UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 3
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended December 31, 2005
Commission file number 002-90519
APPLIED DNA SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Nevada 59-2262718
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790
--------------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(631) 444-6862
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the last 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
The number of shares of Common Stock, $0.001 par value, outstanding on February
14 2006, was 114,772,385 shares, held by approximately 1,380 shareholders.
Transitional Small Business Disclosure Format (check one):
Yes [X] No [_]
EXPLANATORY NOTE
This Amendment No. 3 to Form 10-QSB/A ("Amendment No. 3") amends the amended
Quarterly Report of Applied DNA Sciences, Inc. (the "Company") on Form 10-QSB/A
for the quarter ended December 31, 2005, as filed with the Securities and
Exchange Commission on March 2, 2006 (the "Original Filing"). This Amendment No.
3 is being filed for the purpose of correcting errors in accounting for and
disclosing the issuance by the Company of warrants to acquire the Company's
common stock, revising compensation expense and adjusting shareholder equity. In
addition the Company is correcting certain errors in accounting for the exchange
of its common stock for previously incurred debt owed to a Company Director.
We have not updated the information contained herein for events occurring
subsequent to March 2, 2006, 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, 2005
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet:
December 31, 2005 (Unaudited) 3
Condensed Consolidated Statements of Operations :
Three Months Ended December 31, 2005 and 2004 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through December
31, 2005 (Unaudited) 4
Condensed Consolidated Statement of Stockholder's Equity (Deficiency):
For the Period from September 16, 2002 (Date) of Inception Through
December 31 2005 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows:
Three Months Ended December 31, 2005 and 2004 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through December
31, 2005 (Unaudited) 19
Notes to Unaudited Condensed Consolidated Financial Information:
December 31, 2005 21-40
Item 2. Management Discussion and Analysis 41
Item 3. Controls and Procedures 56
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 59
Item 3. Defaults Upon Senior Securities 59
Item 4. Submission of Matters to a Vote of Security Holders 59
Item 5. Other Information 59
Item 6. Exhibits 59
Signatures 60
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
RESTATED
(Unaudited)
ASSETS
December 31, 2005
Current assets:
Cash and cash equivalents $ 164,526
Current other receivables, related party (Note D) 17,404
--------------------
--------------------
Total current assets 181,930
Property, plant and equipment - Net of accumulated
depreciation of $3,084 3,563
Other Assets:
Deposits and prepaid expenses 23,659
Intangible assets:
Patents (net of accumulated amortization of $13,490)
(Note B) 20,767
Intellectual Property (net of accumulated amortization
of $673,636) (Note B) 8,757,264
--------------------
Total Other Assets 8,801,690
--------------------
Total Assets $ 8,987,183
====================
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,858,429
Accrued liabilities due related parties 53,805
Note payable-related party (Note D) 410,429
Note payable (Note C) 550,000
-------------------
Total current liabilities 4,872,663
Warrant Liability (Note G) 8,643,685
Commitments and contingencies (Note I)
Deficiency in Stockholders' equity:
Preferred stock, par value $.001 per share; 10,000,000
shares
authorized; 60,000 issued and outstanding 6
Common stock, par value $.001 per share; 250,000,000
shares
authorized; 112,926,246 shares
issued and outstanding 112,926
Common stock subscription (Note H) (200,000)
Additional said-in-capital 82,663,005
Deficit accumulated during development stage (87,105,102)
--------------------
Total deficiency in stockholders' equity (4,529,165)
--------------------
Total liabilities and deficiency in stockholders' $ 8,987,183
equity
====================
See accompanying notes to unaudited condensed consolidated financial statements
3
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For The Three Months Ended September 16, 2002,
December 31 (Date of Inception)
through
2005 2004 December 31, 2005
------------------- ----------------- --------------------
RESTATED RESTATED RESTATED
Operating expenses:
Selling, general and administrative $ 1,844,477 $ 5,375,068 $ 73,380,081
Research and development 16,270 38,673 893,678
Depreciation and amortization 342,699 4,721 702,126
------------------- ----------------- --------------------
Total operating expenses 2,203,446 5,379,789 74,975,885
Operating loss (2,203,446) (5,379,789) (74,975,885)
Net gain/(loss) on revaluation of warrant liability 6,788,790 -- 23,489,780
Other income (expense) 13,013 315 44,355
Interest (expense) (1,778,906) (1,567,809) (35,663,352)
Income (taxes) benefit -- -- --
------------------- ----------------- --------------------
Net income (loss) $ 2,819,451 $ (6,947,283) $ (87,105,102)
=================== ================= ====================
Income (loss) per common share-basic $ 0.03 $ (0.37) $ (2,18)
=================== ================= ====================
Income per common share-fully diluted $ 0.02 --
===================
Weighted average shares outstanding-basic 112,535,514 18,972,160 40,068,155
=================== ================= ====================
Weighted average shares outstanding-fully diluted 163,392,948 N/A
===================
See accompanying notes to unaudited condensed consolidated financial statements
4
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
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 the financial statements
5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 the financial statements
6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 the financial statements
7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 the financial statements
8
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 the financial statements
9
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 the financial statements
10
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 the financial statements
11
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 the financial statements
12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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
Common stock issued in
settlement of debt at $0.50 per
share in December 2004 - - 2,930,000 1,465,000 - (125,000) - - 1,340,000
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
Warrants exercised at $0.10 per
share in January 2005 - - 25,000 12,500 (10,000) - - - 2,500
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 1,628,789 814,395 (276,895) - - - 537,500
Fair value of warant liability
reclassed due to registration
rights granted in January 2005 - - - - (3,108,851) - - - (3,108,851)
Warrants exercised at $0.10 per
share in January 2005 - - 17,500 8,750 (7,000) - - - 1,750
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 2,399,012 1,199,504 (407,830) - - - 791,674
Common Stock issued in
exchange for consulting
services at $1.30 per share - - 315,636 157,818 252,508 - - - 410,326
in January 2005
Common Stock issued in
exchange for consulting
services at $1.44 per share
in February 2005 - - 5,796,785 2,898,393 5,418,814 - - - 8,317,207
Fair value of 55,000 warrants
issued to consultants for
services at $1.31 per warrant in
February 2005 - - - - 72,017 - - - 72,017
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 75,757 37,879 (12,879) - - - 25,000
See accompanying notes to the financial statements
13
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 $0.10 per
share in February 2005 - - 20,000 10,000 (8,000) - - - 2,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 606,060 303,030 (103,030) - - - 200,000
Warrants exercised at $0.10 per
share in February 2005 - - 45,000 22,500 (18,000) - - - 4,500
Common Stock issued in
exchange for related party debt
at $1.31 per share in February
2005 - - 1,500,000 750,000 1,215,000 - - - 1,965,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 278,433 139,217 (47,334) - - - 91,883
Common Stock issued in
exchange for consulting services
at $1.17 per share in February
2005 - - 17,236 8,618 11,548 - - - 20,166
Common stock issued in
exchange for debt at $0.50 per
share in February 2005 - - 300,000 150,000 - - - - 150,000
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 716,500 358,250 322,425 - - - 680,675
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 10,500 5,250 4,725 - - - 9,975
Common stock issued in
exchange for debt at $0.50 per
share in March 2005 - - 13,202,000 6,601,000 - - - - 6,601,000
Common Stock issued in
exchange for consulting
services at $1.19 per share
in March 2005 - - 185,000 92,500 127,650 - - - 220,150
Options exercised at $0.60 per
share in March 2005 - - 100,000 50,000 10,000 - - - 60,000
Common Stock issued in
exchange for consulting
services at $0.98 per share
in March 2005 - - 1,675,272 837,636 804,131 - - - 1,641,767
See accompanying notes to the financial statements
14
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 $0.92 per share
in March 2005 - - 24,333 12,167 10,219 - - - 22,386
Common Stock issued in
exchange for consulting
services at $0.99 per share
in March 2005 - - 15,000 7,500 7,350 - - - 14,850
Common stock issued in exchange
for debt at $0.50 per share
in March 2005 - - 1,240,000 620,000 - - - - 620,000
Common stock canceled for
shares issued in exchange of
debt in March 2005 - - (500,000) (250,000) - - - - (250,000)
Common stock subscribed
Canceled in March 2005 - - - - - 750,000 - - 750,000
Common Stock issued in
exchange for consulting
services at $0.89 per share
in March 2005 - - 10,000 5,000 3,900 - - - 8,900
Adjust common stock par value
from $0.50 to $0.001 per share,
per amendment of articles dated
March 2005 - - - (32,312,879) 32,312,879 - - - -
Beneficial Conversion discount
relating to Notes Payable in
March 2005 - - - - 7,371,000 - - - 7,371,000
Stock options granted to
employees in exchange for
services rendered, at exercise
price below fair value of common
stock in March 2005 - - - - 180,000 - - - 180,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 160,000 160 127,840 - - - 128,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 40,000 40 31,960 - - - 32,000
See accompanying notes to the financial statements
15
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 $0.75 per share in April 2005 - - 850,000 850 636,650 - - - 637,500
Common Stock issued in
exchange for consulting services
at $0.33 per share in April 2005 - - 500,000 500 164,500 - - - 165,000
Common Stock canceled during
April 2005, previously issued for
services rendered at $3.42 per
share - - (10,000) (10) (34,190) - - - (34,200)
Common Stock issued in
settlement of debt at $0.33 per
share in April 2005 - - 75,758 77 24,923 (25,000) - - -
Common Stock issued in
exchange for consulting services
at $0.68 per share in April 2005 - - 50,000 50 33,950 - - - 34,000
Proceeds received against
subscription Payable in June
2005 - - - - - 118,000 - - 118,000
Common Stock canceled in
June 2005, previously issued for
services rendered at $0.50 per
share - - (10,000) (10) (4,990) - - - (5,000)
Cancellation of previously
granted stock options granted
to employees for services
rendered, at exercise price
below fair value of common stock - - - - (180,000) - - - (180,000)
Common Stock issued in
exchange for consulting services
at $0.60 per share in July 2005 - - 157,000 157 94,043 - - - 94,200
Common Stock issued in
exchange for intellectual property
at $0.67 per share in July 2005 - - 36,000,000 36,000 24,084,000 - - - 24,120,000
Common Stock issued in
exchange for consulting
services at $0.60 per share
in July 2005 - - 640,000 640 383,360 - - - 384,000
Common Stock issued in
exchange for employee services
at $0.48 per share in July 2005 - - 8,000,000 8,000 3,832,000 - - - 3,840,000
See accompanying notes to the financial statements
16
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 $0.94 per share
in July 2005 - - 121,985 121 168,217 - - - 168,338
Common Stock issued in
exchange for consulting
services at $0.48 per share
in August 2005 - - 250,000 250 119,750 - - - 120,000
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.62 per share in
September 2005 - - 814,158 814 501,858 - - - 502,672
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.70 per share in
September 2005 - - 391,224 391 273,466 - - - 273,857
Common Stock issued in
exchange for consulting
services at $0.94 per share
in September 2005 - - 185,000 185 173,715 - - - 173,900
Common Stock returned in
September 2005, previously
issued for services rendered at
$0.40 per share - - (740,000) (740) (453,232) 56,000 1,000 - (396,972)
Net Loss (67,109,519) (67,109,519)
--------- --------- ---------- ----------- ----------- ---------- --------- ------------ -----------
Balance as of September
30, 2005 60,000 $ 6 112,230,392 $ 112,230 82,320,715 $ 20,000 $ - $(89,924,553) $(7,471,602)
========= ======== =========== =========== =========== ========== ========= ============ ===========
See accompanying notes to the financial statements
17
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2005
(Unaudited)
RESTATED
(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 pursuant
to subscription at $0.50 per
share in October 2005 - - 400,000 400 199,600 (200,000) - - -
Common Stock issued in
exchange for consulting
services at $0.75 per share
in October 2005 - - 100,000 100 74,900 - - - 75,000
Common Stock returned in
October 2005, previously
issued for services
rendered at $0.60 per share - - (350,000) (350) (209,650) - - - (210,000)
Common stock issued pursuant
to subscription at $0.50 per
share in December 2005 - - 40,000 40 19,960 (20,000) - - -
Common Stock issued to investors
persuant to registration rights
agreement at $0.51 per share in
December 2005 - - 505,854 506 257,480 - - - 257,986
Net Income - - - - - - - 2,819,451 2,819,451
--------- ------- ----------- ----------- ----------- ---------- ------------ ----------- ----------
Balance as of
December 31, 2005 60,000 6 112,926,246 112,926 82,663,005 (200,000) - (87,105,102)(4,529,165)
========= ======= =========== =========== =========== ========== ============ =========== ==========
See accompanying notes to unaudited condensed consolidated financial statements
18
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the period
September 16,
2002 (date of
inception)
For The Three Months Ended through
December 31, December 31,
2005 2004 2005
------------ ------------- ----------------
RESTATED RESTATED RESTATED
Cash flows from operating activities:
Net Income ( loss) $2,819,451 $(6,947,283) $(87,105,102)
Adjustments to reconcile net loss to net cash used in Operating activities:
Depreciation and amortization 336,942 4,721 690,210
Organizational Expenses 88,500
Preferred Shares issued in exchange for service -- -- 1,500,000
Warrants issued to consultants and note holders -- 3,169,052 9,378,430
Income attributable to re-pricing of warrants (6,788,790) (23,489,780)
Financing costs attributable to issuance of warrants 1,758,900 -- 24,907,115
Amortization of beneficial conversion feature-convertible notes -- 1,515,000 10,461,000
Debt in exchange for common stock at fair market price -- -- 1,365,000
Common stock issued:
in exchange for consultant services rendered 75,000 1,174,300 30,649,373
in exchange for intellectual property in connection with costs of
acquiring intangible assets 14,689,100
in connection with issuance of penalty shares pursuant to pending SB-2
registration 257,986 1,034,515
Common stock canceled-previously issued for services rendered (210,000) (642,605) (1,073,845)
Other assets (4,975) (24,026) (17,404)
Restricted cash related to stock subscription escrow -- -- (13,890)
Increase in due related parties -- (1,065,318) --
Accounts payable and accrued liabilities 53,805 1,523 94,558
Net cash used in operating activities 1,288,311 1,203,816 3,707,766
------------ ------------- -------------
(413,370) (1,610,820) (13,134,454)
Cash flows from investing activities:
Capital expenditures (9,397) -- (23,659)
Payments for patent filing 6,103 -- (6,647)
Net cash used in investing activities -- (4,347) (25,698)
------------ ------------- -------------
(3,294) (4,347) (56,004)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost -- -- 432,000
Proceeds from issuance of convertible debt -- 250,000 9,204,000
Proceeds from sale of options -- 36,000 343,750
Repayment of debt (24,854)
Proceeds from loans 550,000 1,390,000 3,300,000
Advances from shareholders -- 100,088
------------ ------------- -------------
Net cash provided by financing activities 550,000 1,676,000 13,354,984
------------ ------------- -------------
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period 133,336 60,833 164,526
Cash and cash equivalents at end of period 31,190 1,832 --
------------ ------------- -------------
$ 164,526 $ 62,665 $ 164,526
============ ============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest
Cash paid during period for taxes -- -- --
-- -- --
Non-cash transaction
Common stock issued for services 75,000 1,174,300 30,649,373
Common stock issued in exchange for intellectual property -- -- 9,430,900
Common stock issued in exchange for previously incurred debt -- -- 3,109,533
Common stock penalty shares issued pursuant to pending SB-2 registration 257,986 -- 1,034,515
See accompanying notes to unaudited condensed consolidated financial statements
19
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Common stock canceled-previously issued for services
rendered (210,000) (642,605) (1,073,845)
Warrants issued in exchange for financing costs 1,758,900 -- 24,907,115
Amortization of beneficial conversion feature -- 1,515,000 10,461,000
Preferred Shares in exchange for services -- -- 1,500,000
Warrants issued to consultants -- 3,169,052 5,260,930
Acquisition:
Common stock retained -- 1,015
Assets acquired -- (135)
Total consideration paid -- 880
Organization expenses - note issued in exchange of shares retired -- 88,500
Common stock issued in exchange for note payable -- 88,500 88,500
See accompanying notes to unaudited condensed consolidated financial statements
20
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(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/A, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended December 31, 2005 are not
necessarily indicative of the results that may be expected for the fiscal year
ended September 30, 2006. The unaudited condensed consolidated financial
statements should be read in conjunction with the September 30, 2005 financial
statements.
Business and Basis of Presentation
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of Nevada. The Company is in the
development stage, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA
embedded biotechnology security solutions in the United States. To date, the
Company has generated nominal sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
inception through December 31, 2005, the Company has accumulated losses of
$87,105,102.
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,
2005 property and equipment consist of:
December 31,
2005
Furniture $ 6,647
Accumulated depreciation (3,084)
---------------
Net $ 3,563
21
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended September 30, 2003 and for
the subsequent periods.
The Company did not grant any stock options to employees during the period ended
December 31, 2005. Had compensation costs for the Company's stock options been
determined based on the fair value at the grant dates for the awards, the
Company's net loss and losses per share would have been as follows:
For the Period
September, 16
2002 (Date of
For The Three For The Three Inception
Months ended Months ended through
December 31, December 31, December 31,
2005 2004 2005
=============== ============== ==============
Net loss - as reported
$ 2,819,451 $ (6,947,283) $ (87,105,102)
Add: Total stock based employee
compensation expense as reported under
intrinsic value method ( APB No. 25) -- -- --
Deduct: Total stock based employee
compensation expense as reported under
fair value method ( APB No. 123) -- -- (1,836,222)
--------------- -------------- --------------
Net loss - Pro Forma $ 2,819,451 $ (6,947,283) $ (88,941,324)
=============== ============== ==============
Net loss attributable to common
stockholders - Pro Forma $ 2,819,451 $ (6,947,283) $ (88,941,324)
=============== ============== ==============
Basic income (loss) per share - as reported $ 0.03 $ (0.37) $ (2.18)
==== ====== ======
Basic (and assuming dilution) loss
per share - Pro Forma $ 0.03 $ (0.37) $ (2.22)
==== ====== ======
Fully diluted income per share-as reported $ 0.02
====
Fully diluted income per share-Pro Forma $ 0.02
====
22
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact that this statement will have on Company's consolidated
financial statements.
New Accounting Pronouncements
SFAS 123R. On March 31, 2004 the Financial Accounting Standards Board ("FASB")
issued its exposure draft, "Share-Based Payments", which is a proposed amendment
to SFAS 123. The exposure draft would require all share-based payments to
employees, including grants of employee stock options and purchases under
employee stock purchase plans, to be recognized in the statement of operations
based on their fair value. The FASB issued the final standard in December 2004
that is effective for small business issuers for annual periods beginning after
December 15, 2005. The Company has not yet assessed the impact of adopting this
new standard.
SFAS 151. In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This
Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company does not anticipate that
the implementation of this standard will have a material impact on its financial
position, results of operations or cash flows.
SFAS 152. In December 2004, the FASB issued SFAS No.152, "Accounting for Real
Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67"
("SFAS 152) The amendments made by Statement 152 This Statement amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA SFAS 153. On December 16, 2004, FASB
issued Statement of Financial Accounting Standards No. 153, Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions (" SFAS 153"). This statement amends APB Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange
of similar productive assets meets a commercial-substance criterion and fair
value is determinable, the transaction must be accounted for at fair value
resulting in recognition of any gain or loss. SFAS 153 is effective for
nonmonetary transactions in fiscal periods that begin after June 15, 2005. The
Company does not anticipate that the implementation of this standard will have a
material impact on its financial position, results of operations or cash flows.
23
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
NOTE B - ACQUISITION OF INTANGIBLE ASSETS
The Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets,
whereby the Company periodically test its intangible assets for impairment. On
an annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.
Biowell Technology, Inc.
On July 12, 2005, the Company acquired certain intellectual properties from
Biowell Technology, Inc. ("Biowell") through an Asset Purchase Agreement
("Agreement") in exchange for 36 million shares of the Company's restricted
common stock having an aggregate fair value at the date of issuance of
$24,120,000. The intangible assets acquired consist of proprietary DNA
anti-counterfeit trade secrets created by Biowell that are intended to protect
intellectual property from counterfeiting, fraud, piracy, product diversion and
unauthorized intrusion.
The purchase price has been allocated as follows:
Amortizable intangible assets acquired are comprised of:
Developed core technologies $ 2,260,900
Developed product technologies 7,170,000
-----------
Total amortizable intangible assets 9,430,900
Transaction costs 14,869,100
-----------
Total purchase price $24,120,000
===========
In Process Research & Development
The Company concluded as of the date of acquisition, the acquired intangible
assets, consisting of developed core and product technologies had reached full
development and that it was not the intention of the Company's management to
utilize the asset in specific research and development activities as defined in
SFAS No. 2 Accounting for Research & Development Costs, As a result, the Company
determined there was no in-process research and development ("IPR& D") projects
in place related to the technology acquired , nor any future research and
development activities planned. Accordingly, there is no charge to operations
during the year ended September 30, 2005 for IPR&D in connection with the
acquisition of the assets.
24
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE B - ACQUISITION OF INTANGIBLE ASSETS (continued)
Transaction costs
The amount of the purchase price that could not be allocated to acquired
identifiable intangible assets or IPR & D was $14,689,100 and was charged to
operations as a cost of the transaction during the year ended September 30,
2005.
The identifiable intangible assets acquired and their carrying value at December
31, 2005 are:
Weighted
Gross Average
Carrying Accumulated Residual Amortization
Amount Amortization Net Value Period
(Years)
Amortizable
Intangible
Assets:
Trade secrets and
developed technologies
$ 9,430,900 $ 673,636 $ 8,757,264 - 7
Patents 34,237 13,490 20,767 - 5
----------- --------- ----------- --------- --------
Total
Amortized
Identifiable
Intangible Assets $9,465,137 $687,126 $8,778,031 - 6.99
Total amortization expense charged to operations for the three months ended
December 31, 2005 and 2004 were $338,545 and $4,370 respectively.
Estimated amortization expense as of December 31, 2005 is as follows:
2006 $ 1,357,279
2007 1,357,279
2008 1,349,748
2009 1,349,271
2010 and after 3,704,998
------------
Total $ 9,116,575
============
25
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE C - NOTES PAYABLE
Note payable, secured by all Company assets, payable from November 3, 2005,
repayment due upon the earlier of $750,000 in new financing or by April 1, 2006,
rate of interest 16% per annum. 550,000
-----------------
550,000
Less: current portion 550,000
-----------------
Note Payable - long-term $ --
=================
NOTE D- RELATED PARTY TRANSACTIONS
At December 31, 2005, related party note payable is as follows:
4% Convertible Note Payable, unsecured, to related party and due August 1,
2005; currently in default. Note holder has the option to covert unpaid
principal together with any accrued and unpaid interest to 180,000 shares of
the Company's common stock. $ 410,429
On October 18, 2005, Maureen Huppe, a Company shareholder obtained a judgment in
Los Angeles County, California against Lawrence Lee, director of the Company,
for short swing profits as a result of trading Company shares. Per the judgment,
Mr. Lee is obligated to reimburse the Company $245,911 in damages plus legal
fees. In addition, the Company owes Mr. Lee $35,162 in outstanding accrued
liabilities. In offsetting the outstanding liability against the pending
reimbursement, the Company anticipates proceeds of approximately $211,000 from
Mr. Lee.
The Company issued 1,500,000 shares of its restricted common stock to a Company
officer and Director in exchange for $600,000 of previously incurred debt. The
debt was in the form of a promissory note.
The Company valued the shares at $1.31 per share for a total of $1,965,000,
which represents the fair value of the common stock on the date of the exchange.
The difference between the fair value of the common stock of $1,965,000 and the
face value of the debt of $600,000 or $1,365,000 has been charged to current
period interest expense.
The Company's current and former officers and shareholders have advanced funds
to the Company for travel related and working capital purposes. No formal
repayment terms or arrangements exist. The amount of the advances due at
December 31, 2005 was $53,805 and is included in accounts payable and accrued
expenses
On July 15, 2005, the Company entered into a consulting agreement with Timpix
International Limited ("Timpix") for the consulting services of three former
Biowell employees, Drs. Jun-Jei Sheu, Ben Liang and Johnson Chen. The consulting
agreement is for the shorter of two years, or until all of the consultants have
obtained a visa to work in the United States and execute employment agreements
with the Company. The consulting agreement shall automatically renew for one
year periods until terminated. Pursuant to the consulting agreement, the Company
is obligated to pay $47,000 per month, which is apportioned at $20,000 per month
for Mr. Sheu, $15,000 per month for Mr. Liang and $12,000 per month for Mr.
Chen. In the event that either of Messrs. Sheu, Liang or Chen becomes employed
by us, the monthly consulting fee shall be reduced accordingly. We have
negotiated an agreement in principle to restructure the Consulting Agreement,
whereby, fees owed to Timpix from July 2005 through December 2005 will be
waived, and salaries for each of the three consultants will be reduced starting
January 1, 2006. Travel costs totaled $39,000 for the three months ended
December 31, 2005.
26
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE D- RELATED PARTY TRANSACTIONS (continued)
The Company owes Biowell Technology, Inc., $15,000 for unpaid previous research
and development costs.
In July 2005, the Company entered into a license agreement with Biowell, whereby
the Company granted Biowell an exclusive license to sell, market, and
sub-license the Company's products in selected Asian countries. The exclusive
license for such selected territories is for an initial period of until December
31, 2010, and if Biowell meets its performance goals, the license agreement will
extend for an additional five year term. The license agreement gives Biowell the
initial rights to future anti-fraud biotechnologies developed by the Company and
also new applications for the existing technology that may be developed for the
marketplace as long as the license agreement remains in effect. In the event
that Biowell shall sub-license the products within its territories, Biowell
shall pay the Company 50% of all fees, payments or consideration or any kind
received in connection with the grant of the sublicense. Biowell is required to
pay a royalty of 10% on all net sales made and is required to meet certain
minimum annual net sales in its various territories. Cumulative royalties earned
from the period July 2005 through December 31, 2005 totaled $17,404 with $14,274
occurring in the three months ended December 31, 2005 and is included in other
income.
NOTE E - 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 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 during the
quarter ended March 31, 2005 .
$ 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.
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.
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.
27
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE E - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
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 Convertible Notes were
converted 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 six months ended March 31, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued a warrant in February, 2005 that has registration rights
for the underlying shares. As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet $23,148,214 and charged to operations as interest
expense. Upon the registration statement being declared effective, the fair
value of the warrant on that date will be reclassified to equity. The Company
initially valued the warrants using the Black-Scholes pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of
152.59%, (3) risk-free interest rate of 3.67%, and (4) expected life of 5 years.
In connection with the placement of the $1,465,000 of convertible notes as
described above, the Company agreed to registered shares of the Company's common
stock underlying certain previously issued and outstanding warrants that were
not subject to a registration rights agreement at the time the warrants were
issued. These warrants consist of following:
o 105,464 warrants entitling the holder to purchase 105,464
shares of the Company's common stock at the price of $ .10 per
share. These warrants were issued in July, 2004 and lapse if
unexercised by July, 2009.
o 1,602,500 warrants entitling the holder to purchase 1,602,500
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.
As a result, the Company is required to classify the warrants as derivative
liabilities and mark then to market at each reporting date. The fair value of
the warrants that were subject to registration reclassified as liabilities from
additional paid in capital at March 31, 2005 totaled $3,108,851. Upon the
registration statement being declared effective, the fair value of the warrants
on that date will be reclassified to equity. The Company initially valued the
warrants using the Black-Scholes pricing model with the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 148.66%, (3) risk-free
interest rate of 3.21%, and (4) expected life of 3 years.
$ 7,371,000 Convertible Notes
In January and February, 2005, the Company sold an 10% convertible debenture in
the aggregate amount of $7,371,000 in a private placement and exempt offerings
to sophisticated investors, net of costs and fees.
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.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 14,742,000 shares of the
Company's common stock.
28
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE E - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 14,742,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants lapse if unexercised by February, 2010. A registration rights
agreement was executed and consummated in January, 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 $257,985 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 $7,731,000 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 in February, 2005, the debt discount
attributed to the beneficial conversion feature of $7,371,000 was charged to
interest expense in its entirety during the six months ended March 31, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued warrants that have registration rights for the underlying
shares. As the contract must be settled by the delivery of registered shares and
the delivery of the registered shares is not controlled by the Company, pursuant
to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the net value of the warrants at
the date of issuance was recorded as a warrant liability on the balance sheet
$23,148,214 and charged to operations as interest expense. Upon the registration
statement being declared effective, the fair value of the warrant on that date
will be reclassified to equity. The Company initially valued the warrants using
the Black-Scholes pricing model with the following assumptions: (1) dividend
yield of 0%; (2) expected volatility of 152.59%, (3) risk-free interest rate of
3.67%, and (4) expected life of 5 years.
NOTE F - STOCK OPTIONS AND WARRANTS
Warrants
The Company issued options and warrants during the years ended September 30,
2005 and 2004 for consulting and employee services, fees in connection with
obtaining financing and various other services. The following table summarizes
the changes in options and warrants outstanding and the related prices for the
shares of the Company's common stock issued to shareholders of the Company.
These warrants were granted in lieu of cash compensation for services performed
or financing expenses in connection with the sale of the Company's common stock.
29
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE F - STOCK OPTIONS AND WARRANTS (continued)
Warrants Warrants
Outstanding Exercisable
Weighted Average Weighed Weighted
Remaining
Number Contractual Average Number Average
Exercise Exercise Exercise
Prices Outstanding Life (Years) Price Exercisable Price
------------- -------------- ------------------------- ----------- -------------- ------------
$0.10 105,464 3.54 $ 0.10 105,464 $ 0.10
$0.20 5,000 2.88 $ 0.20 5,000 $ 0.20
$0.50 5,550,000 3.77 $ 0.50 5,550,000 $ 0.50
$0.55 9,000,000 2.47 $ 0.55 9,000,000 $ 0.55
$0.60 9,182,000 3.38 $ 0.60 9,182,000 $ 0.60
$0.70 750,000 1.59 $ 0.70 750,000 $ 0.70
$0.75 17,727,000 3.75 $ 0.75 17,727,000 $ 0.75
$1.00 100,000 0.79 $ 1.00 100,000 $ 1.00
---------- ----------
42,369,464 42,369,464
Transactions involving warrants are summarized as follows:
Weighted Average Price
Number of Shares Per Share
Balance, September 30, 2003 383,500 $ 1.38
------------------ --------------------
Granted 4,574,753 0.58
Exercised (88,000) 1.00
Canceled or expired -- --
------------------ --------------------
Balance, September 30, 2004 4,870,253 $ 0.63
------------------ --------------------
Granted 32,873,000 0.67
Exercised (142,500) 0.34
Canceled or expired (731,289) 0.65
------------------ --------------------
Balance, September 30, 2005 36,869,464 $ 0.67
------------------ --------------------
Granted 5,500,000 0.50
Exercised -- --
Canceled or expired -- $ --
------------------ --------------------
Balance, December 31, 2005 42,369,464 $ 0.67
------------------ --------------------
During the quarter ended December 31, 2005, the Company granted 5,500,000
warrants with an exercise price of $.50 per share to non employees in exchange
for financing expenses. As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
fair value of the warrants at the date of issuance was recorded as a warrant
liability of $1,758,900 and charged to operations as interest expense. Upon the
registration statement being declared effective, the fair value of the warrants
on that date will be reclassified to equity. The Company initially valued the
warrants using the Black-Scholes pricing model with the following assumptions:
(1) dividends yield of 0%; (2) expected volatility of 156.19%, (3) risk-free
interest rate of 4.35%, and (4) expected life of 5 years.
30
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE G - WARRANT LIABILITIES
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities and EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock", the Company has
accounted warrants to purchase its common stock that provide for the payment of
liquidated damages if the stipulated registration deadlines were not met as
liabilities.
As of the date of this filing, the registration statement has not yet been
declared effective by the SEC. The Company valued the warrants using the
Black-Scholes option pricing model. The Company revalued the warrants as of
December 31, 2005 using the Black-Scholes option pricing model. Assumptions
regarding the life were one to five years, expected dividend yield of 0%, a risk
free rate of 4.18 %, and a volatility of 155.91%. The determined value as of
December 31, 2005 of $8,643,685. The net change in the fair value of the warrant
liability value from September 30, 2005 of $6,788,790 has been recorded as a
gain from change in warrant liabilities in the consolidated condensed statement
of losses.
NOTE H - 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 15, 2005. Prior to the February 15,
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.
During the fiscal year ended September 30, 2003, the Company issued 895,200
shares of common stock in exchange for subscription at approximately $ 0.12 per
share.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement (see Note I). 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.
31
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE H - CAPITAL STOCK (continued)
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 C). The option
expired 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 had an option through December 10, 2004 to acquire the remaining
1,000,000 shares from the former controlling owner in exchange for $11,500. On
June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant
to the option agreement.
In July 2003, the Company issued 10,000 shares of common stock for cash
previously subscribed at $1.00 per share.
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 132,000
shares of common stock in exchange for cash at approximately $0.50 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 5,149,472
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.
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.
During the fiscal year ended September 30, 2005, the Company issued 11,040,647
shares of common stock, net of cancellation of 2,329,600 shares, in exchange for
consulting and employee services. The Company valued the shares issued at
$13,008,371, net of cancellation of $1,328,269, which represents the fair value
of the services received which did not differ materially from the value of the
stock issued
32
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE H - CAPITAL STOCK (continued)
During the fiscal year ended September 30, 2005, the Company issued 1,500,000
shares of common stock for shares previously subscribed at approximately $.54
per share.
During the fiscal year ended September 30, 2005, the Company issued 222,500
shares of common stock for warrants and options exercised at approximately $0.48
per share
During the fiscal year ended September 30, 2005, the Company retired $1,836,057
of convertible notes payable for 5,563,809 shares of common stock. The Notes are
convertible into shares of common stock at a price of $0.33 per share.
During the fiscal year ended September 30, 2005, the Company issued 17,672,000
shares of common stock at $0.50 per share pursuant to the exercise terms of
notes payable. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
In October 2004, the Company issued 500,000 shares of common stock in exchange
for debt at $0.50 per share.
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
In February 2005, the Company in exchange for a related party note in the
outstanding principal amount of $600,000 and as settlement for certain claims
related thereto issued 1,500,000 shares of common stock using a price of $1.31
per share. (See note D)
In March, 2005, the Company granted stock options to purchase a aggregate of
300,000 shares of common stock to employees that vested immediately. The
exercise prices of the stock options granted were below the fair value of the
Company's common stock at the grant date. Compensation expense of $180,000 and
$0 was charged to operations during the period ended March 31, 2005 and 2004,
respectively.
In June 2005, the Company cancelled 300,000 stock options previously granted
valued at $180,000. In accordance with EITF 96-18 the measurement date to
determine fair value was the date at which a commitment for performance by the
counter party to earn the equity instrument was reached. The Company valued the
shares issued for consulting services at the rate which represents the fair
value of the services received which did not differ materially from the value of
the stock issued.
In July 2005, the Company issued 36 million shares in exchange for intellectual
property at approximately $0.67 per share for a total of $24,120,000. The value
of the acquired intangible assets was established at $9,430,900, with the
balance of the purchase price, or $14,689,100, charged to operations as a cost
of the transaction. (See Note B)
In 2005, the Company issued 8,550,000 shares of its common stock without
restriction to employees in exchange for services rendered. The Company valued
the shares issued at market value and charged operations in the period the
shares were issued. The Company is investigating the circumstances surrounding
the issuance of the shares and the possible subsequent resale of certain of the
shares on the open market and the possibility of violations of securities laws
(see Note H).
33
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE H - CAPITAL STOCK (continued)
In September 2005, the Company issued 814,158 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of July and August 2005. The
Company valued the shares issued at approximately $0.62 per share for a total of
$502,672.
In September 2005, the Company issued 391,224 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of September 2005. The
Company valued the shares issued at approximately $0.70 per share for a total of
$273,857.
In October, 2005, the Company issued 400,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $200,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
In October 2005, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.75 per share for a total of $75,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2005, the Company cancelled 350,000 shares previously issued for
services valued at $210,000.
In December, 2005, the Company issued 40,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $20,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
In December 2005, the Company issued 505,854 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 31, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of October 2005. The Company
valued the shares issued at approximately $0.51 per share for a total of
$257,985. The Company continues to accrue the penalties relating to the pending
SB-2 registration.
In December 2005, in connection with debt financing, the Company issued
5,500,000 warrants to purchase the Company's common stock at an exercise price
of $0.50 for five years. The fair value attributable to the warrants of
$1,758,900 was charged to operations in the three months ended December 31,
2005.
NOTE I- COMMITMENTS AND CONTINGENCIES
Employment and Consulting Agreements
The Company has consulting agreements with outside contractors, certain of whom
are also Company stockholders. The Agreements are generally month to month.
34
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE I- COMMITMENTS AND CONTINGENCIES (continued)
On July 15, 2005, we entered into a consulting agreement with Timpix for the
consulting services of three former Biowell employees, Drs. Jun-Jei Sheu, Ben
Liang and Johnson Chen. The consulting agreement is for the shorter of two
years, or until all of the consultants have obtained a visa to work in the
United States and execute employment agreements with us. Such consulting
agreement shall automatically renew for one year periods until terminated.
Pursuant to the consulting agreement, we shall pay $47,000 per month, which is
apportioned at $20,000 per month for Mr. Sheu, $15,000 per month for Mr. Liang
and $12,000 per month for Mr. Chen. In the event that either of Messrs. Sheu,
Liang or Chen becomes employed by us, the monthly consulting fee shall be
reduced accordingly. We have negotiated an agreement in principle to restructure
the Consulting Agreement, whereby, fees owed to Timpix from July 2005 through
December 2005 will be waived, and salaries for each of the three consultants
will be reduced starting January 1, 2006.
Litigation
On or about November 24, 2004, Oceanic Consulting, S.A. filed a complaint
against the Company in the Superior Court of the State of New York. The
Complaint alleges a breach of contract. The Company and the Plaintiff settled
the dispute subsequent to the date of the financial statements.
On or about January 10, 2005, Stern & Co. filed a complaint against the Company
in the United States District Court for the Southern District of New York. The
Complaint alleges a breach of contract. Subsequent to the date of the financial
statements, the Company and the Plaintiff settled the dispute.
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us for $13,000 in the Superior Court of New Jersey, Middlesex County.
The Company settled this matter subsequent to the date of the financial
statements.
On or about January 12, 2006, James Paul Brown, a former consultant to the
Company filed a complaint against the Company in the Superior Court of the State
of California. The Complaint alleges a breach of contract. Subsequent to the
date of the financial statements, the Company and the Plaintiff settled the
dispute.
In January 2006, a former employee of the Company filed a complaint alleging
wrongful termination against the Company. The former employee is seeking
$230,000 in damages. The Company believes that it has meritorious defenses to
the plaintiff's claims and intends to vigorously defend itself against the
Plaintiff's claims. Management believes the ultimate outcome of this matter will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
On or about April 4, 2006, the Company filed a complaint against Paul Reep,
Adrian Butash, John Barnett, Chanty Cheang, Jaime Cardona (former Company
employees and officers), and Angela Wiggins ( a former consultant to the
Company) in the United States District Court for the Central District of
California . The Company has asked the court to make a judicial determination
that an agreement, which the Company did not authorize and which is the basis of
previously disclosed litigation against the Company by Paul Reep, a former
employee of the Company, and a new action filed by former employees of the
Company as set forth in the subsequent paragraph, is invalid and unenforceable.
This matter is in its early stages.
35
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE I- COMMITMENTS AND CONTINGENCIES (continued)
On or about April 17, 2006, former employees of the Company filed a complaint
against the Company and certain of its current officers and Directors in Los
Angeles County Superior Court. The Complaint alleges a breach of contract,
violations of California Labor Code and wrongful termination and is seeking
$950,000 in specified damages, plus fees and costs. The complaint alleges a
breach of contract. The Company believes that it has meritorious defenses to the
plaintiff's claims and intends to vigorously defend itself against the
Plaintiff's claims. Management believes the ultimate outcome of this matter will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity.
Operating Lease Commitment
The Company leases office space under operating lease in Los Angeles, California
for its corporate use from an entity controlled by significant former
shareholder, expiring in November 2006. In November 2005, the Company closed its
Los Angeles facility and relocated to Stony Brook, New York.
Registration of Company's Shares of Common Stock
Until the Company successfully completes its pending registration statement on
SEC Form SB-2, the Company is subject to liquidated damages (see Note F). In
connection with the $ 1,465,000 and $ 7,371,000 million convertible debt
financing during the quarters ended December 31, 2004 and March 31, 2005,
respectively (see Note E), the Company was obligated to deliver registered
shares underlying the convertible notes and warrants by July 2005. Since the
registration was not effective by July 2005, the Company has been accruing and
charging to operations the stipulated liquidated damages in shares of Company
stock accruing at the rate of 3.5% per month on the face value of the previously
issued convertible notes. During the three months ended December 31, 2005, the
Company has paid and charged to operations penalties of $257,985 in the form of
unregistered shares of its common stock to the former noteholders, and has
accrued and charged to operations an additional $329,700 representing unpaid
penalties as of December 31, 2005
36
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE I- COMMITMENTS AND CONTINGENCIES (continued)
Matters Voluntarily Reported to the SEC and Securities Act Violations
We previously disclosed that we were investigating the circumstances surrounding
certain issuances of 8,550,000 shares to employees and consultants in July 2005
(see Note H), and have engaged our new outside counsel to conduct this
investigation. We have voluntarily reported our current findings from the
investigation to the SEC, and we have agreed to provide the SEC with further
information arising from the investigation. We believe that the issuance of
8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of the Board of Directors. These former officers received a total of
3,000,000 of these shares. In addition, it appears that the 8,000,000 shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance with the Securities Act of 1933, as amended. Our investigation is
continuing. The members of our management who effectuated the stock issuances
that are being examined in the investigation no longer work for us. We believe
that we may incur significant costs and expenses in continuing this
investigation. In the event that any of the exemptions from registration with
respect to the issuance of the Company's common stock under federal and
applicable state securities laws were not available, the Company may be subject
to claims by federal and state regulators for any such violations. In addition,
if any purchaser of the Company's common stock were to prevail in a suit
resulting from a violation of federal or applicable state securities laws, the
Company could be liable to return the amount paid for such securities with
interest thereon, less the amount of any income received thereon, upon tender of
such securities, or for damages if the purchaser no longer owns the securities.
As of the date of these financial statements, the Company is not aware of any
alleged specific violation or the likelihood of any claim. There can be no
assurance that litigation asserting such claims will not be initiated, or that
the Company would prevail in any such litigation.
The Company is unable to predict the extent of its ultimate liability with
respect to any and all future securities matters. The costs and other effects of
any future litigation, government investigations, legal and administrative cases
and proceedings, settlements, judgments and investigations, claims and changes
in this matter could have a material adverse effect on the Company's financial
condition and operating results
NOTE J - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
The accompanying financial statements for the three months ended December 31,
2005 have been restated for the purpose of correcting errors in accounting for
and disclosing the issuance by the Company of warrants to acquire the Company's
common stock, revising compensation expense and adjusting shareholder equity. In
addition the Company is correcting certain errors in accounting for the exchange
of its common stock for previously incurred debt owed to a Company Director.
Accordingly, the Company has restated the financial statements as of and for the
three months ended December 31, 2005 by disclosing the effect of these errors in
this amended Form 10-QSB/A.
The result of the December 31, 2005 Condensed Consolidated Balance Sheet
restatement is to:
- Reflect the reclassification of warrants from equity to liability
resulting n an $8,643,685 increase to Warrant Liability compared to the
previous filing.
- Adjust for warrant valuations for issuance to non employees of $2,284,764
to Additional Paid in Capital.
- Increase in liabilities for accrual of penalties relating to convertible
notes of $714,351.
- $1,265,300 additional compensation recorded in the restatement
- Net Shareholder Equity decreased by $9,357,736 as a result of the
combination of factors described above
37
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
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, 2005.
For the Period Ended December 31, 2005
--------------------------------------
(As Restated) (As Reported)
------------ -----------
ASSETS $ 8,987,183 8,987,183
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Current Liabilities 4,872,663 4,158,312
Warrant Liability 8,643,685 --
Stockholders' Equity:
Preferred Stock 6 6
Common Stock 112,926 112,926
Common Stock Subscription (200,000) (200,000)
Additional Paid-In-Capital 82,663,005 82,785,842
Deficit Accumulated During Development Stage (87,105,102) (77,869,903)
------------ ------------
Total Stockholders' Equity (4,529,165) 4,828,571
------------ ------------
Total Liabilities and Stockholders' Equity $ 8,987,183 8,987,183
For both the three months ended December 31, 2005, the result of the December
31, 2005 Condensed Consolidated Statement of Losses restatement is to:
- Increase Selling, General and Administrative for penalties relating
to convertible notes of $329,700.
- Reflect gain on the revaluation of warrants of $6,788,790 as a result of
reclassifying warrants from equity to a liability net with initial
warrant valuation of $1,758,900 charged to interest expense.
- Net loss decreased by $4,700,190 the three months ended December 31,
2005 and increased by $7,514,385 for the period September 16, 2002
through December 31, 2005 as a result of the combination of factors
described above
38
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE J - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Income Statement as
of December 31, 2005.
For the Period September 16, 2002
For the Three Months Ended December (Date of Inception) Through December
31, 2005 31, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
Operating Expenses:
Selling general and
administrative $ 1,844,477 $ 2,078,727 $ 73,380,081 $ 65,562,416
Research and development 342,699 342,699 893,678 893,678
Depreciation and
amortization 16,270 16,270 702,126 702,126
--------------- -------------- --------------- -------------
Total Operating Expenses 2,203,446 2,437,696 74,975,885 67,158,220
Operating Loss (2,203,446) (2,437,696) (74,975,885) (67,158,220)
Net gain/(loss) on
revaluation of warrant
liability 6,788,790 -- 23,489,780 --
Other income (expense) 13,013 13,013 44,355 44,355
Interest income
(expense) (1,778,906) (19,806) (35,663,352) (10,756,038)
Net Income (Loss) $ 2,819,451 $ (2,444,489) $ (87,105,102) (77,869,903)
Income (Loss) per
common share-basic $ 0.03 $ (0.02) $ (2.18) (1.94)
Income per common
share-fully diluted) $ 0.02
Weighted average shares
outstanding-basic 112,535,514 112,535,514 40,061,781 40,068,155
Weighted average shares
outstanding-fully
diluted 163,392,948
The result of the Condensed Consolidated Income Statement restatement is to:
- Decrease the loss for the three months December 31, 2005 by $4,700,190
within operating activities as a result of the net $5,029,890 warrant
liability reclassification and the $329,700 penalties accrued related to
convertible debt.
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, 2005.
39
APPLIED DNA SCIENCES, INC
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
DECEMBER 31, 2005
RESTATED
(Unaudited)
NOTE J - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
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 three months ended December 31, 2005. See the full Condensed
Consolidated Statement of Cash Flows for the periods ended December 31, 2005 for
additional details.
For the Period September 16, 2002
For the Three Months Ended December (Date of Inception) Through
31, 2005 December 31, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
Cash Flows from operating
activities:
Net income (loss) from operating
activities $ 2,819,451 $ (2,444,489) $ (87,668,852) $ (87,105,102)
Summary of adjustments to
reconcile net loss to net cash
(used in) operating activities:
Warrant revaluation (6,788,790) -- 23,489,780 --
Other operating activities - see
Cash Flow statement for full
details 3,555,969 2,031,119 98,024,178 65,331,199
Net cash (used in) operating
activities (413,370) (413,370) (13,134,454) (13,102,454)
Cash flows from investing activities:
- see Cash Flow statement for full
details
Net cash (used in) investing
activities (3,294) (3,294) (56,004) (56,004)
Cash flows from financing activities:
- see Cash Flow statement for full
details -- -- 10,054,984 10,022,984
Proceeds from loans 550,000 550,000 3,300,000 3,300,000
Net cash provided by financing
activities 550,000 550,000 13,354,984 13,322,984
Net increase (decrease) in cash
and cash equivalents 133,336 133,336 164,526 164,526
Cash and cash equivalents at
beginning of period 31,190 31,190 -- --
Cash and cash equivalents at end
of period 164,526 164,526 164,526 164,526
NOTE J- SUBSEQUENT EVENTS
On March 29, 2006, and April 13, 2006, the Company borrowed $200,000 in the
aggregate, at a rate of 7.5% per annum, from BioCogent, Ltd., ("BioCogent"), an
entity controlled by the Company's President and Chief Executive Officer. These
loans are due and payable upon the earlier to occur of (1) the close of business
on June 30, 2006, or (2) the closing of the issuance and sale by the Company of
its securities for gross proceeds of at least $250,000. These loans were paid in
full as of June 30, 2006.
40
Item 2. Management's Discussion and Analysis
Forward-Looking Statements
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this report. The quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, including statements using
terminology such as "can", "may", "believe", "designated to", "will", "expect",
"plan", "anticipate", "estimate", "potential" or "continue", or the negative
thereof or other comparable terminology regarding beliefs, plans, expectations
or intentions regarding the future. Forward looking statements involve risks and
uncertainties and actual results could differ materially from those discussed in
forward-looking statements. All forward looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to the Company as of the date thereof, and the Company assumes no
obligations to update any forward-looking statement or risk factor, unless the
Company is required to do so by law.
Plan of Operations
Sales and Marketing
Our revenues will come from three sources:
1) direct sales to manufacturer,
2) sales through our OEM relationships, and,
3) authentication (laboratory) services.
We employ a multi-tier sales and marketing strategy involving our marketing and
sales staff working together with high-level contacts in target industries and
our OEM base. We are attempting to develop strategic alliances and marketing
partners by setting up alliances with Biowell's technology partners, granting
licenses to existing anti-counterfeit suppliers and partner with industry
leaders for intellectual property development.
We are cognizant that no technology exists today to enable someone in the street
to ascertain, at the point of purchase, whether an expensive product, or a
child's foodstuff, or pharmaceutical product is genuine, worth the money being
paid and safe to use or ingest. No brand owner is able to rapidly determine
whether a product is real of fake. Many multi-billion dollar brands have no
technology to protect against counterfeiting, to detect its occurrence and to
interdict or prosecute the counterfeiter. No company has the capability to
determine with forensic certainty that it is subject to attack. Such companies
remain seriously exposed to product liability, loss of consumer confidence and
loss of revenues. Governments have no rapid detection system to determine at
thepoint of entry, inspection or seizure whether products are real or fake. A
major thrust of our marketing efforts is to work with consumer groups, media,
corporate officers, government departments, Customs, insurers and others to
bring home the message that, in a world of criminality and terrorism, no-one is
safe.
Business Strategy and Approach
We have established integrated business operations addressing and servicing the
needs of the global security marketplace on the part of corporations and
governments for; anti-counterfeiting, fraud prevention, product authentication,
brand protection, supply chain management and protection.
Intellectual Property Development, Product Operations & Partnerships
We have proprietary DNA security technology, and develop security solutions that
protect corporate and intellectual property from counterfeiting, fraud, piracy
and product diversion using botanical DNA as an encrypted/code molecule that can
be embedded in inks, paper, substrates, liquids, textiles, thread, plastics,
holograms and microchips.
41
We produce security solutions customized to our customer's needs. We market and
sell DNA anti-counterfeit and fraud prevention solutions that integrate into,
and layer with, existing security solutions. These DNA security features are
integrated at the original equipment manufacturer level with ink, paper,
liquids, thread and hologram producers, who in turn sell/supply finished
security products such as primary and secondary product packaging for
pharmaceuticals, beauty products, textiles, currency, passports, ID cards, etc.
We have strict protocols for specifying, integrating, testing, shipping and
confirming the presence of DNA in any given product.
We plan to develop new product lines that will address specific new challenges
in the security marketplace, and bring these advances to target industries,
customers and countries.
Additionally, we will identify strategic partnerships and co-marketing ventures,
and licensees to work with us to develop market and sell our biotechnological
security products. This will include sub-licensing the technology to key
partners in specific sectors with an established base of customers. These
partners will be able to enhance their product lines and client services by
adding our technology to the existing security matrix in their products,
providing an enhanced solution to deter fraud and counterfeiting.
Management Strategy
We anticipate a period of rapid change as we begin commercialization of the
products now available subsequent to: (a) the signing of our licenses with
Biowell, (b) the establishment of our prototyping labs at Stony Brook, and (c)
the availability of products that have recently been commercialized in Asia by
Biowell.
We have organized our resources to manage our commercialization effectively,
optimizing the delivery of new prototypes for customers, and managing
outsourcing especially through our OEMs. Our Chief Executive Officer is
responsible for the strategic direction, coordinating with our overseas
technology partner Biowell and scientific development as well as corporate
governance and operations. Our President is responsible for business
development, including relations with US and foreign government agencies,
developing business relationships with target corporations and OEM's, and
securing revenues. Our Chief Financial Officer covers overall financial
management, financial reporting, corporate administration, investors relations.
Our marketing department develops strategic awareness of our technologies across
target industry sectors, their associated media and lobbying companies and
liaises with regulatory bodies (EPA, FDA, etc) and industry Associations (CTFA,
PHARMA, etc). Our sales department covers specific industries, such as the
pharmaceutical, packaging, ink, cosmetic and comestible sectors and acts as our
media spokesperson, clarifying for the pharmaceutical and nutraceutical
industries, allied health professionals and consumers the advantages of our
anti-counterfeit, diversion and piracy applications and products. Our Chairman
oversees the Biowell and Stony Brook DNA production Laboratories and the
development of core DNA sciences for current and future applications. Our
Strategic Technology Development Officer is principally engaged in the
productization of DNA markers for specific industry applications, and for
liaison with corresponding scientists from our principal OEM partners, e.g.,
petroleum markers, chemical markers, markers for precious stones, DNA-encrypted
inks, DNA markers for the pharmaceutical industry, etc.
Consultant & Enforcement Operations
As nations are threatened by terrorism and corporations try to prevent corporate
fraud, counterfeiting, product diversion and industrial espionage, the need for
secure anti-counterfeiting and identification systems increases. Our technology
can provide important and cost-effective support for local, state, and federal
governments as well as corporations doing business with highly sensitive
information or products susceptible to counterfeit. Our anti-counterfeiting
technology can be used for the following types of identification and important
government documents:
o Passports
o Green cards
o Visas
o Driver's licenses
o Social Security cards
o Student visas
o Military ID's
42
o Other important Identity cards and official documents
We intend to work in collaboration with Biowell and other security organizations
in order to continue to research and develop new product lines derived from, but
not limited to, DNA technology. Research and development of new product lines is
an ongoing commitment and is currently underway in the Biowell labs and will
continue in the U.S. at our new facilities being established at the Long Island
High Technology Incubator (LIHTI) at Stony Brook University in New York.
Research and development objectives include the development of a new line of
detection technologies that will provide faster and more convenient ways to
authenticate DNA, continuous effort to incorporate our DNA markers with various
products for new applications, and establishment of a leading DNA authentication
service lab. We believe that we will obtain commercial revenues for these
efforts within 12-24 months, although no assurances can be given that we will
ever generate revenues. Our prototyping laboratory will customize
"off-the-shelf" products for new customers on a case-by-case basis. These new
products are typically newly configured labels, inks or packing elements. We
have identified several options for remote detection and faster detection
methodologies.
We will consult with our clients on a total security service offering; how to
protect their brands, intellectual property, products and physical security
access and how to reduce risk exposure, product liability exposure and product
recall liabilities. We plan to offer worldwide DNA analysis services supporting
the authentication of products and the detection, interdiction, deterrence and
prosecution of counterfeiters and related crimes, through our subcontractors,
sub-licensees and security industry collaborative partners.
International Sub-License Operations
Developing Technology - We have an in-depth understanding of DNA microchip
design and applications. We will jointly develop DNA-holograms and
DNA-Hologram-RFID devices, DNA-inks, DNA-dyes and DNA-security labels with
leading original equipment manufacturers in these specialist fields.
We will utilize our existing relationships and develop new ones to introduce our
anti-counterfeiting technology to generate business. Each industry has unique
requirements and needs for their anti-counterfeit solutions, and we believe our
DNA technology will provide maximum security technologies. For example, our
smart packaging solutions with DNA security markers in ink, paper and holograms
has widespread application in packaging for pharmaceuticals, cosmetics,
automotive markets, passports, ID's and currency. Our proprietary technology
offers immediate and affordable detection and security for their brands and
products.
Strong Technology Alliances - Our technology can also provide advanced security
dimensions to:
o Electronics security: access and physical/plant security
(biometric security cards enhanced with DNA)
o Security Holograms (DNA enhanced)
o Radio Frequency Identification systems (DNA + RFID)
o Security papers and printing
o Holograms (DNA holograms)
o Other security-related products and systems
Law Enforcement Expertise - The resources of our collaborative partners in the
security industry include former federal law enforcement, security, and
intelligence officers who provide the company with extensive contacts and
hands-on experience in:
o Intellectual property investigation
o Counter-intelligence
o Personal security services
o Anti-counterfeit technologies
o Secure communications and data management
43
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements; we believe the following
critical accounting policies involve the most complex, difficult and subjective
estimates and judgments:
o stock-based compensation
o fair value of intangible assets
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 -
Accounting for Stock-Based Compensation, providing alternative methods of
voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2003.
We elected to continue to account for stock-based compensation plans using the
intrinsic value-based method of accounting prescribed by APB No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Under the
provisions of APB No. 25, compensation expense is measured at the grant date for
the difference between the fair value of the stock and the exercise price.
From its inception, the Company has incurred significant costs in connection
with the issuance of equity- based compensation, which is comprised primarily of
our common stock and warrants to acquire our common stock, to non-employees. The
Company anticipates continuing to incur such costs in order to conserve its
limited financial resources. The determination of the volatility, expected term
and other assumptions used to determine the fair value of equity based
compensation issued to non-employees under SFAS 123 involves subjective judgment
and the consideration of a variety of factors, including our historical stock
price, option exercise activity to date and the review of assumptions used by
comparable enterprises.
We account for equity based compensation, issued to non-employees in exchange
for goods or services , in accordance with the provisions of SFAS No. 123 and
EITF No. 96-18, "Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services".
Fair Value of Intangible Assets
We have adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby we
periodically test our intangible assets for impairment. On an annual basis, and
when there is reason to suspect that their values have been diminished or
impaired, these assets are tested for impairment, and write-downs will be
included in results from operations.
On July 12, 2005, we acquired certain intellectual properties from Biowell
through an Asset Purchase Agreement in exchange for 36 million shares of our
restricted common stock having an aggregate fair value at the date of issuance
of $24,120,000. The value of the acquired intangible assets was $9,430,900, with
the balance of the purchase price, or $14,689,100, charged to operations as a
cost of the transaction.
44
Revenues
From our inception on September 16, 2002, we have not generated revenues from
operations. We believe we will begin generating revenues from operations in the
fiscal year as we transition from a development stage enterprise to that of an
active growth stage company, although no assurances can be given that we will
generate any revenues from operations.
Costs and Expenses
Selling, general and administrative expenses for the three months ended December
31, 2005 compared to December 31, 2004 decreased $3.531 million or 66% to $1.844
million from $5.375 million in the prior period. For the three months ended
December 31, 2005, we incurred lower fund raising and consultant costs, $465,000
lower royalties and $50,000 in lower travel costs as compared to the same period
ended December 31, 2004. Offsetting the decreases was $1.461 million in higher
costs such as $774,000 in accrued penalty shares pursuant to the pending SB-2
registration and $687,000 in relocation, restructuring charges and other items.
Research and development expenses decreased $22,000 for the three months ended
December 31, 2005 compared to the same period in 2004 from $38,000 to $16,000
primarily due to lower development and testing costs.
In the three month period ended December 31, 2005, depreciation and amortization
increased $338,000 for the period compared to the same period in 2004 from
$5,000 to $343,000. In the year ended September 30, 2005, the Company
capitalized $9.431 million related to an intellectual property asset
acquisition. As a result, the Company recorded amortization expense totaling
$336,000 for the quarter ended December 31, 2005 compared to no intangible asset
amortization in the three months ended December 31, 2004. The Company estimates
a seven year useful life that commenced during the fourth fiscal quarter of
2005.
Other Income/Loss
The Company realized a gain on revaluation of warrant liability of $6.789
million, which represents an increase of $6.789 million from zero for the three
month period ended December 31, 2005 and 2004, respectively.
Total operating expenses decreased to $2.203 million from $5.380 million, or a
decrease of $3.177 million as a result of the combination of factors listed
above.
Interest expense, for the three months ended December 31, 2005 increased to
$1.779 million from $1.568 million in the same period of 2004, an increase of
$211,097. In the three months ended December 2004, the Company expensed $1.515
million in beneficial conversion feature related to the sale of convertible debt
and attached warrants in the year ended December 31, 2005. In the three month
period ended December 31, 2005, we charged $1.465 million to interest expense
related to the excess of mark to market compared to beneficial conversion
feature and zero to the three months ended December 31, 2004.
As a result of the revaluation our warrant liability, our net profit for the
three months ended December 31, 2005 increased to $2.819 million from a loss of
$6.947 million in the prior period as a result of the combination of factors
described above.
Liquidity and Capital Resources
Our liquidity needs originate from working capital requirements, indebtedness
payments and research and development expenditure funding. Historically, we have
financed our operations through the sale of equity and convertible debt as well
as borrowings from various credit sources.
In November, 2005, we issued and sold a promissory note in principal amount of
$550,000. We issued warrants to purchase a total of 5,500,000 shares of our
common stock at an exercise price of $0.50 per share to certain persons
designated by International Allied Fund, and paid $55,000 in cash to VC Arjent
for its services as the placement agent for this placement.
45
As of December 31, 2005, we had a working capital deficit of $4,690,733 as a
result of our operating losses from our inception through December 31, 2005. We
generated a cash flow deficit of $13,134,454 from operating activities from our
inception on September 16, 2002 through December 31, 2005. Cash flows used in
investing activities was $56,004 during this period. We met our cash
requirements during this period through the receipt of $13,354,984 in the form
of private placement of our common stock, the issuance of convertible notes (net
of repayments and costs), and advances from the Company's officers, principal
shareholders and third parties.
We expect capital expenditures to be less than $500,000 fiscal 2006. Our primary
investments will be in laboratory equipment to support prototyping and our
authentication services.
Exploitation of potential revenue sources will be financed primarily through the
sale of securities and convertible debt, exercise of outstanding warrants,
issuance of notes payable and other debt or a combination thereof, depending
upon the transaction size, market conditions and other factors.
While we have raised capital to meet our working capital and financing needs in
the past, additional financing is required within the next 12 months in order to
meet our current and projected cash flow deficits from operations and
development. We have sufficient funds to conduct our operations for several
months, but not for 12 months or more. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.
By adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial condition.
Our registered independent certified public accountants have stated in their
report dated October 21, 2005, that we have incurred operating losses in the
last two years, and that we are dependent upon management's ability to develop
profitable operations. These factors among others may raise substantial doubt
about our ability to continue as a going concern.
We will still need additional investments in order to continue operations to
cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations.
Potential Liability Resulting From Issuance and Resale of Stock
During the months of July and August 2005, the Company issued a total of
8,550,000 shares (the "Shares") of its common stock to nine employees and
consultants. These shares were not registered under the Securities Act of 1933,
as amended ("Securities Act"), or the securities laws of any state. Further, the
Shares were issued without a restrictive legend prohibiting their resale except
in compliance with the Securities Act. The Company believes that certain of the
Shares were subsequently sold on the open market but has been unable to
determine the magnitude of the sales. The Company is currently investigating the
circumstances surrounding the issuance of the Shares and the possible subsequent
resale of certain of the Shares on the open market and the possibility of
violations of securities laws.
The above described actions may lead to civil lawsuits and governmental actions
against the Company for violations of federal securities laws. The Company is
unable to predict the extent, if any, of its ultimate liability if such actions
were brought. The costs and other effects of any governmental investigations and
proceedings, litigation, claims and damages, and settlements and judgments in
this matter could have a material adverse effect on the Company's
46
financial condition and operating results. The Company is taking actions to
insure its compliance with securities laws.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Product Research and Development
As a result of the recent financings, the Company anticipates expending $500,000
of available cash towards research and development activities during the next
twelve (12) months.
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the sale of any material property, plant or equipment
during the next 12 months. We do not anticipate the acquisition of any material
property, plant or equipment during the next 12 months.
Number of Employees
From our inception through the period ended December 31, 2005, we have mainly
relied on the services of outside consultants for services. We currently have
eight employees. In order for us to attract and retain quality personnel, we
anticipate we will have to offer competitive salaries to future employees. We
anticipate that it may become desirable to add additional full and or part time
employees to discharge certain critical functions during the next 12 months.
This projected increase in personnel is dependent upon our ability to generate
revenues and obtain sources of financing. There is no guarantee that we will be
successful in raising the funds required or generating revenues sufficient to
fund the projected increase in the number of employees. As we continue to
expand, we will incur additional cost for personnel.
Going Concern
The financial statements included in this filing have been prepared in
conformity with generally accepted accounting principles that contemplate the
continuance of the Company as a going concern. The Company's cash position may
be inadequate to pay all of the costs associated with testing, production and
marketing of products. Management intends to use borrowings and security sales
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
47
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 $67,109,519 for the year ended September 30, 2005. For
the three months ended December 31, 2005, we recorded a net income of
$2,819,451. We cannot assure you that we can achieve or sustain profitability on
a quarterly or annual basis in the future. Our operations are subject to the
risks and competition inherent in the establishment of a business enterprise.
There can be no assurance that future operations will be profitable. Revenues
and profits, if any, will depend upon various factors, including whether we will
be able to generate revenue. As a result of continuing losses, we may exhaust
all of our resources prior to completing the development of our products.
Additionally, as we continue to incur losses, our accumulated deficit will
continue to increase, which might make it harder for us to obtain financing in
the future. We may not achieve our business objectives and the failure to
achieve such goals would have an adverse impact on us, which could result in
reducing or terminating our operations.
If We Are Unable to Obtain Additional Funding Our Business Operations Will be
Harmed and If We Do Obtain Additional Financing Our Then Existing Shareholders
May Suffer Substantial Dilution.
We will require additional funds to sustain and expand our research and
development activities. We anticipate that we will require up to approximately
$500,000 to fund our anticipated research and development operations for the
next twelve months, depending on revenue from operations. Additional capital
will be required to effectively support the operations and to otherwise
implement our overall business strategy. Even if we do receive additional
financing, it may not be sufficient to sustain or expand our research and
development operations or continue our business operations.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our research and development plans. Any
additional equity financing may involve substantial dilution to our then
existing shareholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated October 21, 2005, our independent auditors stated that our
financial statements for the year ended September 30, 2005 were prepared
assuming that we would continue as a going concern. Our ability to continue as a
going concern is an issue raised due to our incurring net losses of $87,924,553
during the period September 16, 2002 (date of inception) through September 30,
2005. We continue to experience net operating losses. Our ability to continue as
a going concern is subject to our ability to generate a profit and/or obtain
necessary funding from outside sources, including obtaining additional funding
from the sale of our securities, generating sales or obtaining loans and grants
from various financial institutions where possible. Our continued net operating
losses increase 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
48
materially and adversely affect our business operations, which would result
in loss of revenues and greater operating expenses.
Our Acquired Technology Has Yet to be Independently Validated
In July 2005, we acquired certain intellectual property. Such intellectual
property relating to the botanical DNA, encapsulation methods, integrity of the
technology and all other stated claims by the seller need to be independently
validated by a third party. Satisfactory completion of this independent
validation will be required prior to their being available for commercial sale.
In the event that some or all of the technology cannot be independently
validated, we will be unable to commercially develop products utilizing such
technology, which could have a materially adverse effect on our business and
results of operations.
Failure to License New Technologies Could Impair Our New Product Development.
To generate broad product lines, it is advantageous to sometimes license
technologies from third parties rather than depend exclusively on our own
employees. As a result, we believe our ability to license new technologies from
third parties is and will continue to be important to our ability to offer new
products.
In addition, from time to time we are notified or become aware of patents held
by third parties that are related to technologies we are selling or may sell in
the future. After a review of these patents, we may decide to seek a license for
these technologies from these third parties or discontinue our products. There
can be no assurance that we will be able to continue to successfully identify
new technologies developed by others. Even if we are able to identify new
technologies of interest, we may not be able to negotiate a license on favorable
terms, or at all. If we lose the rights to patented technology, we may need to
discontinue selling certain products or redesign our products, and we may lose a
competitive advantage. Potential competitors could license technologies that we
fail to license and potentially erode our market share for certain products. Our
licenses typically subject us to various commercializations, sublicensing,
minimum payment, and other obligations. If we fail to comply with these
requirements, we could lose important rights under a license. In addition,
certain rights granted under the license could be lost for reasons beyond our
control. We may not receive significant indemnification from a licensor against
third party claims of intellectual property infringement.
We Currently Have no or Limited Manufacturing, Sales, Marketing or Distribution
Capabilities.
We currently have no in-house manufacturing capability. We rely on third-party
vendors for this service. We do not currently have any arrangements with any
distributors and we may not be able to enter into arrangements with qualified
distributors on acceptable terms or at all. We currently have a limited sales
and marketing team. If we are not able to develop greater sales, marketing or
distribution capacity, we may not be able to generate revenue or sufficient
revenue to support our operations.
If We Fail to Introduce New Products, or Our existing Products are not Accepted
by Potential Customers, We May Not Gain or May Lose Market Share.
Rapid technological changes and frequent new product introductions are typical
for the markets we serve. Our future success will depend in part on continuous,
timely development and introduction of new products that address evolving market
requirements. We believe successful new product introductions provide a
significant competitive advantage because customers invest their time in
selecting and learning to use new products, and are often reluctant to switch
products. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
We may experience delays in the development and introduction of products. We
cannot assure that we will keep pace with the rapid rate of change in life
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;
49
o The timing of introduction of the product relative to
competitive products;
o Customers' opinions of the products' utility;
o Ease of use;
o Consistency with prior practices;
o Scientists' opinions of the products' usefulness;
o Citation of the product in published research; and
o General trends in life sciences research.
We have not experienced any difficulties with the preceding factors, however,
there can be no assurance that we will not experience difficulties in the
future. The expenses or losses associated with unsuccessful product development
or lack of market acceptance of our new products could materially adversely
affect our business, operating results and financial condition.
A Manufacturer's Inability to Produce Our Goods on Time and to Our
Specifications Could Result in Lost Revenue and Net Losses
We do not own or operate any manufacturing facilities and therefore depend upon
independent third parties for the manufacture of all of our products. Our
products are manufactured to our specifications. The inability of a manufacturer
to ship orders of our products in a timely manner or to meet our quality
standards could cause us to miss the delivery date requirements of our customers
for those items, which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could have a material
adverse effect as our revenues would decrease and we would incur net losses as a
result of sales of the product, if any sales could be made. Because of our
business, the dates on which customers need and require shipments of our
security products from us are critical.
If We Need to Replace Manufacturers, Our Expenses Could Increase Resulting in
Smaller Profit Margins
We compete with other companies for the production capacity of our manufacturers
and import quota capacity. Some of these competitors have greater financial and
other resources than we have, and thus may have an advantage in the competition
for production and import quota capacity. If we experience a significant
increase in demand, or if an existing manufacturer of ours must be replaced, we
may have to expand our third-party manufacturing capacity. We cannot assure you
that this additional capacity will be available when required on terms that are
acceptable to us or similar to existing terms which we have with our
manufacturers, either from a production standpoint or a financial standpoint. We
do not have long-term contracts with any manufacturer. None of the manufacturers
we use produces our products exclusively.
Should we be forced to replace one or more of our manufacturers, we may
experience an adverse financial impact, or an adverse operational impact, such
as being forced to pay increased costs for such replacement manufacturing or
delays upon distribution and delivery of our products to our customers, which
could cause us to lose customers or lose revenues because of late shipments.
If a Manufacturer of Ours Fails to Use Acceptable Labor Practices, We
Might Have Delays in Shipments or Face Joint Liability for Violations, Resulting
in Decreased Revenue and Increased Expenses
While we require our independent manufacturers to operate in compliance with
applicable laws and regulations, we have no control over the ultimate 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.
50
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.
o
Our future growth may be attributable to acquisitions of and new product lines
and new businesses. We expect that future acquisitions, if successfully
consummated, will create increased working capital requirements, which will
likely precede by several months any material contribution of an acquisition to
our net income.
Our failure to manage growth or future acquisitions successfully could seriously
harm our operating results. Also, acquisition costs could cause our quarterly
operating results to vary significantly. Furthermore, our stockholders would be
diluted if we financed the acquisitions by incurring convertible debt or issuing
securities.
Although we currently only have operations within the United States, if we were
to acquire an international operation; we will face additional risks, including:
o difficulties in staffing, managing and integrating international
o operations due to language, cultural or other differences;
o Different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
If We Are Unable to Retain the Services of Messrs. Sheu, Hayward or Liang, or If
We Are Unable to Successfully Recruit Qualified Managerial and Sales Personnel
Having Experience in Business, We May Not Be Able to Continue Our Operations.
Our success depends to a significant extent upon the continued service of Mr.
Jun-Jei Sheu, our Chairman of the Board of Directors, Dr. James Hayward, our
Chief Executive, Dr. Benjamin Liang, our Secretary and Strategic Technology
Development Officer. We do not have employment agreements with Drs. Sheu,
Hayward or Liang Loss of the services of Drs. Sheu, Hayward or Liang could have
a material adverse effect on our growth, revenues, and prospective business. We
do not maintain key-man insurance on the life of Drs. Sheu, Hayward or Liang We
are not aware of any other named executive officer or director who has plans to
leave us or retire. In addition, in order to successfully implement and manage
our business plan, we will be dependent upon, among other things, successfully
recruiting qualified managerial and sales personnel having experience in
business. Competition for qualified individuals is intense. There can be no
assurance that we will be able to find, attract and retain existing employees or
that we will be able to find, attract and retain qualified personnel on
acceptable terms.
Failure to Attract and Retain Qualified Scientific or Production Personnel Could
Have a Material Adverse Effect On Us.
Recruiting and retaining qualified scientific and production personnel to
perform research and development work and product manufacturing 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
51
eliminated, resulting in fewer or no products for sale and lower revenues. We
generally do not enter into employment agreements requiring these employees to
continue in our employment for any period of time.
We Need to Expand Our Sales and Support Organizations to Increase Market
Acceptance of Our Products.
We currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
existing customers. The employment market for sales personnel, and customer
service and support personnel in this industry is very competitive, and we may
not be able to hire the kind and number of sales personnel, customer service and
support personnel we are targeting. Our inability to hire qualified sales,
customer service and support personnel may materially adversely affect our
business, operating results and financial condition.
The Biomedical Research Products Industry is Very competitive, and we may be
Unable to Continue to Compete Effectively in this Industry in the Future.
We are engaged in a segment of the biomedical research products industry that is
highly competitive. We compete with many other suppliers and new competitors
continue to enter the market. Many of our competitors, both in the United States
and elsewhere, are major pharmaceutical, chemical and biotechnology companies,
and many of them have substantially greater capital resources, marketing
experience, research and development staff, and facilities than we do. Any of
these companies could succeed in developing products that are more effective
than the products that we have or may develop and may be more successful than us
in producing and marketing their products. It is impossible to quantify the
number of competitors since they include both the companies we attempt to sell
our products and services to through their use of internal security and various
other security product companies. Some of the anti-counterfeiting and fraud
protection competitors that we are aware of include: Authentix, InkSure, DNA
Technologies, Inc., Art Guard International, Theft Protection Systems, Tracetag
and November AG. Although it is impossible to determine the total market size
and market data information because companies are secretive about what security
methods they utilize and how much they spend on such measures, we have
determined that annual sales by some of our competitors have been as follows:
Inksure - $1.0 million
DNA Technologies, Inc. - $22.6 million
November AG - $5.8 million
We expect this competition to continue and intensify in the future. Competition
in our markets is primarily driven by:
o Product performance, features and liability;
o Price;
o Timing of product introductions;
o Ability to develop, maintain and protect proprietary
products and technologies;
o Sales and distribution capabilities;
o Technical support and service;
o Brand loyalty;
o Applications support; and
o Breadth of product line.
o
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
52
conflict with various third parties who acquire or claim ownership rights in
certain trademarks. We cannot assure that the actions we have taken to establish
and protect these trademarks and other proprietary rights will be adequate
to prevent imitation of our products by others or to prevent others from seeking
to block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent, as do the laws of the United States.
Intellectual Property Litigation Could Harm Our Business.
Litigation regarding patents and other intellectual property rights is extensive
in the biotechnology industry. In the event of an intellectual property dispute,
we may be forced to litigate. This litigation could involve proceedings
instituted by the U.S. Patent and Trademark Office or the International Trade
Commission, as well as proceedings brought directly by affected third parties.
Intellectual property litigation can be extremely expensive, and these expenses,
as well as the consequences should we not prevail, could seriously harm our
business.
If a third party claims an intellectual property right to technology we use, we
might need to discontinue an important product or product line, alter our
products and processes, pay license fees or cease our affected business
activities. Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all. We are currently not aware of any intellectual property rights
that are being infringed nor have we received notice from a third party that we
may be infringing on any of their patents.
Furthermore, a third party may claim that we are using inventions covered by the
third party's patent rights and may go to court to stop us from engaging in our
normal operations and activities, including making or selling our product
candidates. These lawsuits are costly and could affect our results of operations
and divert the attention of managerial and technical personnel. There is a risk
that a court would decide that we are infringing the third party's patents and
would order us to stop the activities covered by the patents. In addition, there
is a risk that a court will order us to pay the other party damages for having
violated the other party's patents. The biotechnology industry has produced a
proliferation of patents, and it is not always clear to industry participants,
including us, which patents cover various types of products or methods of use.
The coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent infringement, we
would need to demonstrate that our products or methods of use either do not
infringe the patent claims of the relevant patent and/or that the patent claims
are invalid, and we may not be able to do this. Proving invalidity, in
particular, is difficult since it requires a showing of clear and convincing
evidence to overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in the United States may be maintained in
secrecy until the patents are issued, because patent applications in the United
States and many foreign jurisdictions are typically not published until eighteen
months after filing, and because publications in the scientific literature often
lag behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our licensors' issued patents or
our pending applications or our licensors' pending applications or that we or
our licensors were the first to invent the technology. Our competitors may have
filed, and may in the future file, patent applications covering technology
similar to ours. Any such patent application may have priority over our or our
licensors' patent applications and could further require us to obtain rights to
issued patents covering such technologies. If another party has filed a United
States patent application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the United States Patent
and Trademark Office to determine priority of invention in the United States.
The costs of these proceedings could be substantial, and it is possible that
such efforts would be unsuccessful, resulting in a loss of our United States
patent position with respect to such inventions.
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.
53
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.
We are Obligated to Pay Liquidated Damages As a Result of Our Failure to Have a
Registration Statement Declared Effective Prior to July 15, 2005, and the
Payment of Liquidated Damages Will Either Result in Depleting Our Working
Capital or Issuance of Shares of Common Stock Which Would Cause Dilution to Our
Existing Shareholders.
Pursuant to the terms of our private placement that closed in January and
February 2005, if we did not have a registration statement registering the
shares underlying the convertible notes and warrants declared effective on or
before July 15, 2005, we are obligated to pay liquidated damages in the amount
of 3.5% per month of the face amount of the notes, which equals $257,985, until
the registration statement is declared effective. At our option, these
liquidated damages can be paid in cash or restricted shares of our common stock.
We have currently decided to pay the liquidated damages due at this point in
common stock, although any future payments of liquidated damages could be made
in cash. If we decide to pay the liquidated damages in cash, we would be
required to use our limited working capital and potentially raise additional
funds. If we decide to pay the liquidated damages in shares of common stock, the
number of shares issued would depend on our stock price at the time that payment
is due. Based on closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and
$0.20 for our common stock on July 15, 2005, August 15, 2005, September 15,
2005, October 17, 2005, November 15, 2005 and December 15, 2005, respectively,
we issued approximately 390,887, 444,802, 368,550, 526,500, 806,204 and
1,289,927 shares of common stock per month, respectively, in liquidated damages.
The issuance of shares upon payment of liquidated damages will have the effect
of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
There Are a Large Number of Shares Underlying Our Warrants That May be Available
for Future Sale and the Sale of These Shares May Depress the Market Price of Our
Common Stock and Will Cause Immediate and Substantial Dilution to Our Existing
Stockholders.
As of February 14, 2006, we had 114,772,385 shares of common stock issued and
outstanding and outstanding options and warrants to purchase 42,369,464 shares
of common stock. All of the shares issuable upon exercise of our warrants may be
sold without restriction. The sale of these shares may adversely affect the
market price of our common stock. The issuance of shares upon exercise of
warrants will cause immediate and substantial dilution to the interests of other
stockholders since the selling stockholders may convert and sell the full amount
issuable on exercise.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities
54
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 h as 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 o the transaction, setting forth the
identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made
the suitability determination; and
o that the broker or dealer received a signed, written
agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
The issuance and resale of certain shares of common stock may lead to civil
lawsuits and governmental actions against the Company.
During the months of July and August 2005, the Company issued a total of
8,250,000 shares (the "Shares") of its common stock to nine employees and
consultants. These shares were not registered under the Securities Act of 1933,
as amended ("Securities Act"), or the securities laws of any state. Further, the
Shares were issued without a restrictive legend prohibiting their resale except
in compliance with the Securities Act. The Company believes that certain of the
Shares were subsequently sold on the open market but has been unable to
determine the magnitude of the sales. The Company is currently investigating the
circumstances surrounding the issuance of the Shares and the possible subsequent
resale of certain of the Shares on the open market and the possibility of
violations of securities laws.
55
The above described actions may lead to civil lawsuits and governmental actions
against the Company for violations of federal securities laws. The Company is
unable to predict the extent, if any, of its ultimate liability if such actions
were brought. The costs and other effects of any governmental investigations and
proceedings, litigation, claims and damages, and settlements and judgments in
this matter could have a material adverse effect on the Company's financial
condition and operating results. The Company is taking actions to insure its
compliance with securities laws.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: As of December 31, 2005, our
management carried out an evaluation, under the supervision of our Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design
and operation of our system of disclosure controls and procedures pursuant to
the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange
Act). Based on that evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures are not effective
to provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is not
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure. Please see the subsection "Significant
Deficiencies In Disclosure Controls And Procedures Or Internal Controls" below.
Changes in internal controls: Except as described below, there were no changes
in internal controls over financial reporting that occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially effect, our internal control over financial reporting. As
described below, as a result of our evaluation of our disclosure controls and
procedures as of December 31, 2005, we determined that our controls and
procedures are not effective and subsequent to the period of this report, began
to implement changes to our internal controls.
Significant Deficiencies In Disclosure Controls And Procedures Or Internal
Controls
As previously reported, on July 11, 2005, we determined there were errors in
accounting for the valuation of equity consulting service transactions during
the January through March 2005 time period. The valuation resulted in the
overstatement of approximately $2.9 million in services provided. The errors
were discovered in connection with a comment raised by the Securities and
Exchange Commission ("SEC") in their review and comment on our registration
statement on Form SB-2. The SEC requested that we provided additional disclosure
regarding issuances of common stock to non-employees in exchange for services.
Upon reviewing and updating our disclosure, we discovered our errors. During the
quarter ended December 31, 2005, we implemented the following changes in our
internal controls to resolve these weaknesses and deficiencies:
1) Establish and maintain a separate binder of all board authorized
activities and a binder with forward looking "budget" of anticipated or
contemplated activity for each of the following:
a) shares issued for services;
b) shares issued for employees;
c) warrant exercises;
d) option exercises;
e) authorized shares and warrant re-pricing;
f) shares issued in exchange for debt; and
g) upcoming ESOP grants and exercises;
2) Require the signature of the principal executive and accounting officers for
all issuances of securities;
3) Require monthly review of share issuances compared to binders; and
56
4) Authorize our transfer agent to handle and track all warrants and ESOP
grants.
We believe that these actions will correct the material deficiencies and
significant weaknesses in our controls and procedures.
In addition to the foregoing, as disclosed elsewhere in this Quarterly Report,
during the months of July and August 2005, we issued a total of 8,250,000 shares
(the "Shares") of our common stock to certain employees and consultants that
were not registered under the Securities Act of 1933, as amended ("Securities
Act"), or the securities laws of any state. Further, the Shares were issued
without a restrictive legend prohibiting their resale except in compliance with
the Securities Act. In addition, we did not previously disclose that these
issuances were unregistered in accordance with the provisions of the Securities
Exchange Act of 1934, as amended.
We are currently investigating the circumstances surrounding the issuance of the
Shares and the possible subsequent resale of certain of the Shares on the open
market and the possibility of violations of securities laws. Since the date of
the issuance of the Shares, we have hired a new Chief Executive Officer and we
are currently searching for a new Chief Financial Officer. We believe that the
retention of these new persons, together with the actions being taken in
response to the accounting errors reported above, should be sufficient to insure
that future issuances of securities are made in compliance with securities laws
and are properly reported.
57
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
described below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
Stern & Co. v. Applied DNA Sciences, Inc., Case No.: 05 CV 00202
Plaintiff Stern & Co. commenced this action against us in the United States
District Court for the Southern District of New York on or about January 10,
2005. In this action, Stern & Co. alleges that it entered into a contract with
us to perform media and investor relations for a monthly fee of $5,000 and stock
options. Stern & Co. claims that we failed to make certain payments pursuant to
the contract and seeks damages in the amount of $96,042.00. In January 2006, we
settled the action by issuing options to purchase 100,000 shares of our common
stock, exercisable for a period of three years after issuance at an exercise
price of $0.70 per share.
Oceanic Consulting, S.A. v. Applied DNA Sciences, Inc., Index No.: 603974/04
Plaintiff Oceanic Consulting, S.A. commenced this action against us in the
Supreme Court of the State of New York, County of New York. Oceanic Consulting,
S.A. asserts a cause of action for breach of contract based upon the allegation
that we failed to make payments pursuant to a consulting agreement. Oceanic
Consulting, S.A. also asserts a causes of action in which it seeks reimbursement
of its expenses and attorneys' fees. Oceanic Consulting, S.A. seeks damages
in the amount of $137,500.00. Oceanic Consulting, S.A. moved for a default
judgment, which we have opposed based upon Oceanic Consulting, S.A.'s failure
to properly serve the complaint as well as our meritorious defenses. Thereafter,
Oceanic Consulting, S.A. agreed to withdraw its motion for a default judgment
and accepted service of our answer on May 23, 2005. We dispute the allegations
of the complaint. This action is in the early stages of discovery and we intend
to vigorously defend this matter.
Crystal Research Associates, LLC v. Applied DNA Sciences, Inc., Docket No.:
L-7947-04
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us in the Superior Court of New Jersey, Middlesex County. We intend to
move to vacate the default judgment on various grounds. We dispute the
allegations of the complaint and we intend to vigorously defend this matter.
Paul Reep v. Applied DNA Sciences, Inc., Case No. BC 345702
Plaintiff, Paul Reep, a former employee, filed this action against Applied DNA
Sciences, Inc. in the Superior Court of Los Angeles, Los Angeles County,
California, on January 10, 2006. The complaint asserts eight causes of action,
including breach of contract, negligent misrepresentation, fraud, interference
with economic advantage and defamation. The relief sought includes monetary
damages and attorneys' fees. The Company intends to vigorously defend this
matter.
James Paul Brown v. Applied DNA Case No. BC 3457814
Plaintiff, James Paul Brown filed this action against Applied DNA Sciences, Inc.
in the Superior Court of Los Angeles, Los Angeles County, California on January
12, 2006. The complaint asserts a single cause of action for breach of an
alleged oral consulting agreement. The relief sought includes monetary damages
and attorneys' fees. The parties have reached a settlement in principle, which
the Company expects to execute shortly.
58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In December, 2005, we issued 40,000 shares of common stock subscribed for
$200,000. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
In December 2005, we issued 505,854 penalty shares pursuant to the pending SB-2
registration statement. In connection with the 7,371,000 million convertible
debt financing in the quarter ended March 30, 2005, we were obligated to have an
effective resale registration statement by July 2005. Since the registration
statement was not effective by July 2005, we paid the required $257,985 of
liquidated damages in shares of our common stock accruing at the rate of 3.5%
per month on the face value of the outstanding notes for the month of September
2005. The Company valued the shares issued at approximately $0.51 per share for
a total of $257,985.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
10.1 Promissory Note dated November 3, 2005, between Applied DNA Sciences
Inc. and Allied International Fund, filed as an exhibit to the
quarterly report on Form 10-QSB filed with the Securities and Exchange
Commission on February 21, 2006 and incorporated herein by reference.
10.2 Letter dated February 3, 2006 amending Promissory Note dated November
3, 2005, between Applied DNA Sciences Inc. and Allied International
Fund, filed as an exhibit to the quarterly report on Form 10-QSB filed
with the Securities and Exchange Commission on February 21, 2006 and
incorporated herein by reference.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and
Rule 15d-14(a), promulgated under the Securities and Exchange Act of
1934, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and
Rule 15d 14(a), promulgated under the Securities and Exchange Act of
1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 3 to Form 10-QSB/A to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLIED DNA SCIENCES, INC.
Date: October 10, 2006 By: /s/ Dr. James Hayward
---------------------
Chief Executive Officer
Principal Executive Officer,
Principal Financial Officer
and Principal Accounting Officer).
60