UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-QSB
Quarterly Report Pursuant to Section 13 Or 15(D) Of The Securities Act Of 1934
For the quarterly period ended March 31, 2003
Commission file number: 002 90 539
APPLIED DNA SCIENCES, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 59-2262718
(State or other jurisdiction of (IRS Employee
incorporation or organization) Identification No.)
9229 West Sunset Boulevard, Suite 830, Los Angeles, CA 90069
(Address of principal executive offices)
(310) 860-1362
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 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
------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.50 par value 20,902,602
(Class) (Outstanding as of March 31, 2004
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
ITEM 1. Financial Statements
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004
(Unaudited)
ASSETS
Current assets:
Cash and Equivalents $ 198,207
---------------
Total Current Assets 198,207
Property, Plant and Equipment - net 28,804
Other Assets:
Deposits and Prepaid Expenses 23,559
Patent Filing 26,796
---------------
Total Other Assets 50,355
Total Assets $ 277,366
===============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Liabilities
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 428,864
Accrued Liabilities Due Related Parties 117,333
Convertible Notes Payable 661,111
Due to Related Parties 109,943
---------------
Total Current Liabilities 1,317,251
Long Term Liabilities:
Note Payable 88,530
---------------
Commitments and Contingencies -
Deficiency in Stockholders' Equity:
Preferred Stock, par value $.0001 per share; 10,000,000 shares authorized; none
issued at March 31, 2004 and September 30, 2003. -
Common Stock, par value $.50 per share; 100,000,000 shares authorized;
20,902,602 shares and 17,811,082 shares issued and outstanding at March 31,
2004 and September 30, 2003, respectively. 10,451,305
Common Stock Subscription (2,250)
Additional Paid-In-Capital 1,858,436
Deficit Accumulated During Development
Stage (13,435,906)
---------------
(1,128,415)
Total Liabilities and Deficiency in Stockholders' Equity $ 277,366
===============
(See accompanying notes to unaudited condensed consolidated
financial statements)
3
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(Unaudited)
For the Period,
September 16, 2002,
For The Three Months Ended For The Six Months Ended (Date of Inception)
March 31, March 31, March 31, 2004 through
2004 2003 2004 2003 March 31, 2004
------------- ----------- -------------- ------------ ---------------
Revenues: $ - $ - $ - $ - $ -
Cost of goods sold - - - - -
Operating expenses:
Selling, general and administrative 1,909,150 432,984 9,316,900 597,016 12,796,876
Depreciation and amortization 351 - 703 - 702
------------- ----------- -------------- ------------ ---------------
Total operating expenses 1,909,501 432,984 9,317,603 597,016 12,797,578
Loss from Operations (1,909,501) (432,984) (9,317,603) (597,016) (12,797,578)
Other Income (expense) 700 - 1,385 - 26,385
Interest (expense) (527,838) - (662,912) - (664,713)
Income taxes - - - - -
-- -- -- -- -
-
Net loss $ (2,436,638) $ (432,984) $ (9,979,130) $ (597,016) $ (13,435,906)
============= =========== ============= =========== ===============
Loss per common share
(basic and assuming dilution) $ (0.12) $ (0.02) $ (0.51) $ (0.04)
============= =========== ============= ===========
Weighted average shares outstanding 20,700,599 18,939,741 19,575,190 14,621,627
============= =========== ============= ===========
(See accompanying notes to unaudited condensed consolidated
financial statements)
4
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF DEFICIENCY IN STOCKHOLDERS'
EQUITY For the period September 16, 2002 (Date of Inception)
through March 31, 2004
(Unaudited)
Deficit
Deficit
Accumulated
Additional Stock Stock During
Common Common Stock Paid-In Subscription Subscription Development
Shares Amount Capital Payable Receivable Stage Total
-----------------------------------------------------------------------------------------
Issuance of common stock to Founders
in exchange for services on
September 16, 2002 at $0.01 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 1,000 - - - - 1,000
Cancellation of Common Stock in connection
with merger with ProHealth Medical
Technologies, Inc., on October 21, 2002. (100,000) - (1,000) - - - (1,000)
Issuance of Common Stock in exchange for
services in October 2002 at
$0.065 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) (76) (54,264) - 54,340 - -
Issuance of Common Stock in exchange for
licensing services valued at $0.065 per
share in January 2003 1,500,000 150 97,350 - - - 97,500
Issuance of Common Stock in exchange for
consulting services valued at $0.13 per
share in January 2003. 586,250 58 76,155 - - - 76,213
Issuance of Common Stock in exchange for
consulting services at $0.065 per share
in February 2003. 9,000 1 584 - - - 585
Issuance of Common Stock to Founders in
exchange for services valued at $0.0001
per share in March 2003. 10,140,000 1,014 - - - - 1,014
Issuance of Common Stock in exchange for
consulting services valued at $2.50 per
share in March 2003. 91,060 9 230,625 - - - 230,634
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 issued 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,
April 1, 2003 860,000 86 55,814 - - 55,900
Common Stock issued in exchange for cash
at $1.00 per share, April 9, 2003 18,000 2 - - - - 2
Common Stock issued in exchange for
consulting services at $0.065 per share,
April 9, 2003 9,000 1 584 - - - 585
Common Stock issued in exchange for
consulting services at $2.50 per share,
April 23, 2003 5,000 1 12,499 - - - 12,500
Common Stock issued in exchange for
consulting services at $2.50 per share,
June 12, 2003 10,000 1 24,999 - - - 25,000
Common Stock issued in exchange for
cash at $1 per share on June 17 2003. 50,000 5 49,995 - - - 50,000
Common stock issued 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,
June 30, 2003 (7,500,000) (750) 750 - - - -
Common stock issued in exchange for
consulting services at $0.065 per share,
June 30, 2003. 270,000 27 17,523 - - - 17,550
5
Common stock subscribed in exchange for cash
at $1.00 per share pursuant to private
placement, June 30, 2003 - - - 10,000 - - 10,000
Common stock subscribed in exchange
for cash at $2.50 per share pursuant to
private placement, June 30, 2003 - - - 24,000 - - 24,000
Common stock issued in exchange
for consulting
services at approximately $2.01
per share, July 2003 213,060 21 428,797 - - - 428,818
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 for options
exercised at $1.00 in July 2003 20,000 2 19,998 - - - 20,000
Common stock issued for options
exercised at $1.00-
subscription payable-in
July 2003 10,000 1 9,999 (10,000) - - -
Common stock issued in exchange for
consulting services at approximately
$2.38 per share, August 2003 172,500 17 410,913 - - - 410,931
Common stock issued 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 $2.41 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 for options
exercised at
$1.00 in September 2003 95,000 10 94,991 - - - 95,000
Common stock subscription receivable
reclassed -September 2003 - - - - 2,600 - 2,600
Common Stock subscibed to at $2.50
per share in
September 2003 - - - 300,000 - - 300,000
Net Loss - - - - - (3,445,164) (3,445,164)
-----------------------------------------------------------------------------------------
Balance at September 30, 2003 17,811,082 1,781 2,577,566 300,000 - (3,456,776) (577,429)
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
$2.85 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, Decemeber, 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 subscibed to at $2.50 per
share in December 2003 - - - 104,000 - - 104,000
Beneficial conversion feature relating
to notes payable - - 1,168,474 - - - 1,168,474
Beneficial conversion feature relating
to warrants - - 206,526 - - - 206,526
Adjust common stock par value from
$0.0001 to $0.50 per share, per
amendment of articles dated Dec 2003 - 10,223,167 (10,223,167) - - - -
Common Stock issued pursuant to
subscription at $2.50 share in
Jan 2004 41,600 20,800 83,200 (104,000) - - -
6
Common stock issued in exchange for
consulting services at $2.95 per
share, Jan 2004 13,040 6,520 31,948 - - - 38,468
Common stock issued in exchange for
consulting services at $2.60 per
share, Jan 2004 123,000 61,500 258,300 - - - 319,800
Common stock issued in exchange for
consulting services at $3.05 per
share, Jan 2004 1,000 500 2,550 - - - 3,050
Common stock issued in exchange for
employee services
at $3.07 per share, Feb 2004 6,283 3,142 16,146 - - - 19,288
Common stock issued in exchange for
consulting services at
$3.04 per share, Mar 2004 44,740 22,370 113,640 - - - 136,010
Common Stock issued for options
exercised at $1.00 per
share in Mar 2004 55,000 27,500 27,500 - - - 55,000
Common stock issued in exchange
for employee services at
$3.00 per share, Mar 2004 5,443 2,722 13,622 - - - 16,344
Common stock issued in exchange
for employee services at
$3.15 per share, Mar 2004 5,769 2,885 15,292 - - - 18,177
Common stock issued in exchange
for consulting services
at $3.00per share, Mar 2004 125,000 62,500 312,500 - - - 375,000
Common stock issued in exchange
for employee services
at $3.03 per share, Mar 2004 8,806 4,403 22,236 - - - 26,639
Common Stock issued pursuant to
subscription at $2.50
per share in Mar 2004 22,500 11,250 (9,000) - (2,250) - -
Beneficial conversion feature
relating to notes payable - - 122,362 - - - 122,362
Beneficial conversion feature
relating to warrants - - 177,638 - - - 177,638
Net Loss - - - - - (9,979,130) (9,979,130)
-----------------------------------------------------------------------------------------
Balance at March 31, 2004 20,902,602 $10,451,305 $ 1,858,436 $ - $(2,250)$ (13,435,906) $(1,128,415)
=========================================================================================
(See accompanying notes to unaudited condensed
consolidated financial statements)
7
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
For the period
September 16, 2002
For The Six Months Ended (date of inception)
March 31, through March 31,
2004 2003 2004
----------- ----------- --------------
Cash flows from operating activities:
Net loss $ (9,979,130) $ (597,016) $ (13,435,906)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: -
Depreciation 703 - 703
Common stock retired - - 88,500
Amortization of beneficial conversion feature 661,111 - 661,111
Common stock issued in exchange for consultant services rendered 7,844,142 445,466 10,137,492
Common stock canceled-previously issued for services rendered (282,000) - (282,000)
Changes in Assets and Liabilities: -
Increase in Prepaid Expenses and Deposits - (2,980) -
Increase in Other Assets - (5,200) -
Increase (decrease) in Accounts payable and accrued liabilities (40,469) 106,103 413,531
----------- ----------- ------------
Net cash provided by (used in) operating activities (1,795,643) (53,627) (2,416,569)
Cash flows from investing activities:
Payments for patent filing (12,906) (26,796)
Payments for security deposit (23,559) (23,559)
Net payments for property, plant and equipment (29,507) - (29,507)
----------- ----------- ------------
Net cash provided by (used in) investing activities (65,972) - (79,862)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost - 18,000 -
Proceeds from subscription of common stock 104,000 - 536,000
Proceeds from sale of options 87,000 - 241,000
Advances from shareholders 34,004 61,480 143,596
Proceeds from convertible notes 1,675,000 - 1,675,000
Repayment of related parties advances (33,653) - (33,653)
Proceeds from related parties advances - - 132,695
----------- ----------- ------------
Net cash provided by (used in) financing activities 1,866,351 79,480 2,694,638
Net increase (decrease) in cash and cash equivalents 4,736 25,853 198,207
Cash and cash equivalents at beginning of period 193,471 - -
----------- ----------- ------------
Cash and cash equivalents at end of period $ 198,207 $ 25,853 $ 198,207
=========== =========== ============
-
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest $ - $ - $ -
=========== =========== ============
Cash paid during period for taxes $ - $ - $ -
=========== =========== ============
Common stock issued for services $ 7,844,142 $ 445,466 $ -
=========== =========== ============
Common stock canceled-previously issued for services rendered $ (282,000) $ - $ -
=========== =========== ============
Common stock retired $ - $ - $ -
=========== =========== ============
(See accompanying notes to unaudited condensed
consolidated financial statements)
8
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month and six-month periods ended March 31, 2004
is not necessarily indicative of the results that may be expected for the year
ended September 30, 2004. The unaudited condensed consolidated financial
statements should be read in conjunction with September 30, 2003 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 March 31, 2004, the Company has accumulated losses of
$13,435,906.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary ProHealth Medical Technologies, Inc. Significant
inter-company transactions have been eliminated in Consolidation.
Reclassification
Certain prior period amounts have been reclassified for comparative purposes.
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended September 30, 2003 and for
the subsequent periods.
9
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
Stock Based Compensation (continued)
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note E / F):
------------------------------------------------------------- --------------------- --------------------- ---------------------
For the Period
September 16, 2002
(Date of Inception)
For The Six Months For The Six Months through March 31,
ended March 31, 2004 ended March 31, 2003 2004
------------------------------------------------------------- --------------------- --------------------- ---------------------
Net loss - as reported $ (9,979,130) $ (597,016) $ (13,435,906)
------------------------------------------------------------- --------------------- --------------------- ---------------------
Add: Total stock based employee compensation expense as
reported under intrinsic value method (APB. No. 25) - - -
------------------------------------------------------------- --------------------- --------------------- ---------------------
Deduct: Total stock based employee compensation expense
as reported under fair value based method (SFAS No. 123)
- - -
------------------------------------------------------------- --------------------- --------------------- ---------------------
Net loss - Pro Forma $ (9,979,130) $ (597,016) $ (13,435,906)
=============== ============= ===============
------------------------------------------------------------- --------------------- --------------------- ---------------------
Net loss attributable to common stockholders - Pro forma $ (9,979,130) $ (597,016) $ (13,435,906)
=============== ============= ===============
------------------------------------------------------------- --------------------- --------------------- ---------------------
Basic (and assuming dilution) loss per share - as reported $ (0.51) $ (0.04) $ (0.63)
============= ============ =============
------------------------------------------------------------- --------------------- --------------------- ---------------------
Basic (and assuming dilution) loss per share - Pro forma $ (0.51) $ (0.04) $ (0.63)
============= ============ =============
------------------------------------------------------------- --------------------- --------------------- ---------------------
10
NOTE B - MERGER
Acquisition
On October 21, 2002, the Company completed a Plan and Agreement of
Reorganization ("Merger") with ProHealth Medical Technologies, Inc.
("ProHealth") an inactive publicly registered shell corporation with no
significant assets or operations. For accounting purposes, the Company shall be
the surviving entity. The transaction is accounted for using the purchase method
of accounting. The total purchase price and carrying value of net assets
acquired of was $ 880. From November 1988 until the date of the merger,
ProHealth was an inactive entity with no significant assets and liabilities
Effective with the Merger, all previously outstanding common stock, preferred
stock, options and warrants owned by the Company's shareholders were exchanged
for an aggregate of 10,178,352 shares of ProHealth common stock. The value of
the stock that was issued was the historical cost of the ProHealth's net
tangible assets, which did not differ materially from their fair value. In
accordance with SFAS No. 141, the Company is the acquiring entity.
11
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
NOTE B - MERGER (Continued)
Effective with the Merger, ProHealth changed its name to Applied DNA Sciences,
Inc. The total purchase price and carrying value of net assets acquired of
ProHealth was $1. The net assets acquired were as follows:
----------------------------------------------------- -----------------
Common stock retained by ProHealth shareholders $ 1,015
----------------------------------------------------- -----------------
(135)
Assets acquired
----------------------------------------------------- -----------------
Total consideration paid $ 880
======
----------------------------------------------------- -----------------
In accordance with SOP 98-5, the Company expensed $880 as organization costs.
NOTE C - RELATED PARTY TRANSACTIONS
Included in current liabilities at March 31, 2004, is $109,943 of advances from
the stockholders of the Company. No formal agreements or repayment terms exist.
Also, the Company owed $117,333 at March 31, 2004 to the stockholders and other
related parties towards accrued expenses.
The Company leases office space under a sub lease agreement with an entity
controlled by a significant former shareholder of the Company.
The Company has entered into long term employment and consulting agreements with
Company's President and Chief Executive Officer and an entity controlled by a
former significant Company shareholder, respectively.
NOTE D - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock. As of
March 31, 2004, there are no preferred shares issued and outstanding.
The Company is authorized to issue 100,000,000 shares of common stock, with an
original par value of $0.0001 par value per share. In December 2003, the Company
amended its Articles of Incorporation changing the par value of the Company's
common to $ 0.50 per share. In connection with the amendment, the Company
increased the book value of its common stock from $2,044 to $10,451,482 and
decreased Additional Paid-In Capital from $9,518,670 to $1,558,259. As of March
31, 2004, the Company has issued and outstanding 20,902,602 shares of common
stock.
12
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
NOTE D - CAPITAL STOCK (Continued)
In October 2003, the Company issued 287,439 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$2.85 per share for a total of $820,418, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2003, the Company issued 120,000 shares of common stock for shares
previously subscribed at $2.50 per share in September 2003.
In October 2003, the Company canceled 100,000 shares of common stock previously
issued in exchange for services at $2.50 per share
In November 2003, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$3.00 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued.
In November 2003, the Company sold 100,000 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
In December 2003, the Company sold 6,400 shares of common stock subscribed for
cash at $2.50 per share pursuant to private placement.
In December 2003, the Company issued 2,125,500 shares of common stock in
exchange for consulting services. . The Company valued the shares issued at
approximately $2.59 per share, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In December 2003, the Company received $104,000 in exchange for a common stock
subscription at $2.50 per share pursuant to private placement.
In January 2004, the Company issued 41,600 of common stock at $2.50 share
pursuant to a subscription made on December 2003.
In January 2004, the Company issued 13,040 of common stock at $2.95 per share in
exchange for consulting services valued at $38,468.
In January 2004, the Company issued 123,000 of common stock at $2.60 per share
in exchange for consulting services valued at $319,800.
In January 2004, the Company issued 1,000 of common stock at $3.05 per share in
exchange for consulting services valued at $3,050.
13
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
NOTE D - CAPITAL STOCK (Continued)
In February 2004, the Company issued 6,283 of common stock at $3.07 per share in
exchange for employee services valued at $19,288.
In March 2004, the Company issued 44,740 of common stock at $3.04 per share in
exchange for consulting services valued at $136,010.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
In March 2004, the Company issued 5,443 of common stock at $3.00 per share in
exchange for employee services valued at $16,344.
In March 2004, the Company issued 5,769 of common stock at $3.15 per share in
exchange for employee services valued at $18,177.
In March 2004, the Company issued 125,000 of common stock at $3.00 per share in
exchange for employee services valued at $375,000.
In March 2004, the Company issued 8,806 of common stock at $3.03 per share in
exchange for employee services valued at $26,639.
In March 2004, the Company issued 22,500 of common stock at $0.10 for
subscription of warrants to be exercised.
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.
14
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
NOTE E - WARRANTS
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company. These warrants were granted in lieu of cash
compensation for services performed or financing expenses in connection with the
sale of the Company's common stock.
------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Exercise price Weighted Number Remaining Warrants Weighted Number Warrants
Outstanding Exercisable
Contractual Life Weighted Weighted
Outstanding (Years) Exercise Price Exercisable Exercise Price
------------------- ----------------- ------------------ ----------------- ----------------- ------------------
$1.00 338,000 4 $1.00 306,000 $1.00
------------------- ----------------- ------------------ ----------------- ----------------- ------------------
$0.10 312,500 5 $0.10 312,500 $0.10
------------------- ----------------- ------------------ ----------------- ----------------- ------------------
$3.20 1,675,000 5 $3.20 1,675,000 $3.20
------------------- ----------------- ------------------ ----------------- ----------------- ------------------
$3.50 45,500 1 $3.50 45,500 $3.50
--------- ---------
------------------- ----------------- ------------------ ----------------- ----------------- ------------------
2,371,000 2,371,000
========= =========
------------------- ----------------- ------------------ ----------------- ----------------- ------------------
Transactions involving warrants are summarized as follows:
------------------------------------------------------ ------------------ -----------------
Number of Shares Weighted
Average Price
Per Share
------------------------------------------------------ ------------------ -----------------
Outstanding at September 30, 2003 383,500 $ 1.51
------------------------------------------------------ ------------------ -----------------
Granted 2,010,000 2.69
------------------------------------------------------ ------------------ -----------------
Exercised (22,500) 0.10
------------------------------------------------------ ------------------ -----------------
Cancelled or expired
- -
------------------------------------------------------ ------------------ -----------------
Outstanding at March 31, 2004 2,371,000 $ 2.42
========== ===========
------------------------------------------------------ ------------------ -----------------
The estimated value of the compensatory warrants granted to non-employees in
exchange for services and financing expenses was determined using the
Black-Scholes pricing model and the following assumptions: contractual term of 2
to 5 years, a risk free interest rate of 1.00%, a dividend yield of 0% and
volatility of 22.9%. The amount of the expense charged to operations for
compensatory warrants granted in exchange for services was $-0- for the three
months ended March 31, 2004 and 2003.
15
NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE
A summary of convertible promissory notes payable at March 31, 2004 (Unaudited)
is as follows:
--------------------------------------------------------------------------------- -----------------
Convertible notes payable ("Bridge Unit Offering"), in quarterly installments $ 1,675,000
of interest only at 10% per annum, secured by all assets of the Company and due
on the earlier of the 9-month anniversary date of the initial closing of the
Offering, or the completion of any equity financing of $3M or more; The
Company, in its sole discretion, may prepay principal at any time without
penalty. The Notes are convertible into shares of common stock of the Company
at a price of $2.50 per share.
--------------------------------------------------------------------------------- -----------------
(751,121)
Debt Discount - beneficial conversion feature, net of accumulated amortization
of $539,715
--------------------------------------------------------------------------------- -----------------
Debt Discount, net of accumulated amortization of $121,396 (262,768)
---------
--------------------------------------------------------------------------------- -----------------
$ 661,111
--------------------------------------------------------------------------------- -----------------
16
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE (Continued)
During the three months ended December 31, 2003, the Company sold 27.5 units
(the "Units") to accredited investors at a price of $50,000 per Unit (the
"Bridge Offering") for a total of $1,375,000. Each Unit consists of (i) a
$50,000 Principal Amount 10% Secured Convertible Promissory Note ("Note" or
"Notes"), (ii) detachable warrants to purchase 50,000 shares of our common
stock, exercisable for a period of five years at a price of $3.20 per share
("$3.20 Warrant") and (iii) detachable warrants to purchase 10,000 shares of our
common stock, exercisable for a period of five years at a price of $0.10 per
share ("$0.10 Warrant" and together with the $3.20 Warrant, the "Warrants"). The
Notes are convertible into shares of our common stock at a price of $2.50 per
share.
The Company accounted for the warrants and notes payable in accordance with APB
No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants" ("APB 14"). APB 14 requires a portion of the proceeds from the
issuance of debt securities with detachable stock warrants to be allocated to
the warrants and treated as paid-in capital. Any resulting discount or premium
on the notes payable should be recorded and amortized over the life of the
notes. The Company used the Black-Scholes model to determine the value of the
warrants issued to the noteholders. Under the Black-Scholes model, the value of
the warrants are determined by taking the difference between acquiring the stock
outright and the present value of paying the exercise price on the expiration
day. As a result, the Company valued the warrants at $206,526. This amount was
recorded as paid-in capital and the resulting discount on the notes payable was
recorded and is being amortized using the interest method over the life of the
notes. The debt discount attributed is amortized over the Bridge Offering's
earliest maturity period of 9 months from the date of issue as interest expense.
In accordance with EMERGING ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR
CONVERTIBLE SECURITIES WITH A BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY
ADJUSTABLE CONVERSION RATIOS ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Bridge Offering note. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid in capital. The Company recognized and measured an aggregate
of $1,168,474 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and a
discount against the Bridge Offering. The debt discount attributed to the
beneficial conversion feature is amortized over the Bridge Offering's earliest
maturity period of 9 months from the date of issue as interest expense.
The Company valued the beneficial conversion of the notes and warrants in
accordance with EITF 00-27 using the Black-Scholes pricing model and the
following assumptions:
o contractual terms of 5 years
o an average risk free interest rate of 1.00%
o a dividend yield of 0.00%
o volatility of 22.9%.
17
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE (Continued)
During the three months ended March 31, 2004, the Company sold 6 units (the
"Units") to accredited investors at a price of $50,000 per Unit (the "Bridge
Offering") for a total of $300,000. Each Unit consists of (i) a $50,000
Principal Amount 10% Secured Convertible Promissory Note ("Note" or "Notes"),
(ii) warrants to purchase 50,000 shares of our common stock, exercisable for a
period of five years at a price of $3.20 per share ("$3.20 Warrant") and (iii)
warrants to purchase 10,000 shares of our common stock, exercisable for a period
of five years at a price of $0.10 per share ("$0.10 Warrant" and together with
the $3.20 Warrant, the "Warrants"). The Notes are convertible into shares of our
common stock at a price of $2.50 per share.
The Company accounted for the warrants and notes payable in accordance with APB
No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants" ("APB 14"). APB 14 requires a portion of the proceeds from the
issuance of debt securities with detachable stock warrants to be allocated to
the warrants and treated as paid-in capital. Any resulting discount or premium
on the notes payable should be recorded and amortized over the life of the
notes. The Company used the Black-Scholes model to determine the value of the
warrants issued to the noteholders. Under the Black-Scholes model, the value of
the warrants are determined by taking the difference between acquiring the stock
outright and the present value of paying the exercise price on the expiration
day. As a result, the Company valued the warrants at $177,638. This amount was
recorded as paid-in capital and the resulting discount on the notes payable was
recorded and is being amortized using the interest method over the life of the
notes. The debt discount attributed is amortized over the Bridge Offering's
earliest maturity period of 9 months from the date of issue as interest expense.
In accordance with EMERGING ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR
CONVERTIBLE SECURITIES WITH A BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY
ADJUSTABLE CONVERSION RATIOS ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Bridge Offering note. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid in capital. The Company recognized and measured an aggregate
of $122,362 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid in capital and a
discount against the Bridge Offering. The debt discount attributed to the
beneficial conversion feature is amortized over the Bridge Offering's earliest
maturity period of 9 months from the date of issue as interest expense.
The Company valued the beneficial conversion of the notes and warrants in
accordance with EITF 00-27 using the Black-Scholes pricing model and the
following assumptions:
o contractual terms of 5 years
o an average risk free interest rate of 4.25%
o a dividend yield of 0.00%
o volatility of 42.0%.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2004
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",
18
"plan", "anticipate", "estimate", "potential" or "continue", or the negative
thereof or other comparable terminology regarding beliefs, plans, expectations
or intentions regarding the future. Forward looking statements involve risks and
uncertainties and actual results could differ materially from those discussed in
forward-looking statements. All forward looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to the Company as of the date thereof, and the Company assumes no
obligations to update any forward-looking statement or risk factor, unless the
Company is required to do so by law.
Plan of Operation
The Company presently does not have any available credit, bank financing or
other external sources of liquidity. Due to its brief history and historical
operating losses, the Company's operations have not been a source of liquidity.
The Company will need to obtain additional capital in order to expand operations
and become profitable. The Company intends to pursue the granting of
sub-licenses outside the United States, and if successful, the granting of
sub-licenses would constitute a substantial additional source of liquidity and
capital over time. In order to obtain capital, the Company may need to sell
additional shares of its common stock or borrow funds from private lenders.
There can be no assurance that the Company will be successful in obtaining
additional funding and granting of sub-licenses outside the Unites States.
During the three months ended March 31, 2004, the Company's priorities were to
recruit and build its team, organize its new infrastructure and to develop a
successful strategy how best to exploit its exclusive Biowell license agreement,
therefore no revenues were anticipated, planned or received, expenses of
$12,796,876 were incurred stemming from general, selling, and administrative
expenses. Although the management of the Company is of the opinion that
continuing to develop and finance the Company's present business of providing
DNA anti-counterfeit technology may ultimately be successful, management
nevertheless expects that the Company will need substantial additional capital
before the Company's operations can be fully implemented.
Liquidity and Capital Resources
As of March 31, 2004, we had a working capital deficit of $1,119,044. As a
result of our operating losses from our inception through March 31, 2004, we
generated a cash flow deficit of $2,416,569 from operating activities. We met
our cash requirements during this period from advances of $143,596 from the
Company's officer and principal shareholders, advances of $132,695 from related
parties, cash proceeds of $241,000 received as a result of registered options
exercised at $1.00 per shares, cash proceeds received of $536,000 for shares
sold, and $1,675,000 received for a 10% Secured Convertible Promissory Note to
be issued pursuant to a private placement offering.
While we have raised capital to meet our working capital and financing needs in
the past, additional financing is required in order to meet our current and
projected cash flow deficits from operations and development. We are seeking
financing in the form of equity through a Private Placement Memorandum in order
to provide the necessary working capital. We currently have no commitments for
financing. There is no guarantee that we will be successful in raising the funds
required.
By adjusting its operations and development to the level of capitalization,
management believes it has sufficient capital resources to meet projected cash
flow deficits through the next twelve months. However, if thereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations, liquidity and
financial condition.
The effect of inflation on the Company's operating results was not significant.
The Company's operations are located in North America with a wholly-owned
subsidiary located in London, United Kingdom, and there are no seasonal aspects
that would have a material effect on the Company's financial condition or
results of operations.
19
The Company's independent certified public accountant has stated in his report
included in the Company's October 21, 2002 Form 8-K, as amended, that the
Company has incurred operating losses from its inception , and that the Company
is dependent upon management's ability to develop profitable operations. These
factors among others may raise substantial doubt about the Company's ability to
continue as a going concern.
Bridge Unit Offering
From November through March 17, 2004, we sold 33.5 units (the "Units") to
accredited investors at a price of $50,000 per Unit (the "Offering") for a total
of $1,675,000. Each Unit consists of (i) a $50,000 Principal Amount 10% Secured
Convertible Promissory Note ("Note" or "Notes"), (ii) warrants to purchase
50,000 shares of our common stock, exercisable for a period of five years at a
price of $3.20 per share ("$3.20 Warrant") and (iii) warrants to purchase 10,000
shares of our common stock, exercisable for a period of five years at a price of
$0.10 per share ("$0.10 Warrant" and together with the $3.20 Warrant, the
"Warrants"). The Notes are convertible into shares of our common stock at a
price of $2.50 per share. The Company was obligated to file a registration
statement registering the shares underlying the Notes and Warrants within 45
days of the close of the Bridge Unit Offering. The Company is presently in
default for failure to file the registration statement on or before May 1, 2004.
The aggregate principal amount of Notes sold was $1,675,000. The Notes are
secured and bear interest at 10% per annum, computed on the basis of a 365-day
year, accruing from the date an investor's subscription was closed upon by the
Company. Principal and all accrued interest will be payable in full on the
earlier of (i) the 9-month anniversary date of the initial closing of the
Offering, or (ii) the completion of any equity financing of $3,000,000 or more.
The Company, in its sole discretion, may prepay principal at any time without
penalty. The Notes are convertible into shares of common stock of the Company at
a price of $2.50 per share.
The Notes are secured by a security agreement giving the Holder a security
interest in all the patents, licenses, equipment, fixtures, inventory and
accounts receivable of the Company, and/or any of its subsidiaries.
The following events constitute events of default under the Notes:
(i) Default in the payment of the principal or accrued interest on any Note or
upon any other indebtedness of the Company that is greater than $100,000, as and
when the same shall become due, whether by default or otherwise, which Default
shall have continued for a period of five (5) business days; or
(ii) Any representation or warranty made by the Company or any officer of the
Company in the Notes, or in any agreement, report, certificate or other document
delivered to the Holder pursuant to the Notes shall have been incorrect in any
material respect when made which shall not have been remedied ten (10) days
after written notice thereof shall have been given by the Holder; or
(iii) The Company shall fail to perform or observe any affirmative covenant
contained in Section 4 of the Notes and such Default, if capable of being
remedied, shall not have been remedied ten (10) days after written notice
thereof shall have been given by the Holder; or
(iv) The Company or any subsidiary (A) shall institute any proceeding or
voluntary case seeking to adjudicate it bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of any order for relief or the appointment of a receiver, trustee,
custodian or other similar official for such Company or any subsidiary or for
any substantial part of its property, or shall consent to the commencement
against it of such a proceeding or case, or shall file an answer in any such
case or proceeding commenced against it consenting to or acquiescing in the
commencement of such case or proceeding, or shall consent to or acquiesce in the
appointment of such a receiver, trustee, custodian or similar official; (B)
shall be unable to pay its debts as such debts become due, or shall admit in
writing its inability to apply its debts generally; (C) shall make a general
assignment for the benefit of creditors; or (D) shall take any action to
authorize or effect any of the actions set forth above ; or
20
(v) Any proceeding shall be instituted against the Company seeking to adjudicate
it bankrupt or insolvent, or seeking dissolution, liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief of debtors, or
seeking the entry of an order for relief or the appointment of a receiver,
trustee, custodian or other similar official for the Company or for any
substantial part of its property, and either such proceeding shall not have been
dismissed or shall not have been stayed for a period of sixty (60) days or any
of the actions sought in such proceeding (including, without limitation, the
entry of any order for relief against it or the appointment of a receiver,
trustee, custodian or other similar official for it or for any substantial part
of its property) shall occur; or
(vi) One or more final judgments, arbitration awards or orders for the payment
of money in excess of $100,000 in the aggregate shall be rendered against the
Company, which judgment remains unsatisfied for thirty (30) days after the date
of such entry; or (vii)Delisting of the Common Stock from the principal market
or exchange on which the Common Stock is listed for trading; Company's failure
to comply with the conditions for listing; or notification that the Company is
not in compliance with the conditions for such continued listing; or
(viii)The issuance of an SEC stop trade order or an order suspending trading of
the Common Stock from the principal market or exchange on which the Common Stock
is listed for trading for longer than five (5) trading days; or
(ix) The failure by the Company to issue shares of Common Stock to the Holder
upon exercise by the Holder of the conversion rights of the Holder in accordance
with the terms of the Notes, or the failure to transfer or cause its transfer
agent to transfer (electronically or in certificated form) any certificate for
shares of Common Stock issued to the Holder upon conversion of or otherwise
pursuant to the Notes as and when required by the Notes, or the failure to
remove any restrictive legend (or to withdraw any stop transfer instructions in
respect thereof) on any certificate for any shares of Common Stock issued to the
Holder upon conversion of or otherwise pursuant to the Notes as and when
required by the Notes, and any such failure shall continue uncured for ten (10)
days after the Company shall have been notified thereof in writing by the
Holder; or
(x) The failure by the Company to file the Registration
Statement within forty-five (45) days following the Closing Date (as defined in
the Subscription Agreement) or obtain effectiveness with the Securities and
Exchange Commission of the Registration Statement within one hundred thirty five
(135) days following the Closing Date (as defined in the Subscription Agreement)
or such Registration Statement lapses in effect (or sales cannot otherwise be
made thereunder effective, whether by reason of the Company's failure to amend
or supplement the prospectus included therein) for more than twenty (20)
consecutive days or forty (40) days in any twelve month period after the
Registration Statement becomes effective; or
(xi) The Company shall encumber or hypothecate the collateral subject to the
Security Agreement to any party; or
(xii) A default by the Company of a material term, covenant, warranty or
undertaking of any other agreement to which the Company and Holder are parties,
or the occurrence of an event of default under any such other agreement.
Holders shall, at any time prior to the Maturity Date, have the right to convert
the Note into Shares of the Company at $2.50 per such Share, which right shall
be exercised in the Holder's sole and absolute discretion. Holders shall, with
respect to any Shares acquired thereby, be granted the same demand and
piggy-back registration rights as if such Shares were purchased as part of the
Units.
In the event of and immediately upon the occurrence of an "Event of Default,"
the Notes shall become immediately due and payable without any action by the
Holder and the Notes shall bear interest until paid at the rate of 12% per annum
or such amount as shall be allowed by law.
In the event that the sum due under the Note is not repaid on the Maturity Date,
the Holder will have the option to either have the Note accrue interest at 12%
or such amount as legally allowed until paid, or to convert the entirety of the
debt then outstanding under the Note into the number of shares derived by
dividing the sum of such debt by the dollar value equal to 80% of the closing
ask price of the shares on the last trading day immediately preceding the
Maturity Date as reported on the market upon which the shares shall then be
trading, provided, however, that the conversion price shall never be less than
$1.00 per share. Any shares acquired thereby shall carry with them the demand
and piggy back registration rights granted to the Holder under the terms of the
Note.
Bridge Offering Warrants
Each Unit, or $50,000 principal amount of the Note, entitles the holder warrants
exercisable on a one for one basis into shares of Common Stock at an exercise
price of $3.20 during a five-year period commencing on the initial closing of
the Offering (which was December 15, 2003, 2003). per share. In addition, each
Unit also entitles the holder to 10,000 warrants exercisable on a one for one
basis into shares of Common Stock at an exercise price of $0.10 per share during
a five-year period commencing on the initial closing of the Offering (which was
December 15, 2003) In the event a holder of Warrants fails to exercise the
Warrants prior to their expiration, the Warrants will expire, and the holder
thereof will have no further rights with respect to the Warrants.
21
The Warrants expire at 5:00 p.m., New York time, on the fifth anniversary after
the initial closing of the Offering. In the event a holder of Warrants fails to
exercise the Warrants prior to their expiration, the Warrants will expire and
the holder thereof will have no further rights with respect to the Warrants.
Product Research and Development
Without substantial financial resources we do not anticipate incurring material
research and development costs during the next twelve 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. Without substantial financial resources we do not
anticipate the acquisition of any material property, plant or equipment during
the next 12 months.
Number of Employees
As of March 31, 2004, we have ten full time employees and we continue to rely on
the services of outside consultants. 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.
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.
Risks
Applied DNA Sciences, Inc. is a small company entering a technical and
specialized scientific industry. The Company's growth will depend upon the
working capital and financial support, which we are in the process of seeking.
The Company will need substantial additional capital to expand and to exploit
its potential. While the management team has strong contacts in the geographic
and product territories, the Company is small with limited assets and a limited
operating history and may, as a result, have difficulties securing large enough
and increasing financial commitments from potential investors. Thus the Company
may be subject to the high risks associated with start-up companies and small
business.
The Company relies on a small number of key individuals to implement plans and
operations. Although the Company may obtain key person life insurance coverage
22
on the Company's key individuals, once substantial financial resources are
obtained, the Company has not done so at this time. Should for some reason their
services become unavailable, the Company will be required to retain other
qualified personnel.
Reductions or delays in research and development budgets and in government
funding may negatively impact the Company's sales. Future clients may include
researchers at pharmaceutical and biotechnology companies as well as other
industrial sectors, academic institutions and government and private
laboratories. Fluctuations in the research and development budgets of these
researchers and their organizations could have a significant effect on demand
for the Company's products. Research and development budgets fluctuate due to
numerous factors that are outside the Company's control and are difficult to
predict, including changes in available resources, spending priorities and
institutional budgetary policies. The Company's business could be seriously
damaged by any decrease in life science research and development expenditures by
pharmaceutical, biotechnological and other industrial sector companies, academic
institutions or government and private laboratories. Although the level of
research funding has increased during the past several years, we cannot assure
that this trend will continue. Government funding of research and development is
subject to the political process, which is inherently fluid and unpredictable.
Also government proposals to reduce or eliminate budgetary deficits have
sometimes included reduced allocations to the US National Institute of Health
and other government agencies that fund research and development activities.
Also, our potential customers receive funds from approved grants at particular
times of the year, as determined by the federal government. Grants have, in the
past, been frozen for extended periods or have otherwise become unavailable to
various institutions without advance notice. The timing of receipt of grant
funds affects the timing of purchase decisions by our customers and, as a
result, can cause fluctuations in our sales and operating results.
The Company regards trademarks, trade secrets and other intellectual property as
a component of its success. The Company relies on trademark law and trade secret
protection and confidentiality and /or license agreements with consultants,
customers, partners and others to protect our intellectual property. Effective
trademark and trade secret protection may not be available in every country in
which the Company's products are available. The Company cannot be certain that
the Company has taken adequate steps to protect its intellectual property,
especially in countries where the laws may not protect the Company's rights as
fully as in the United States. In addition, the Company's third party
confidentiality agreements can be breached and, if they are, there may not be
adequate remedy available to the Company. If the Company's trade secrets become
known, the Company may lose its competitive edge.
The Company may be unable to protect its trademarks, trade secrets and other
intellectual property rights that are important to its business. The Company
regards its trademarks, trade secrets and other intellectual property as a
component of its success. The Company relies on trademark law as well as trade
secret protection and confidentiality license agreements with consultants,
employees, customers, partners and partners to protect our intellectual
property.
Litigation as regards the Company intellectual property or other subject matters
could harm the Company's business. Litigation regarding patents and other
intellectual property rights is extensive in the biotechnology industry. The
Company is aware that patents have been applied for, and in some cases issued to
others, claiming technologies that are closely related to Applied DNA Sciences,
Inc. As a result, and in part due to the ambiguities and evolving nature of
intellectual property law, the Company periodically receives notices of
potential infringements of patents held by others. Although to date the Company
has successfully resolved these types of claims, the Company may not be able to
do so in the future. In the event of an intellectual property dispute, the
Company may be forced to litigate. This litigation could involve proceedings
declared 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 the Company not prevail, could seriously harm
the Company's business. In the case a third party claims an intellectual
property right to technology the Company uses, the Company may need to
discontinue an important product or product line, alter its products and
processes, pay license fees or cease its affected business activities, Although
the Company might under these circumstances attempt to obtain a license to this
intellectual property, it may not be able to do so on favorable terms, or at
all.
23
In addition to intellectual property rights litigation, other substantial,
complex or extended litigation could result in large expenditures for the
Company and distraction of its management. For example, law suits by employees,
shareholders, collaborators, distributors or sublicensees could be very costly
and substantially disrupt the Company's business. Disputes from time to time
with companies or individuals are not uncommon in the industry and the Company
cannot assure that it will always be able to resolve them out of court.
The Company's growth depends upon the ability to undertake sales in current
markets and to expand sales nationally to additional market segments and to
Europe, South America, Australia and parts of the Middle East. There can be no
certainty that the Company's efforts to increase and expand sales can be
accomplished on a profitable basis. The expansion to other delivery methods and
to other venues will depend on a number of factors, most notably the timely and
successful promotion and sale of the Company's products and related services
directly or via sublicensing agreements. The Company's inability to expand
sales, in a timely manner, would have a material adverse effect on its business,
operating results and its financial condition.
ITEM 3. CONTROLS AND PROCEDURES
The Company's management including the Chief Executive Officer, President and
Chief Financial Officer, have evaluated, within 90 days prior to the filing of
this quarterly report, the effectiveness of the design, maintenance and
operation of the Company's disclosure controls and procedures. Management
determined that the Company's disclosure controls and procedures were effective
in ensuring that the information required to be disclosed by the Company in the
reports that it files under the Exchange Act is accurate and is recorded,
processed , summarized and reported within the time periods specified in the
Commission's rules and regulations.
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision making can be fully faulty and that
breakdowns in internal control can occur because of human failures such as
errors or mistakes or intentional circumvention of the established process.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation thereof, including any corrective actions with regard to significant
deficiencies and material weaknesses.
24
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2004, the Company issued a total of 41,600 shares of Common Stock at
$2.50 per share in fulfillment of a stock subscription made in December 2003
to various consultants in exchange for administrative, marketing, financial
advisory and legal consulting services. These issuances are considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
To conserve capital, in February 2004, the Company issued 6,283 shares of Common
Stock to employees in lieu of their cash salaries. Such issuances were
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
In March 2004, the Company issued 44,740 shares of Common Stock in exchange for
consulting services. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
In March 2004, the Company issued 125,018 shares of Common Stock in exchange for
employee services. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
In March 2004, the Company issued 22,500 of common stock at $0.10 for
subscription of warrants to be exercised. This issuance is considered exempt
under Regulation D of the Securities Act of 1933 and Rule 506 promulgated
thereunder, as well as Section 4(2) of the Act.
In March 2004, the Company issued 5,443 of common stock at $3.00 per share in
exchange for employee services valued at $16,344.
In March 2004, the Company issued 5,769 of common stock at $3.15 per share in
exchange for employee services valued at $18,177.
In March 2004, the Company issued 8,806 of common stock at $3.03 per share in
exchange for employee services valued at $26,639.
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 AND REPORTS ON FORM 8-K
31.1 Principal Executive Officer certification pursuant to Rule 13a-14 and
15d-14 under the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herein.
31.2 Principal Financial Officer certification pursuant to Rule 13a-14 and
15d-14 under the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herein.
32.1 Chief Executive Officer certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. Filed herein.
32.2 Chief Financial Officer certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed herein.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 21, 2004 Applied DNA Sciences, Inc.
/s/Rob Hutchison
-----------------
Rob Hutchison
Chief Executive Officer
/s/ Gerhard Wehr
-------------------
Gerhard Wehr
Chief Financial Officer
26