39,070 - - - 39,130
Issuance of common stock in
exchange for subscription in
November and December 2002
at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - -
Cancellation of common stock
in January 2003 previously
issued in exchange for
consulting services - - (836,000) (84) (54,264) - 54,340 - (8)
Issuance of common stock in
exchange for licensing services
valued at $ 0.065 per share in
January 2003 - - 1,500,000 150 97,350 - - - 97,500
Issuance of common stock in
exchange for consulting
services valued at $ 0.13 per
share in January 2003 - - 586,250 58 76,155 - - - 76,213
Issuance of common stock in
exchange for consulting
services at $ 0.065 per share
in February 2003 - - 9,000 1 584 - - - 585
Issuance of common stock to
Founders in exchange for
services valued at $0.0001 per
share in March 2003 - - 10,140,000 1,014 - - - - 1,014
Issuance of common stock in
exchange for consulting
services valued at $2.50 per
share in March 2003 - - 91,060 10 230,624 - - - 230,634
See accompanying notes to 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, 2004
RESTATED
(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
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
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, 2004
RESTATED
(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, 2004
RESTATED
(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
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Preferred shares issues in
exchange for services at $25.00
per share, October 2003 15,000 15 - - - - - - 15
Common stock issued in
exchange for consulting services
at approximately $2.85 per
share, October 2003 - - 287,439 29 820,389 - - - 820,418
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable-October 2003 - - 120,000 12 299,988 (300,000) - - -
Common stock canceled in
October 2003, previously issued
for services rendered at $2.50
per share - - (100,000) (10) (249,990) - - - (250,000)
Common stock issued in
exchange for consulting services
at approximately $3 per share,
November 2003 - - 100,000 10 299,990 - - - 300,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, November, 2003 - - 100,000 10 249,990 - - - 250,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, December, 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for consulting services
at approximately $2.59 per
share, December 2003 - - 2,125,500 213 5,504,737 - - - 5,504,950
Common Stock subscribed to
at $2.50 per share in Dec 2003
- - - - - 104,000 - - 104,000
Beneficial conversion feature
relating to notes payable - - - - 1,168,474 - - - 1,168,474
Beneficial conversion feature
relating to warrants - - - - 206,526 - - - 206,526
Adjust common stock par value
from $0.0001 to $0.50 per share,
per amendment of articles dated
Dec 2003 - - - 10,223,166 (10,223,166) - - - -
Common Stock issued pursuant
to subscription at $2.50 share in
Jan 2004 - - 41,600 20,800 83,200 (104,000) - - -
Common stock issued in
exchange for consulting services
at $2.95 per share, Jan 2004 - - 13,040 6,520 31,948 - - - 38,468
Common stock issued in
exchange for consulting services
at $2.60 per share, Jan 2004 - - 123,000 61,500 258,300 - - - 319,800
See accompanying notes to 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, 2004
RESTATED
(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 issued in
exchange for consulting services
at $3.05 per share, Jan 2004 - - 1,000 500 2,550 - - - 3,050
Common stock issued in
exchange for employee services
at $3.07 per share, Feb 2004 - - 6,283 3,142 16,147 - - - 19,289
Common stock issued in
exchange for consulting services
at $3.04 per share, Mar 2004 - - 44,740 22,370 113,640 - - - 136,010
Common Stock issued for
options exercised at $1.00 per
share in Mar 2004 - - 55,000 27,500 27,500 - - - 55,000
Common stock issued in
exchange for employee services
at $3.00 per share, Mar 2004 - - 5,443 2,722 13,623 - - - 16,345
Common stock issued in
exchange for employee services
at $3.15 per share, Mar 2004 - - 5,769 2,885 15,292 - - - 18,177
Preferred shared converted to
common shares for consulting
services at $3.00 per share,
Mar 2004 (5,000) (5) 125,000 62,500 312,500 - - - 374,995
Common stock issued in
exchange for employee services
at $3.03 per share, Mar 2004 - - 8,806 4,400 22,238 - - - 26,638
Common Stock issued pursuant
to subscription at $2.50 per
share in Mar. 2004 - - 22,500 11,250 (9,000) - - - 2,250
Beneficial Conversion Feature
relating to Notes Payable - - 122,362 - - - 122,362
Beneficial Conversion Feature - -
relating to Warrants - - 177,638 - - - 177,638
Common stock issued in
exchange for consulting services
at $2.58 per share, Apr 2004 - - 9,860 4,930 20,511 - - - 25,441
Common stock issued in
exchange for consulting services
at $2.35 per share, Apr 2004 - - 11,712 5,856 21,667 - - - 27,523
Common stock issued in
exchange for consulting services
at $1.50 per share, Apr 2004 - - 367,500 183,750 367,500 - - - 551,250
Common stock returned to
treasury at $0.065 per share,
April 2004 - - (50,000) (25,000) 21,750 - - - (3,250)
Preferred stock converted to
common stock for consulting
services at $1.01 per share in
May 2004 (4,000) (4) 100,000 50,000 51,250 - - - 101,246
Common stock issued per
subscription May 2004 - - 10,000 5,000 (4,000) - (1,000) - -
See accompanying notes to 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, 2004
RESTATED
(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 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, 2004
RESTATED
(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 issued in
exchange for consulting
services at $0.46 per
share in September 2004 - - 5,000 2,500 (212) - - - 2,288
Common stock issued pursuant
to subscription at $0.50 per
share in September 2004 - - 40,000 20,000 - - - - 20,000
Preferred shares converted to
common stock for consulting
services at $0.41 per share in
September 2004 (4,000) (4) 100,000 50,000 4,000 - - - 53,996
Preferred shares issued in
exchange for service at $25 per
share in September 2004 60,000 6 - - 1,499,994 - - - 1,500,000
Fair value of 2,841,000 warrants
issued to non-employees and
consultants for services rendered
at approximately $.71 per warrant
in September 2004 - - - - 2,019,862 - - - 2,019,862
Net Loss - - - - - - - (19,358,258) (19,358,258)
--------- --------- ---------- ----------- ----------- ---------- -------- ------------ -----------
Balance at September 30, 2004 60,000 $ 6 23,981,054 $11,990,527 $ 6,118,993 $ - $ (1,000) $(22,815,034) $(4,706,508)
========= ========= ========== =========== =========== ========== ======== ============ ===========
See accompanying notes to 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, 2004
RESTATED
(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 issued in
exchange for consulting services
at $0.68 per share in October
2004 - - 200,000 100,000 36,000 - - - 136,000
Common stock returned
to treasury at $0.60
per share, Oct 2004 - - (1,069,600) (534,800) (107,297) - - - (642,097)
Common stock issued in
exchange for consulting services
at $0.60 per share in Oct 2004 - - 82,500 41,250 8,250 - - - 49,500
Common Stock issued pursuant
to subscription at $0.60 share in
October 2004 - - 500,000 250,000 50,000 (300,000) - - -
Common stock issued in
exchange for consulting services
at $0.50 per share in October 2004 - - 532,500 266,250 - - - - 266,250
Common Stock issued in
exchange for debt at $0.50 share
in October 2004 - - 500,000 250,000 - - - - 250,000
Common Stock issued pursuant
to subscription at $0.45 share in
October 2004 - - 1,000,000 500,000 (50,000) (450,000) - - -
Common stock issued in
exchange for consulting services
at $0.45 per share in October 2004 - - 315,000 157,500 (15,750) - - - 141,750
Common Stock issued in
exchange for consulting
services at $0.47 share
in November 2004 - - 100,000 50,000 (3,000) - - - 47,000
Common Stock issued in
exchange for consulting
services at $0.80 share
in November 2004 - - 300,000 150,000 90,000 - - - 240,000
Common Stock issued in
exchange for consulting
services at $1.44 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, 2004
RESTATED
(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
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Warrants exercised
at $0.60 per share
in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000
Beneficial Conversion discount
relating to Notes Payable - - - - 1,465,000 - - - 1,465,000
Common stock issued at $0.016
per share in exchange for note
payable in December 2004 - - 5,500,000 2,750,000 (2,661,500) - - - 88,500
Fair value of 6,063,500 warrants
issued to non employees and
consultants for services rendered
at $.52 per warrant in
October and December 2004 - - - - 3,169,052 - - - 3,169,052
Net Loss - - - - - - - (6,947,283) (6,947,283)
--------- ------- ---------- ---------- ---------- --------- ----------- ----------- ----------
Balance at December 31, 2004 60,000 6 32,121,454 16,060,727 8,218,548 (755,000) - (29,762,317) (6,238,036)
========= ======== ========== ========== ========== ========= =========== =========== ==========
See accompanying notes to unaudited condensed consolidated financial statements
13
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Period
September 16, 2002
For the Three Months Ended (Date of Inception)
December 31, December 31, through December 31
2004 2003 2004
-----------------------------------------------------
RESTATED RESTATED
Cash Flows (used in) operating activities:
Net loss $ (6,947,283) $(7,542,490) $(29,762,317)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,721 351 7,882
Organizational expenses -- -- 88,500
Preferred shares issued in exchange for services -- -- 1,500,000
Fair value of warrants issued to non-employees and consultants
in exchange for services 3,169,052 -- 5,188,914
Amortization of beneficial conversion feature 1,515,000 133,273 3,140,000
Common stock issued in exchange for services 1,174,300 6,625,368 13,572,032
Common stock canceled--previously issued for services rendered (642,605) (282,000) (928,180)
Increase (decrease) in assets and liabilities:
Restricted cash (1,065,318) -- (1,079,208)
Security Deposits (24,026) (23,559) (47,585)
Due related parties, net 1,523 154,219
Accounts payable and accrued liabilities 1,203,816 (61,589) 2,959,525
------------ ----------- ------------
Net cash (used in) operating activities (1,610,820) (1,150,646) (5,206,218)
Cash flows from investing activities:
Acquisition of property and equipment -- (29,507) (29,507)
Payment of patent filing fees (4,347) -- (25,698)
------------ -- ------------
Net cash (used in) investing activities (4,347) (29,507) (55,205)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost -- 266,000 432,000
Proceeds from subscription of common stock 250,000 104,000 375,000
Proceeds from exercise of options and warrants 36,000 32,000 277,000
Repayment of related party advances, net 34,004
Net advances from shareholders -- 100,088
Proceeds from loans 1,390,000 1,175,030 4,140,000
------------ ----------- ------------
Net cash provided by financing activities 1,676,000 1,611,034 5,324,088
------------ ----------- ------------
Increase (decrease) in cash and cash equivalents 60,833 430,881 62,665
Cash and cash equivalents, beginning of period 1,832 193,471 --
------------ ----------- ------------
Cash and cash equivalents, end of period $ 62,665 $ 624,352 $ 62,665
============ =========== ============
See accompanying notes to unaudited condensed consolidated financial statements
14
For the Period
September 16, 2002
For the Three Months Ended (Date of Inception)
December 31, December 31, through December 31
2004 2003 2004
-----------------------------------------------------
RESTATED RESTATED
Supplemental Information:
Cash paid during the period for interest -- -- --
Cash paid during the year for taxes -- -- --
Non--cash disclosures:
Common stock issued for services 1,174,300 6,625,368 13,573,032
Common stock issued in exchange for previously incurred debt -- --
Fair value of warrants issued to non-employees and consultants
in exchange for services 3,169,052 -- 5,188,914
Amortization of beneficial conversion feature attributed to
convertible notes 1,465,000 1,375,000 3,140,000
Common stock canceled--previously issued for services rendered (642,605) (282,000) (928,180)
Preferred shares issued in exchange for services -- 1,500,000
Acquisition:
Common stock retained -- 1,015
Assets acquired -- (135)
------------
Total consideration paid -- 880
============
Organization expenses-- note issued in exchange of shares retired 88,500 -- 88,500
See accompanying notes to unaudited condensed consolidated financial statements
15
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended December 31, 2004 are not
necessarily indicative of the results that may be expected for the year ended
September 30, 2005. The unaudited condensed consolidated financial statements
should be read in conjunction with September 30, 2004 financial statements.
Business and Basis of Presentation
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of Nevada. The Company is in the
development stage, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA
embedded biotechnology security solutions in the United States. To date, the
Company has generated nominal sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
inception through December 31, 2004, the Company has accumulated losses of
$29,762,317.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary ProHealth Medical Technologies, Inc. Significant
inter-company transactions have been eliminated in consolidation.
Reclassification
Certain prior period amounts have been reclassified for comparative purposes.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives of 3 to 5 years using the straight line method. At December 31,
2004 property and equipment consist of:
Furniture $ 29,507
Accumulated depreciation (1,756)
-------
Net $ 27,751
16
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Advertising
The Company follows a policy of charging the costs of advertising to expense as
incurred. For the three months ended December 31, 2004 and 2003, the Company
incurred $4,490 and $0 respectively.
Intangible Assets
Intangible assets are amortized using the straight-line method over their
estimated period of benefit, ranging from one to ten years. The Company
periodically evaluates the recoverability of intangible assets and takes into
account events or circumstances that warrant revised estimates of useful lives
or that indicate that impairment exists. All of the Company's intangible assets
are subject to amortization..
At December 31, 2004, intangible assets consist of the following:
Intangible assets $34,257
Accumulated amortization (6,126)
-------
$28,131
Restricted Cash
Per the terms of the Promissory Note Payable agreement dated December 20, 2004,
all proceeds received from note holders remain in escrow subject to (i) the
filing of a Definitive Information Statement that increases the authorized
common stock of the Company and reduces par value, and (ii) the closing of a
Private Placement for $1,000,000 or more and in the event of such occurrence the
Note will automatically without notice to the note holder, convert into common
stock of the Company at any time at $0.50 per share for a period of three years
and callable at $1.25 per share after the underlying stock is registered if said
stock trades at above $1.25 per share for 10 days - See Note .
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.
17
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note C):
For the Period
September 16,
2002 (Date of
For The Three For The Three Inception)
Months ended Months ended through
December 31, December 31, December 31,
2004 2003 2004
---- ---- ----
Net loss - as reported $ (6,947,283) $ (7,542,490) $ (29,762,317)
Add: Total stock based employee
compensation expense as reported under
intrinsic value method (APB. No. 25) - - -
Deduct: Total stock based employee
compensation expense as reported under
fair value based method (SFAS No. 123) - - -
===========================================================
Net loss - Pro Forma $ (6,947,283) $ (7,542,490) $ (29,762,317)
===========================================================
Net loss attributable to common
stockholders - Pro forma $ (6,947,283) $ (7,542,490) $ (29,762,317)
===========================================================
per share - as reported $ (0.37) $ (0.41) $ (1.57)
===========================================================
Basic (and assuming dilution) loss
per share - Pro forma $ (0.22) $ (0.41) $ (1.57)
===========================================================
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 the Company's
consolidated financial statements.
18
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE B - MERGER
On October 21, 2002, the Company completed a Plan and Agreement of
Reorganization ("Merger") with ProHealth Medical Technologies, Inc.
("ProHealth") an inactive publicly registered shell corporation with no
significant assets or operations. For accounting purposes, the Company shall be
the surviving entity. The transaction is accounted for using the purchase method
of accounting. The total purchase price and carrying value of the net assets
acquired was $880. From November 1988 until the date of the Merger, ProHealth
was an inactive entity with no significant asset and liabilities.
Effective with the Merger, all previously outstanding common stock, preferred
stock, options and warrants owned by the Company's shareholders were exchanged
for an aggregate of 10,178,352 shares of ProHealth common stock. The value of
the stock that was issued was the historical cost of the the ProHealth's net
tangible assets, which did not differ materially from their fair value. In
accordance with SFAS No. 141, the Company is the acquiring entity.
Effective with the Merger, ProHealth changed its name to Applied DNA Sciences,
Inc.
The total purchase price and carrying value of the net assets acquired of
ProHealth was $1. The net assets acquired were as follows:
Common stock retained by ProHealth shareholders: $1,015
Assets acquired: (135)
-------
Total consideration: $ 880
In accordance with SOP 98-5, the Company expensed $880 as organization costs.
NOTE C - RELATED PARTY TRANSACTIONS
At December 31, 2004, notes payable are as follows:
December 31,
2004
(Unaudited)
Note payable, unsecured, related party, payable from August 1, 2005, right to
convert to restricted stock in lieu of cash, rate of interest 4%, 160,000 shares
prior to October 31, 2005 or 180,000 shares after that date. 425,000
Note Payable to ex-president, in September, 2004; unsecured and non-interest
bearing ;payable on demand 600,000
Note payable, ex-officer of the Company; unsecured and non-interest bearing ;
due $100,000 upon first funding. 20% rate of interest, or 100,000 shares at
par value of $0.50 100,000
----------
1,125,000
Less; current portion 1,125,000
----------
Note Payable - long-term $ -0-
==========
19
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE C - RELATED PARTY TRANSACTIONS (continued)
Included in current liabilities is $61,943 at December 31, 2004, which
represents advances from the stockholders of the Company. No formal agreements
or repayment terms exist. Additionally, the Company owed $168,857 at December
31, 2004 to stockholders and other related parties for unreimbursed expenses and
advances. The amounts are included in accrued liabilities.
The Company leases office space under a sub lease agreement with an entity
controlled by a significant former shareholder of the Company.
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES
$ 1,675,000 Convertible Notes
Convertible notes payable ("Bridge Unit Offering") in quarterly installments of
interest only at 10% per annum, secured by all assets of the Company and due on
the earlier of the 9 month anniversary date of the initial closing of the
offering or the completion of any equity financing of $3,000,000 or more; the
Company, at its sole discretion may prepay principal at any time without
penalty. The Notes were initially convertible into shares of our common stock at
a price of $2.50 per share.Subsequent to the date of the financial statements,
the Bridge Unit Offering Notes unpaid principal and accrued and unpaid interest
were converted to an aggregate of 4,988,051 shares of the Company's common
shares at a price equal to approximately $. 33 per share (see Note H).
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 1,602,500
common shares of the Company's common stock at the price of $ .60 per share.
These warrants were issued in October, 2003 and lapse if unexercised by October,
2008. A registration rights agreement was executed in December 2004 and
consummated in February, 2005 requiring the Company to register the shares of
its common stock underlying the Convertible Notes and warrants so as to permit
the public resale thereof. The Registration Rights Agreement provided for the
payment of liquidated damages of 3.5% of the aggregate Convertible Note
financing per month if the stipulated registration deadlines were not met.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $1,675,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock, the debt discount attributed to the
beneficial conversion feature of $ 1,675,000 was charged to interest expense in
its entirety during the year ended September 30, 2004.
$ 1,465,000 Convertible Notes
Beginning in December, 2004, the Company sold a 10% convertible debenture in the
aggregate amount of $ 1,465,000 in a private placement and exempt offerings to
sophisticated investors, net of costs and fees ("Convertible Notes").
The Convertible Note's terms called for the debt to automatically convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.
20
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 2,930,000 shares of the
Company's common stock.
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 2,930,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants were issued in February, 2005 and lapse if unexercised by
February, 2010. A registration rights agreement was executed in December 2004
and consummated in February, 2005 requiring the Company to register the shares
of its common stock underlying the Convertible Notes and warrants so as to
permit the public resale thereof. The Registration Rights Agreement provided for
the payment of liquidated damages of 3.5% of the aggregate Convertible Note
financing per month if the stipulated registration deadlines were not met. The
liquidated damages, which approximate $51,275 per month, may be paid, at the
Company's option, in cash or unregistered shares of the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $1,465,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the holders of Convertible Notes
advised the Company they were converting to the Company's common stock in
December 2004, the debt discount attributed to the beneficial conversion feature
of $1,465,000 was charged to interest expense in its entirety during the three
months ended December 31, 2004.
NOTE E - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 250,000,000 shares
of common stock, with a $0.001 par value per share as the result of a
shareholder meeting conducted on February 14, 2005. Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares with a par value of $0.50. In February 2005, the Company passed a
resolution authorizing change in the par value per common shares from $0.50 per
share to $0.001 per share.
During the period September 16, 2002 through September 30, 2003, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately $1,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc.
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
During the fiscal year ended September 30, 2003, the Company issued 2,369,130
shares of common stock, net of cancellation of 860,000 shares in exchange for
consulting services. The Company valued the shares issued at $2,191,227, net of
cancellation of $60,008, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In November 2003, the Company issued 876,000 shares of common stock in exchange
for subscription at approximately $ 0.065 per share.
21
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE E - CAPITAL STOCK (continued)
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement (see Note H). The Company valued the shares issued at
approximately $ .065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth granted the Company an option to acquire up to 8,500,000 shares of
the Company's common stock in exchange for $100,000 (see Note 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 September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
During the fiscal year ended September 30, 2003, the Company issued 154,000
shares of common stock in exchange for previously issued options to purchase the
Company's common stock at $1.00 per share.
During the fiscal year ended September 30, 2003, the Company issued 74,400
shares of common stock in exchange for cash at approximately $0.89 per share.
In October 2003, the Company issued 15,000 shares of convertible preferred stock
in exchange for services. The Company valued the shares issued at the $15 par
value and recorded the value for services when the shares were converted into
common shares as identified below.
During the fiscal year ended September 30, 2004, the Company issued 5,123,171
shares of common stock, net of cancellation of 155,000 shares, in exchange for
consulting services. The Company valued the shares issued at $8,787,315, net of
cancellation of $408,575, which represents the fair value of the services
received which did not differ materially from the value of the stock issued
During the fiscal year ended September 30, 2004, the Company issued 340,500
shares of common stock for shares previously subscribed at approximately $2.04
per share.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
During the fiscal year ended September 30 2004, the Company converted 15,000
preferred shares into 375,000 shares of common stock at $1.47 per share in
exchange for employee services valued at $549,750.
22
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE E - 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 September 2004, the Company issued 60,000 convertible preferred shares at
$25.00, in exchange for consulting services valued at $1,500,000.
In October 2004, the Company issued 200,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.68 per share for a total of $136,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, shareholders returned 1,069,600 shares to treasury issued
earlier in exchange for services valued at $642,098.
In October 2004, the Company issued 82,500 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.60 per share for a total of $49,500, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2004, the Company sold 500,000 shares of common stock subscribed for
cash at $0.60 per share pursuant to private placement.
In October 2004, the Company issued 532,500 shares of common stock to existing
noteholders in exchange for advisory services. . The Company valued the shares
issued at approximately $0.50 per share and charged $266,250 to operations.
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.
23
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE E - CAPITAL STOCK (continued)
In November 2004, the Company issued 60,000 shares of common stock in exchange
for employee services. The Company valued the shares issued at approximately
$0.60 per share for a total of $36,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
NOTE F - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company. These warrants were granted in lieu of cash
compensation for services performed or financing expenses in connection with the
sale of the Company's common stock.
Warrants Outstanding Exercisable
Remaining Weighted Weighted Weighted
Number Contractual Average Average Average
Exercise Exercise
Prices Outstanding Life (Years) Price Exercisable Exercise Price
================ =============== ======================= =============== ============== =================
$0.10 105,464 4.54 $0.10 335,000 $0.10
$0.20 5,000 3.85 $0.20 5,000 $0.20
$0.50 50,000 4.77 $0.50 50,000 $0.50
$0.60 9,223,750 4.30 $0.60 9,223,750 $0.60
$0.70 750,000 2.58 $0.70 750,000 $0.70
$1.00 100,000 0.79 $1.00 100,000 $1.00
10,234,214 10,234,214
=============== ==============
Transactions involving warrants are summarized as follows:
Number of Shares Weighted Average
Price Per Share
Outstanding at September 30, 2004 4,870,253 $ 0.63
Granted 6,063,500 0.68
Exercised (60,000) 060
Canceled or expired (639,539) 0.29
------------- ------------------
Outstanding at December 31, 2004 10,234,214 $ 0.66
============== ===================
24
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE F - STOCK OPTIONS AND WARRANTS (continued)
During the three months ended December 31, 2004, the Company granted 6,063,500
warrants to non-employees in exchange for services and financing expenses.
The estimated fair value of the compensatory warrants granted to the
non-employeeswas determined using the Black-Scholes pricing model and the
following assumptions: contractual term of 2 to 5 years, a risk free interest
rate of 2.47 to 3.53%, a dividend yield of 0% and volatility of from 65.7% to
148.7%. The amount of the expense charged to operations for compensatory
warrants granted in exchange for services and financing expenses was $3,169,052
for the three months ended December 31, 2004.
NOTEG- COMMITMENTS AND CONTINGENCIES
Licensing Agreements
In October, 2002, the Company entered into an exclusive Licensing Agreement
("License") with Biowell Technology, Inc., a company formed under the laws of
Taiwan, Republic of Taiwan. The initial term of the License expires in 2007,
with renewal options under certain terms and conditions. The License grants the
Company exclusive use of certain patented DNA technology along with the rights
to future technology in exchange for an initial payment of 1,500,000 shares of
the Company's restricted common stock (See Note E). The Company is obligated to
order a minimum purchase orders or make future certain minimum annual royalty
payments as follows:
Minimum purchase Alternative Minimum Royalty
Year ended October 8, orders Payable
2005 360,000 -
2006 432,000 -
2007 518,000 -
25
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE G- COMMITMENTS AND CONTINGENCIES (continued)
Consulting Agreements
On August 6, 2004 the Company retained Giuliani Partners, on a non-exclusive
basis, to provide advice and assistance to the Company regarding issues
associated with Applied DNA's proprietary DNA embedded security. The term of the
engagement is one year from the effective date with automatic one year renewals
unless either party expresses an intention not to renew within 60 days prior to
the expiration of the Agreement
As compensation for GP's performance, the Company will pay GP an aggregate
advisory fee of $2,000,000 payable in increments over the term and renewal term.
Two payments of $500,000 each were made by the Company in September 2004 and
January 2005. Thereafter, eight payments of $125,000 are due monthly over the
period February through September 2005. Additionally, the Company will issue a
net-exercisable warrant to purchase shares of common stock of the Company at a
later date. Fees were placed in escrow during GP's completion of its due
diligence review.
Franchising and Distribution Agreements
The Company has entered into a Distribution and Franchising Agreement
("Franchise Agreement") in July 2003. Under the terms of the Franchise
Agreement, the franchisee is obligated to pay the Company $3,000,000 payable
$25,000 upon execution of the Franchise Agreement and the balance payable over
five (5) years with interest accruing at 8% per annum. Payments under the
Franchise Agreement are subject to franchisee's net profits, as defined under
the Franchise Agreement.
Note Payable Settlement
In October 2004, the Company defaulted on a note held by a former Company
officer and director to the amount of $88,500 (See Note E) and in accordance
with the default, the noteholder had the right to demand his outstanding note be
converted back into 7,500,000 shares. The Company subsequently settled the
matter for 5,500,000 shares with 3,500,000 shares retained in escrow for
negotiations on behalf of another party for future compensation.
Litigation
Ex-officer was named as a defendant in a lawsuit brought by an outside party in
the United States District Court for the Central District of California, and in
that action, Applied DNA was named as a "nominal defendant". The plaintiff is
alleging that the ex-officer violated the short swing rule. The Company believes
it has meritorious defenses and will prevail in this matter.
Operating Lease Commitments
The Company leases office space under a operating lease in Los Angeles,
California of its corporate use from an entity controlled by a significant
former shareholder expiring in November 2006. The total lease rental expenses
for the three months ended December 31, 2004 as $47,194.
Commitments for minimum rentals under the non-cancelable lease at September 30,
2004 were as follows:
Year ended September 30,
2005 $139,308
2006 143,977
2007 12,031
$295,316
26
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE G- COMMITMENTS AND CONTINGENCIES (continued)
Employment and Consulting Agreements
The Company has employment agreements with the Company's officers and certain
employees. These employment agreements provide for salaries and benefits
including stock options and extend up to seven years. In addition to salary and
benefit provisions, the agreements include defined commitments should the
employer terminate the employee with or without cause.
The Company has a consulting agreement with an entity controlled by a former
significant shareholder of the Company. The consulting agreement provides for
compensation and certain benefits including stock options and extends up to
seven years. In addition to compensation and benefit provisions, the agreements
include defined commitments should the employer terminate the consultant with or
without cause.
NOTE H - SUBSEQUENT EVENTS
In January 2005, the Company arranged a $5,970,000 private placement of
11,940,000 shares of common stock at $0.50 per share along with 11,940,000
attached warrants with an exercise price of $0.75 that expires in 5 years.
In January 2005, the Company entered into a stock purchase agreement with
Biowell Technology Inc., a Taiwan corporation ("Biowell") whereby a to-be-formed
wholly owned subsidiary of the Company would acquire a company to be formed
which would own all of the intellectual property of Biowell in exchange for
36,000,000 shares of the Company's common stock to be issued to the shareholders
of Biowell. The Acquisition Shares represent 50% of the total shares issued and
outstanding on a fully diluted basis on the date of the execution of the
Agreement.
In February 2005, the Company in a private placement sold an aggregate of
$1,391,000 in secured convertible promissory notes and 2,782,000 warrants. The
notes bear interest at 10% per annum, mature one year from the date of issuance
and are convertible into shares of common stock of the Company at a price of
$0.50 per share (i) at the holder's option; or (ii) automatically upon the
Company's filing of a registration statement registering the shares underlying
the notes and warrants.
During January and February, 2005, the Company issued to the holders of the
$1,675,000 Convertible Notes an aggregate of 4,988,051 shares of its restricted
common stock in exchange for debt (see Note D).
NOTE J - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
The accompanying financial statements for the three months ended December 31,
2004 has been restated to correct dating errors with the issuance of common
stock for consulting services and conversion of convertible debentures.
Accordingly, the Company has restated their financial statements as of and for
the three months ended December 31, 2004 by disclosing the effect of these
errors in this amended Form 10-QSB.
The result of the December 31, 2004 Condensed Consolidated Balance Sheet
restatement is to:
- Properly reflect the conversion of convertible debentures based on stock
issuance date.
- Properly reflect stock issuance for services rendered in the period of
actual stock issuance.
- Properly record warrants issued to non employees and consultants
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Balance Sheet as of
December 31, 2004.
27
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE G - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
December 31, 2004
(As Restated) (As Reported)
ASSETS $ 1,231,450 $ 1,231,450
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Total Current Liabilities 7,469,486 6,004,486
Deficiency in Stockholders' Equity:
Preferred Stock 6 6
Common Stock 16,060,727 20,424,120
Common Stock Subscription (755,000) (880,000)
Additional Paid-In-Capital 8,218,548 10,863,008
Deficit Accumulated During Development Stage (29,762,317) (35,180,170)
Total Deficiency in Stockholders' Equity (6,238,036) (4,773,036)
------------- ------------
Total Liabilities and Deficiency in Stockholders'
Equity $ 1,231,450 $ 1,231,450
For both the three months ended as well as the period September 16, 2002 through
December 31. 2004, the result of the December 31, 2004 Condensed Consolidated
Income Statement restatement is to:
- Decrease Selling, General and Administrative for compensation expense by
$5,417,853.
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Income Statement as
of March 31, 2005.
28
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE G - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
For the Period September 16, 2002
For the Three Months Ended (Date of Inception) Through December
December 31, 2004 31, 2004
(As Restated) (As Reported) (As Restated) (As Reported)
Operating Expenses:
Selling general and
administrative $ 5,375,068 10,792,921 $ 26,435,140 $ 31,852,994
Depreciation and
amortization 4,721 4,721 7,882 7,882
Total Operating Expenses 5,379,789 10,797,642 26,443,022 31,860,876
Operating Loss (5,379,789) (10,797,642) (26,443,022) (31,860,876)
Other income (expense) 315 315 26,700 26,700
Interest income
(expense) (1,567,809) (1,567,809) (3,345,995) (3,345,995)
Net Income (Loss) $ (6,947,283) (12,365,136) $(29,762,317) $(35,180,171)
Gain (Loss) per common
share $ (0.37) (0.45) $ (1.57) $ (1.28)
(basic and assuming
dilution)
Weighted average
shares outstanding 18,972,160 27,402,160 18,972,160 27,402,160
The result of the Condensed Consolidated Cash Flow restatement is to:
- Decrease loss for the three months December 31, 2004 by $5,417,853 within
operating activities as a result of the correction in dating of stock
issuance for services.
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Statement of Cash
Flows for the periods ended December 31, 2004.
Consistent with the original summary presentation, following is a reconciliation
of the Company's restatement of the Condensed Consolidated Statement of Cash
Flows for the periods ended December 31, 2004. See the full Condensed
Consolidated Statement of Cash Flows for the periods ended December 31, 2004 for
additional details.
29
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2004
(Unaudited)
NOTE G - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
For the Period September 16, 2002
For the Three Months Ended December (Date of Inception) Through
31, 2004 December 31, 2004
(As Restated) (As Reported) (As Restated) (As Reported)
Cash Flows from operating
activities:
Net loss $ (6,947,283) $(12,365,136) $(29,762,317) $(35,180,170)
Summary of adjustments to
reconcile net loss to net cash
(used in) operating activities:
Other operating activities - see
Cash Flow statement for full
details 5,336,463 10,754,316 24,556,099 29,973,952
Net cash (used in) operating
activities (1,610,820) (1,586,794) (5,206,218) (5,158,633)
Cash flows from investing
activities:
- see Cash Flow statement for
full details (4,347) (28,373) (55,205) (102,790)
Net cash (used in) investing
activities (4,347) (28,373) (55,205) 102,790)
Cash flows from financing
activities:
- see Cash Flow statement for
full details 286,000 286,000 3,959,088 1,184,088
Proceeds from loans 1,390,000 1,390,000 4,140,000 4,140,000
Net cash provided by financing
activities: 1,676,000 1,676,000 5,324,088 5,324,088
Increase (decrease) in cash and
cash equivalents 60,833 60,833 62,665 62,665
Cash and cash
equivalents-beginning of period 1,832 1,832 - -
Cash and cash equivalents-end of
period $ 62,665 $ 62,665 $ 62,665 $ 62,665
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this report. The quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, including statements using
terminology such as "can", "may", "believe", "designated to", "will", "expect",
"plan", "anticipate", "estimate", "potential" or "continue", or the negative
thereof or other comparable terminology regarding beliefs, plans, expectations
or intentions regarding the future. Forward looking statements involve risks and
uncertainties and actual results could differ materially from those discussed in
forward-looking statements. All forward looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to the Company as of the date thereof, and the Company assumes no
obligations to update any forward-looking statement or risk factor, unless the
Company is required to do so by law.
Plan of Operation
Liquidity and Capital Resources
As of December 31, 2004, we had a deficiency in working capital of $7,406,821.
For the three months ended December 31, 2004, we generated a net cash flow
deficit from operating activities of $1,610,820, consisting primarily of year to
date losses of $6,947,283, $531,695 in net stock issued for consulting services,
$1,515,000 for beneficial conversion of convertible notes payable and warrants,
$3,169,052 for warrants issued to non employees and consultants as well as a net
increase in current liabilities and other of $144,000.
Cash used in investing activities totaled $4,347, which was utilized for patent
filings.
Cash provided by financing activities totaled $1,676,000 consisting of
$1,390,000 in proceeds from loans, and $250,000 and $36,000 in common stock and
exercised options proceeds, respectively.
We expect capital expenditures to be nominal for fiscal 2005. These anticipated
expenditures are for continued investments in property and equipment used in our
business.
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.
The Company presently does not have any available credit, bank financing or
other external sources of liquidity. Due to its brief history and historical
operating losses, the Company's operations have not been a source of liquidity.
The Company will need to obtain additional capital in order to expand operations
and become profitable. The Company intends to pursue the building of a re-seller
network outside the United States, and if successful, the re-seller agreements
would constitute an additional source of liquidity and capital over time. In
order to obtain capital, the Company may need to sell additional shares of its
common stock or borrow funds from private lenders. There can be no assurance
that the Company will be successful in obtaining additional funding and
execution of re-seller agreements outside the Unites States.
During the three months ended December 31, 2004 and 2003 and from September 16,
2002 (inception) through December 31 2003, the Company's priorities were to
recruit and build its team, organize its new infrastructure and to develop a
successful strategy how best to exploit its exclusive Biowell license agreement.
No revenues were generated. Although the management of the Company is of the
opinion that continuing to develop and finance the Company's present business of
providing DNA anti-counterfeit technology may ultimately be successful,
management nevertheless expects that the Company will need substantial
additional capital before the Company's operations can be fully implemented.
31
From our inception through December 31, 2004, we have incurred losses of
$29,762,317. These expenses were associated principally with equity-based
compensation to employees and consultants, product development costs and
professional services.
While we have raised capital to meet our working capital and financing needs in
the past, additional financing is required in order to meet our current and
projected cash flow deficits from operations and development. We are seeking
financing in the form of equity through a Private Placement Memorandum in order
to provide the necessary working capital. We currently have no commitments for
financing. There is no guarantee that we will be successful in raising the funds
required.
The effect of inflation on the Company's operating results was not significant.
The Company's operations are located in North America and there are no seasonal
aspects that would have a material effect on the Company's financial condition
or results of operations.
The Company's independent certified public accountant has stated in their report
included in the Company's September 30, 2004 Form 10-KSB, that the Company has
incurred operating losses from its inception, and that the Company is dependent
upon management's ability to develop profitable operations. These factors among
others may raise substantial doubt about the Company's ability to continue as a
going concern.
Bridge Unit Offering
From November through December 2004, we sold 33.5 units (the "Units") to
accredited investors at a price of $50,000 per Unit (the "Offering") for a total
of $1,675,000. Each Unit consists of (i) a $50,000 Principal Amount 10% Secured
Convertible Promissory Note ("Note" or "Notes"), (ii) warrants to purchase
50,000 shares of our common stock, exercisable for a period of five years at a
price of $3.20 per share ("$3.20 Warrant") and (iii) warrants to purchase 10,000
shares of our common stock, exercisable for a period of five years at a price of
$0.10 per share ("$0.10 Warrant" and together with the $3.20 Warrant, the
"Warrants"). The Notes are convertible into shares of our common stock at a
price of $2.50 per share.
December Promissory Notes Payable
In December 2004, the Company received $1,065,318 in proceeds subject to the
terms of the December Promissory Notes Payable agreement. The Company held the
proceeds in escrow and classified the amount as Restricted Cash - See Note A,
Restricted Cash.
The aggregate principal amount of Notes sold was $1,375,000. The Notes are
secured and bear interest at 10% per annum, computed on the basis of a 365-day
year, accruing from the date an investor's subscription was closed upon by the
Company. Principal and all accrued interest will be payable in full on the
earlier of (i) the 9-month anniversary date of the initial closing of the
Offering, or (ii) the completion of any equity financing of $3,000,000 or more.
The Company, in its sole discretion, may prepay principal at any time without
penalty. The Notes are convertible into shares of common stock of the Company at
a price of $2.50 per share.
The Notes are secured by a security agreement giving the Holder a security
interest in all the patents, licenses, equipment, fixtures, and inventory and
accounts receivable of the Company, and/or any of its subsidiaries.
The following events constitute events of default under the Notes:
(i) Default in the payment of the principal or accrued interest on any Note or
upon any other indebtedness of the Company that is greater than $100,000, as and
when the same shall become due, whether by default or otherwise, which Default
shall have continued for a period of five (5) business days; or
(ii) Any representation or warranty made by the Company or any officer of the
Company in the Notes, or in any agreement, report, certificate or other document
delivered to the Holder pursuant to the Notes shall have been incorrect in any
material respect when made which shall not have been remedied ten (10) days
after written notice thereof shall have been given by the Holder; or
32
(iii) The Company shall fail to perform or observe any affirmative covenant
contained in Section 4 of the Notes and such Default, if capable of being
remedied,shall not have been remedied ten (10) days after written notice thereof
shall have been given by the Holder; or
(iv) The Company or any subsidiary (A) shall institute any proceeding or
voluntary case seeking to adjudicate it bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of any order for relief or the appointment of a receiver, trustee,
custodian or other similar official for such Company or any subsidiary or for
any substantial part of its property, or shall consent to the commencement
against it of such a proceeding or case, or shall file an answer in any such
case or proceeding commenced against it consenting to or acquiescing in the
commencement of such case or proceeding, or shall consent to or acquiesce in the
appointment of such a receiver, trustee, custodian or similar official; (B)
shall be unable to pay its debts as such debts become due, or shall admit in
writing its inability to apply its debts generally; (C) shall make a general
assignment for the benefit of creditors; or (D) shall take any action to
authorize or effect any of the actions set forth above ; or
(v) Any proceeding shall be instituted against the Company seeking to adjudicate
it bankrupt or insolvent, or seeking dissolution, liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee, custodian or other similar official for the Company or for any
substantial part of its property, and either such proceeding shall not have been
dismissed or shall not have been stayed for a period of sixty (60) days or any
of the actions sought in such proceeding (including, without limitation, the
entry of any order for relief against it or the appointment of a receiver,
trustee, custodian or other similar official for it or for any substantial part
of its property) shall occur; or
(vi) One or more final judgments, arbitration awards or orders for the payment
of money in excess of $100,000 in the aggregate shall be rendered against the
Company, which judgment remains unsatisfied for thirty (30) days after the date
of such entry; or
(vii)Delisting of the Common Stock from the principal market or exchange on
which the Common Stock is listed for trading; Company's failure to comply with
the conditions for listing; or notification that the Company is not in
compliance with the conditions for such continued listing; or
(viii)The issuance of an SEC stop trade order or an order suspending trading of
the Common Stock from the principal market or exchange on which the Common Stock
is listed for trading for longer than five (5) trading days; or
(ix) The failure by the Company to issue shares of Common Stock to the Holder
upon exercise by the Holder of the conversion rights of the Holder in accordance
with the terms of the Notes, or the failure to transfer or cause its transfer
agent to transfer (electronically or in certificated form) any certificate for
shares of Common Stock issued to the Holder upon conversion of or otherwise
pursuant to the Notes as and when required by the Notes, or the failure to
remove any restrictive legend (or to withdraw any stop transfer instructions in
respect thereof) on any certificate for any shares of Common Stock issued to the
Holder upon conversion of or otherwise pursuant to the Notes as and when
required by the Notes, and any such failure shall continue uncured for ten (10)
days after the Company shall have been notified thereof in writing by the
Holder; or
(x) The failure by the Company to file the Registration Statement within
forty-five (45) days following the Closing Date (as defined in the Subscription
Agreement) or obtain effectiveness with the Securities and Exchange Commission
of the Registration Statement within one hundred thirty five (135) days
following the Closing Date (as defined in the Subscription Agreement) or such
Registration Statement lapses in effect (or sales cannot otherwise be made
thereunder effective, whether by reason of the Company's failure to amend or
supplement the prospectus included therein) for more than twenty (20)
consecutive days or forty (40) days in any twelve month period after the
Registration Statement becomes effective; or
(xi) The Company shall encumber or hypothecate the collateral subject to the
Security Agreement to any party; or
33
(xii) A default by the Company of a material term, covenant, warranty or
undertaking of any other agreement to which the Company and Holder are parties,
or the occurrence of an event of default under any such other agreement.
Holders shall, at any time prior to the Maturity Date, have the right to convert
the Note into Shares of the Company at $2.50 per such Share, which right shall
be exercised in the Holder's sole and absolute discretion. Holders shall, with
respect to any Shares acquired thereby, be granted the same demand and
piggy-back registration rights as if such Shares were purchased as part of the
Units.
In the event of and immediately upon the occurrence of an "Event of Default,"
the Notes shall become immediately due and payable without any action by the
Holder and the Notes shall bear interest until paid at the rate of 12% per annum
or such amount as shall be allowed by law.
In the event that the sum due under the Note is not repaid on the Maturity Date,
the Holder will have the option to either have the Note accrue interest at 12%
or such amount as legally allowed until paid, or to convert the entirety of the
debt then outstanding under the Note into the number of shares derived by
dividing the sum of such debt by the dollar value equal to 80% of the closing
ask price of the shares on the last trading day immediately preceding the
Maturity Date as reported on the market upon which the shares shall then be
trading, provided, however, that the conversion price shall never be less than
$1.00 per share. Any shares acquired thereby shall carry with them the demand
and piggy back registration rights granted to the Holder under the terms of the
Note.
Bridge Offering Warrants
Each Unit, or $50,000 principal amount of the Note, entitles the holder to
50,000 warrants exercisable on a one for one basis into shares of Common Stock
at an exercise price of $3.20 during a five-year period commencing on the
initial closing of the Offering (which was December 15, 2003, 2003) per share.
In addition, each Unit also entitles the holder to 10,000 warrants exercisable
on a one for one basis into shares of Common Stock at an exercise price of $0.10
per share during a five-year period commencing on the initial closing of the
Offering (which was December 15, 2003) In the event a holder of Warrants fails
to exercise the Warrants prior to their expiration, the Warrants will expire,
and the holder thereof will have no further rights with respect to the Warrants.
The Warrants expire at 5:00 p.m., New York time, on the fifth anniversary after
the initial closing of the Offering. In the event a holder of Warrants fails to
exercise the Warrants prior to their expiration, the Warrants will expire and
the holder thereof will have no further rights with respect to the Warrants.
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
Without substantial financial resources we do not anticipate incurring material
research and development costs during the next twelve months.
34
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, 2004, we have primarily
relied on the services of outside consultants for services The Company has
employment agreements with the Company's officers and certain employees. In
order for us to attract and retain quality personnel, we anticipate we will have
to offer competitive salaries to future employees. We anticipate that it may
become desirable to add additional full and or part time employees to discharge
certain critical functions during the next 12 months. This projected increase in
personnel is dependent upon our ability to generate revenues and obtain sources
of financing. There is no guarantee that we will be successful in raising the
funds required or generating revenues sufficient to fund the projected increase
in the number of employees. As we continue to expand, we will incur additional
cost for personnel.
Going Concern
The financial statements included in this filing have been prepared in
conformity with generally accepted accounting principles that contemplate the
continuance of the Company as a going concern. The Company's cash position may
be inadequate to pay all of the costs associated with testing, production and
marketing of products. Management intends to use borrowings and security sales
to mitigate the effects of its cash position, however no assurance can be given
that debt or equity financing, if and when required will be available. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification of
liabilities that might be necessary should the Company be unable to continue
existence.
Trends, Risks and Uncertainties
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to the Company's
Common Stock.
RISK FACTORS
Much of the information included in this quarterly report includes or is based
upon estimates, projections or other "forward-looking statements". Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined below. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative. Prospective investors should
consider carefully the risk factors set out below.
We Have a History Of Losses Which May Continue, Which May Negatively Impact Our
Ability to Achieve Our Business Objectives.
We incurred net losses of $19,358,259 for the year ended September 30, 2004 and
$3,445,164 for the year ended September 30, 2003. For the three months ended
December 31, 2004, we incurred a net loss of $6,947,283. We cannot assure you
that we can achieve or sustain profitability on a quarterly or annual basis in
the future. Our
35
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
$555,000 to fund our anticipated research and development operations for the
next twelve months, depending on revenue from operations. Additional capital
will be required to effectively support the operations and to otherwise
implement our overall business strategy. Even if we do receive additional
financing, it may not be sufficient to sustain or expand our research and
development operations or continue our business operations.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our research and development plans. Any
additional equity financing may involve substantial dilution to our then
existing shareholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated January 11, 2005, our independent auditors stated that our
financial statements for the year ended September 30, 2004 were prepared
assuming that we would continue as a going concern. Our ability to continue as a
going concern is an issue raised due to our incurring net losses of $22,815,035
during the period September 16, 2002 through September 30, 2004. 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 loss
increases the difficulty in meeting such goals and there can be no assurances
that such methods will prove successful.
Our Research and Development Efforts for New Products May be Unsuccessful.
We will incur significant research and development expenses to develop new
products and technologies. There can be no assurance that any of these products
or technologies will be successfully developed or that if developed they will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and this may materially and adversely affect our business
operations, which would result in loss of revenues and greater operating
expenses.
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
36
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.
We Rely on Our License Agreement With Biowell Technology for the Development of
Our Products, and the Termination of the License Would Have a Material Adverse
Impact on Our Business.
We have executed a licensing agreement with Biowell Technology and we intend to
focus our business on the products developed under this licensing agreement. We
will rely upon Biowell Technology to develop, test and produce products under
this licensing agreement. As a result of the license agreement, we will not
incur expenses with developing products for sale; however, we will be
responsible for marketing the product and building brand recognition in our
licensed territories. Our license could terminate if we fail to perform any
material term or covenant under the license agreement. The termination of our
license agreement would have a material adverse impact on our business, such as
the loss of products and services, which would reduce or eliminate most of our
potential revenue source.
If We Fail to Introduce New Products, or Our existing Products are not Accepted
by Potential Customers, We May Not Gain or May Lose Market Share.
Rapid technological changes and frequent new product introductions are typical
for the markets we serve. Our future success will depend in part on continuous,
timely development and introduction of new products that address evolving market
requirements. We believe successful new product introductions provide a
significant competitive advantage because customers invest their time in
selecting and learning to use new products, and are often reluctant to switch
products. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
We may experience delays in the development and introduction of products. We
cannot assure that we will keep pace with the rapid rate of change in life
sciences research or that our new products will adequately meet the requirements
of the marketplace or achieve market acceptance. Some of the factors affecting
market acceptance of new products include:
o Availability, quality and price relative to competitive products;
o The timing of introduction of the product relative to competitive
products;
o Customers' opinions of the products' utility;
o Ease of use;
o Consistency with prior practices;
o Scientists' opinions of the
o products' usefulness;
o Citation of the product in published research; and
o General trends in
o life sciences research.
37
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'sInability to Produce Our Goods on Time and to Our Specifications
Could Result in Lost Revenue and Net Losses
We do not own or operate any manufacturing facilities and therefore depend upon
independent third parties for the manufacture of all of our products. Our
products are manufactured to our specifications. The inability of a manufacturer
to ship orders of our products in a timely manner or to meet our quality
standards could cause us to miss the delivery date requirements of our customers
for those items, which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could have a material
adverse effect as our revenues would decrease and we would incur net losses as a
result of sales of the product, if any sales could be made. Because of our
business, the dates on which customers need and require shipments of our
security products from us are critical.
If We Need to Replace Manufacturers, Our Expenses Could Increase Resulting in
Smaller Profit Margins
We compete with other companies for the production capacity of our manufacturers
and import quota capacity. Some of these competitors have greater financial and
other resources than we have, and thus may have an advantage in the competition
for production and import quota capacity. If we experience a significant
increase in demand, or if an existing manufacturer of ours must be replaced, we
may have to expand our third-party manufacturing capacity. We cannot assure you
that this additional capacity will be available when required on terms that are
acceptable to us or similar to existing terms which we have with our
manufacturers, either from a production standpoint or a financial standpoint. We
do not have long-term contracts with any manufacturer. None of the manufacturers
we use produces our products exclusively.
Should we be forced to replace one or more of our manufacturers, we may
experience an adverse financial impact, or an adverse operational impact, such
as being forced to pay increased costs for such replacement manufacturing or
delays upon distribution and delivery of our products to our customers, which
could cause us to lose customers or lose revenues because of late shipments.
If a Manufacturer of Ours Fails to Use Acceptable Labor Practices, We Might
Have Delays in Shipments or Face Joint Liability for Violations, Resulting in
Decreased Revenue and Increased Expenses
While we require our independent manufacturers to operate in compliance with
applicable laws and regulations, we have no control over the ultimate actions of
our independent manufacturers. While our internal and vendor operating
guidelines promote ethical business practices and our staff and buying agents
periodically visit and monitor the operations of our independent manufacturers,
we do not control these manufacturers or their labor practices. The violation of
labor or other laws by an independent manufacturer of ours, or by one of our
licensing partners, or the divergence of an independent manufacturer's or
licensing partner's labor practices from those generally accepted as ethical in
the United States, could interrupt, or otherwise disrupt the shipment of
finished products to us or damage our reputation. Any of these, in turn, could
have a material adverse effect on our financial condition and results of
operations, such as the loss of potential revenue and incurring additional
expenses.
The Failure To Manage Our Growth In Operations And Acquisitions Of New Product
Lines And New Businesses Could Have A Material Adverse Effect On Us.
The expected growth of our operations (as to which no representation can be
made) will place a significant strain on our current management resources. To
manage this expected growth, we will need to improve our: o operations and
financial systems; o procedures and controls; and o training and management of
our employees.
Our future growth may be attributable to acquisitions of and new product lines
and new businesses. We expect that future acquisitions, if successfully
consummated, will create increased working capital requirements, which will
likely precede by several months any material contribution of an acquisition to
our net income.
38
Our failure to manage growth or future acquisitions successfully could seriously
harm our operating results. Also, acquisition costs could cause our quarterly
operating results to vary significantly. Furthermore, our stockholders would be
diluted if we financed the acquisitions by incurring convertible debt or issuing
securities.
Although we currently only have operations within the United States, if we were
to acquire an international operation; we will face additional risks, including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o Different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
If We Are Unable to Retain the Services of Messrs. Hutchison, Brocklesby, Butash
or Klemm, or If We Are Unable to Successfully Recruit Qualified Managerial and
Sales Personnel Having Experience in Business, We May Not Be Able to Continue
Our Operations.
Our success depends to a significant extent upon the continued service of Mr.
Rob Hutchison, our Chief Executive Officer, Mr. Peter Brocklesby, our President,
Mr. Adrian Butash, our Chief Marketing Officer and Ms. Karin Klemm, our Chief
Operating Officer and Interim Chief Financial Officer. We do not have employment
agreements with Messrs. Hutchison, Brocklesby, Butash or Klemm. Loss of the
services of Messrs. Hutchison, Brocklesby, Butash or Klemm could have a material
adverse effect on our growth, revenues, and prospective business. We do not
maintain key-man insurance on the life of Messrs. Hutchison, Brocklesby, Butash
or Klemm. Besides Mr. Hutchison's desire to retire within the next few months,
we are not aware of any other named executive officer or director who has plans
to leave us or retire. In addition, in order to successfully implement and
manage our business plan, we will be dependent upon, among other things,
successfully recruiting qualified managerial and sales personnel having
experience in business. Competition for qualified individuals is intense. There
can be no assurance that we will be able to find, attract and retain existing
employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
Failure to Attract and Retain Qualified Scientific or Production Personnel Could
Have a Material Adverse Effect On Us.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing are critical to
our success. Because the industry in which we compete is very competitive, we
face significant challenges attracting and retaining a qualified personnel base.
Although we believe we have been and will be able to attract and retain these
personnel, there is no assurance that we will be able to continue to
successfully attract qualified personnel. In addition, our anticipated growth
and expansion into areas and activities requiring additional expertise, such as
clinical testing, government approvals, production, and marketing will require
the addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to attract and retain
these personnel or, alternatively, to develop this expertise internally would
adversely affect our business 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.
39
The Biomedical Research Products Industry is Very Competitive, and We may be
Unable to Continue to Compete Effectively in this Industry in the Future.
We are engaged in a segment of the biomedical research products industry that is
highly competitive. We compete with many other suppliers and new competitors
continue to enter the market. Many of our competitors, both in the United States
and elsewhere, are major pharmaceutical, chemical and biotechnology companies,
and many of them have substantially greater capital resources, marketing
experience, research and development staff, and facilities than we do. Any of
these companies could succeed in developing products that are more effective
than the products that we have or may develop and may be more successful than us
in producing and marketing their products. It is impossible to quantify the
number of competitors since they include both the companies we attempt to sell
our products and services to through their use of internal security and various
other security product companies. Also, it is also impossible to determine
market size and market data information because companies are secretive about
what security methods they utilize and how much they spend on such measures.
Some of the anti-counterfeiting and fraud protection competitors that we are
aware of include: Authentix, InkSure, DNA Technologies, Inc., Art Guard
International, Theft Protection Systems, Tracetag and November AG.
We expect this competition to continue and intensify in the future. Competition
in our markets is primarily driven by:
o Product performance, features and liability;
o Price;
o Timing of product introductions;
o Ability to develop, maintain and protect proprietary products and
technologies;
o Sales and distribution capabilities;
o Technical support and service;
o Brand loyalty;
o Applications support; and
o Breadth of product line.
If a competitor develops superior technology or cost-effective alternatives to
our products, our business, financial condition and results of operations could
be materially adversely affected.
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.
40
Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all. We are currently not aware of any intellectual property rights
that are being infringed nor have we received notice from a third party that we
may be infringing on any of their patents.
Furthermore, a third party may claim that we are using inventions covered by the
third party's patent rights and may go to court to stop us from engaging in our
normal operations and activities, including making or selling our product
candidates. These lawsuits are costly and could affect our results of operations
and divert the attention of managerial and technical personnel. There is a risk
that a court would decide that we are infringing the third party's patents and
would order us to stop the activities covered by the patents. In addition, there
is a risk that a court will order us to pay the other party damages for having
violated the other party's patents. The biotechnology industry has produced a
proliferation of patents, and it is not always clear to industry participants,
including us, which patents cover various types of products or methods of use.
The coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent infringement, we
would need to demonstrate that our products or methods of use either do not
infringe the patent claims of the relevant patent and/or that the patent claims
are invalid, and we may not be able to do this. Proving invalidity, in
particular, is difficult since it requires a showing of clear and convincing
evidence to overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in the United States may be maintained in
secrecy until the patents are issued, because patent applications in the United
States and many foreign jurisdictions are typically not published until eighteen
months after filing, and because publications in the scientific literature often
lag behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our licensors' issued patents or
our pending applications or our licensors' pending applications or that we or
our licensors were the first to invent the technology. Our competitors may have
filed, and may in the future file, patent applications covering technology
similar to ours. Any such patent application may have priority over our or our
licensors' patent applications and could further require us to obtain rights to
issued patents covering such technologies. If another party has filed a United
States patent application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the United States Patent
and Trademark Office to determine priority of invention in the United States.
The costs of these proceedings could be substantial, and it is possible that
such efforts would be unsuccessful, resulting in a loss of our United States
patent position with respect to such inventions.
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.
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.
41
As of April 26, 2005, we had 68,371,025 shares of common stock issued and
outstanding and outstanding warrants to purchase 25,248,717 shares of common
stock. All of the shares issuable upon exercise of our warrants may be sold
without restriction. The sale of these shares may adversely affect the market
price of our common stock. The issuance of shares upon exercise of warrants will
cause immediate and substantial dilution to the interests of other stockholders
since the selling stockholders may convert and sell the full amount issuable on
exercise.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Prior to May 2001 and new management, we were delinquent in our reporting
requirements, having failed to file our quarterly and annual reports for the
years ended 1998 - 2000 (except the quarterly reports for the first two quarters
of 1999). We have been current in our reporting requirements for the last three
years, however, there can be no assurance that in the future we will always be
current in our reporting requirements.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of the
person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability
determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock
42
transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of December 31, 2004, the
Company's management carried out an evaluation, under the supervision of the
Company's Chief Executive Officer and the Chief Financial Officer of the
effectiveness of the design and operation of the Company's system of disclosure
controls and procedures pursuant to the Securities and Exchange Act, Rule
13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, as of the date of their
evaluation, for the purposes of recording, processing, summarizing and timely
reporting material information required to be disclosed in reports filed by the
Company under the Securities Exchange Act of 1934.
Changes in internal controls. There were no changes in internal controls over
financial reporting, known to the Chief Executive Officer or Chief Financial
Officer that occurred during the period covered by this report that has
materially affected, or is likely to materially effect, the Company's internal
control over financial reporting.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities and Use of Proceeds
On October 1, 2004, we issued a total of 199,999 shares to parties related to an
investment banker with which we have a non-exclusive engagement.
On October 13, 2004, we issued a total of 257,500 shares to two consultants for
financial advisory and marketing services.
On October 18, 2004, we issued a total of 347,500 shares to previous investors
as consideration for our agreement to extend our registration commitment.
On October 19, 2004, we issued 1,000,000 shares to a single investor for total
proceeds of $500,000.
On October 26, 2004, we issued a total of 500,000 shares to parties related to
our investment banker in settlement for various breaches made in our Placement
Agent Agreement.
On November 4, 2004, we issued 100,000 to an employee as compensation for
services previously rendered.
On November 15, 2004 through December 17, 2004, we issued a total of
415,000shares to a consultant for financial advisory services.
On December 17, 2004, we issued 5,000 shares to an employee for services
previously rendered.
To obtain funding for our ongoing operations, we sold $1,465,000 in convertible
promissory notes to 13 investors in December 2004. Each promissory note was
automatically convertible into shares of our common stock, at a price of $0.50
per share, upon the closing of a private placement for $1 million or more. In
connection with the sale of the convertible promissory notes, we issued
2,930,000 warrants to purchase shares of common stock. The warrants are
exercisable until three years from the date of issuance at a purchase price of
$0.75 per share. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
43
Subsequent Sale of Equity Securities
On January 4, 2005, we issued 12,500 shares as a result of an investor's
exercise of his $0.10 warrants. This issuance is considered exempt under
Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder.
Also on January 10, 2005, we issued additional shares to our investors in
accordance with an adjustment provision in our private placement and placement
agent agreement. We issued a total of 3,249,750 shares of Common Stock to 24
investors. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
On January 13, 2005, we issued additional shares to two consultants in
accordance with an adjustment provision in their consulting agreements. A total
of 662,000 shares were issued. This issuance is considered exempt under
Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder.
To obtain funding for our ongoing operations, we conducted a private placement
offering in January and February 2005, in which we sold $7,311,000 of 10%
Secured Convertible Promissory Notes to 61 investors. The 10% Secured
Convertible Promissory Notes automatically convert into shares of our common
stock, at a price of $0.50 per share, upon the filing of this registration
statement. In connection with the private placement offering, we have issued
15,222,000 warrants. The warrants are exercisable until five years from the date
of issuance at a purchase price of $0.75 per share. This issuance is considered
exempt under Regulation D of the Securities Act of 1933 and Rule 506 promulgated
thereunder.
On January 28, 2005, we closed upon a private placement transaction in excess of
$1 million, and on February 2, 2005, the promissory notes issued in December
2004 were converted into an aggregate of 2,930,000 shares of common stock. This
issuance is considered exempt under Regulation D of the Securities Act of 1933
and Rule 506 promulgated thereunder.
The following table provides information about purchases by us and our
affiliated purchasers during the quarter ended December 31, 2004 of equity
securities that are registered by us pursuant to Section 12 of the Securities
Exchange Act of 1934:
ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) (b) (c ) (d)
Total Number of Average Price Paid Total Number of Maximum Number (or
Shares (or units) per share (or Unit) Shares (or Units) Approximate Dollar value) of
Purchased Purchased as Part of Shares (or Units) that May
Publicly Announced Yet Be Purchased Under the
Plans or Programs (1) Plans or Programs (1)
10/01/04-
10/31/04 0 $0 0 0
11/01/04-
11/30/04 0 $0 0 0
12/01/04-
12/31/04 0 $0 0 0
(1) We have not entered into any plans or programs under which we may
repurchase its common stock.
On December 17, 2003, we issued a total of 1,850,000 shares to ten consultants
in connection with our agreement with the company's investment bankers, Vertical
Capital Partners, Inc. These issuances are considered exempt from registration
by reason of the Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
44
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and
Rule 15d-14(a), promulgated under the Securities and Exchange Act of
1934, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and
Rule 15d 14(a), promulgated under the Securities and Exchange Act of
1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 2 to Form 10QSB/A to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLIED DNA SCIENCES, INC.
Date: October 10, 2006 By: /s/ JAMES A. HAYWARD
---------------------
Chief Executive Officer
(Principal Executive
Officer, Principal
Financial Officer and
Principal Accounting Officer)
46