SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2003
Commission File Number 002-90539
Applied DNA Sciences, Inc.
(Exact Name of Small Business Issuer in its charter)
Nevada 59-2262718
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
9229 W. Sunset Boulevard, Suite 830, Los Angeles, CA 90069
(Address of principal executive offices) (Zip code)
Issuer's telephone number (310) 860-1362
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.50 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. None
State the aggregate market value of the voting stock held by non- affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $23,090,089.
Number of outstanding shares of the registrant's par value $0.001 common stock
as of December 9, 2003: 18,329,921
TABLE OF CONTENTS
PART I PAGE
Item 1. Business and Development of the Company 3
Item 2. Description of Property 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Plan of Operation 22
Item 7. Financial Statements (F1-F26)
PART III
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 37
Item 8(a) Controls and Procedures 37
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 38
Item 10. Executive Compensation 41
Item 11. Security Ownership of Certain Beneficial Owners and Management 42
Item 12. Certain Relationships and Related Transactions 43
Item 13. Exhibits and Reports on Form 8-K 44
Item 14. Principal Accountant's Fees and Services 46
Exhibit Index 44
2
ITEM 1. DESCRIPTION OF BUSINESS
This Annual Report on Form 10-KSB (including the section regarding Management's
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding our business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not deemed to represent an all-inclusive means of identifying
forward-looking statements as denoted in this Annual Report on Form 10-KSB.
Additionally, statements concerning future matters are forward-looking
statements.
Although forward-looking statements in this Annual Report on Form 10-KSB
reflect the good faith judgment of our management, such statements can only be
based on facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, without
limitation, those specifically addressed under the heading "Risks Related to Our
Business" below, as well as those discussed elsewhere in this Annual Report on
Form 10-KSB. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-KSB. We file reports with the Securities and Exchange
Commission ("SEC"). We make available on our website under "Investor
Relations/SEC Filings," free of charge, our annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file
such materials with or furnish them to the SEC. Our website address is
www.adnas.com. You can also read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
You can obtain additional information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-KSB. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this Annual Report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and prospects.
Overview
Applied DNA Sciences, Inc. provides security solutions for the protection
of corporate, personal and intellectual property from counterfeit and fraud by
utilizing a proprietary line of DNA (deoxyribonucleic acid)
embedded-biotechnology products. Our products and services will be offered to
corporations and government agencies and will be accompanied with monitoring and
enforcement support. Essentially, we use plant DNA and synthetically isolate
fragments that have unique characteristics and one-of-a-kind sequences. By
working with various media, Applied DNA Sciences embeds its DNA technology into
ink, microchips, glue, paints, and other materials, and then authenticates the
specially tailored DNA fragments to ensure that the product has not been
counterfeited or tampered with.
We have an exclusive licensing and partnership agreement with Biowell
Technology, Inc. of Taiwan, which agreement will provide our initial source of
revenue. Our territories include the United States, the European Union, Canada,
Mexico, Colombia, Saudi Arabia and the United Arab Emirates. We hope to be a
leader in sales, marketing, and sub-licensing of the DNA products developed by
Biowell Technology in the world's largest markets.
3
History
We were incorporated under the laws of the state of Florida under the name
of Datalink Systems, Inc. in 1983. Datalink subsequently re-domesticated in the
state of Nevada, changing its name ultimately to ProHealth Medical Technologies,
Inc. ProHealth Medical Technologies, Inc. was an inactive publicly-registered
entity with no significant assets or operations. On October 21, 2002, Datalink
completed an Agreement and Plan of Reorganization ("Agreement") with Applied DNA
Sciences, Inc. ("ADNAS"), a privately-held company organized under the laws of
the state of Nevada. Effective with the Agreement and Plan of Reorganization,
all previously outstanding common stock, preferred stock, options and warrants
owned by ADNAS stockholders were exchanged for an aggregate of 10,178,352 shares
of ProHealth Medical Technologies, Inc. common stock.
Following the consummation of the Agreement and Plan of Reorganization, in
November of 2002, the name of the corporation was changed to Applied DNA
Sciences, Inc.
Principal Offices
Our principal offices are located at 9229 West Sunset Boulevard, Suite 830,
Los Angeles, CA 90069, and our phone number is 310-860-1362. Our Web address is
www.adnas.com.
License Agreement with Biowell Technology
Applied DNA Sciences has acquired the exclusive license to sell, market,
and sub-license all of Biowell Technology, Inc.'s DNA anti-counterfeit and fraud
prevention biotechnology and products in the United States, the European Union,
Canada, Mexico, Colombia, Saudi Arabia and the United Arab Emirates.
The exclusive license also gives us the initial rights to future anti-fraud
biotechnologies developed by Biowell 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 addition to marketing the DNA products in its
territory, we intend to build or subcontract the building of DNA anti-fraud
laboratories, development centers, and service facilities. The exclusive license
agreement was entered into in October of 2002 and was amended in July of 2003.
It has an initial term of five years with an automatic ten-year renewal upon the
meeting of certain minimum-guarantee objectives. Thereafter, the license is
renewable for successive three-year terms upon the successful completion of
certain minimum-guarantee objectives.
The minimum guarantees that we must meet each year of the license agreement
to retain the exclusive license for the technologies are as follows:
Year Minimum Guarantee
1st year $50,000 gross purchase orders or payment of $25,000
2nd year $300,000 gross purchase orders or payment of $100,000
3rd year $360,000 gross purchase orders
4th year $432,000 gross purchase orders
5th year $518,400 gross purchase orders
For the first year, we paid $25,000 to Biowell in lieu of the minimum gross
purchase orders.
Additionally, any new product license that Applied DNA Sciences receives
from Biowell will remain exclusive for the first eighteen months. In order to
keep an exclusive license, we are required to provide Biowell with a minimum of
$100,000 in gross purchase orders during such eighteen-month period. If we reach
this minimum guarantee, the exclusive license for the new product extends for a
total of three additional years, with us being required to produce gross minimum
purchase orders of 20% greater than the previous year's minimum guarantee. The
business relationship created by the exclusive license agreement, as amended,
provides for us and Biowell to develop collaborative technologies. To date, we
have filed one provisional patent application (60/463215) with the USPTO on
April 16, 2003. The provisional application cover sheet lists Lawrence C. Lee
(CEO, Applied DNA) and Jun-Jei Sheu (CEO, Biowell, Taiwan) as the inventors.
In consideration for the granting of the exclusive license, Biowell
received 1.5 million shares of our common stock, with the option to purchase
another 500,000 shares. In return, Applied DNA Sciences received the option to
purchase 500,000 shares of Biowell common stock.
4
Sub-Licensing
In conjunction with Biowell, we are in various stages of negotiation for
the sale of geographic Sub-Licenses of our licensed technology. Presently, we
are negotiating with entities for the sale of Sub-Licenses in Mexico, Canada,
Italy, Colombia, Saudi Arabia and the UAE. In August of 2003, Applied DNA,
Biowell and G. A. Corporate Finance Ltd. entered into a Sub-License Agreement
for the United Kingdom in exchange for $3,000,000. G. A. Corporate Finance Ltd.
paid $25,000 to us upon its execution of the Agreement, and the remaining
$2,975,000 payment to us is contingent upon G.A. Corporate Finance Ltd.
achieving gross revenues. The remaining principal is subject to an interest
bearing promissory note, payable in twenty (20) consecutive quarterly
installments of principal and interest in the amount equal to the lower of
$185,937.50 or 35% of Gross Revenues (as defined therein) for that quarter due
on the final day of the quarter. In the event that the sub-license agreement is
terminated for any reason, the remaining amount due under the Note will cease to
be due.
The minimum guarantees that G. A. Corporate Finance, Ltd. must meet each
year of the license agreement to retain the exclusive license for the
technologies are as follows:
Year Minimum Guarantee
1st year $50,000 gross purchase orders
2nd year $150,000 gross purchase orders
3rd year $300,000 gross purchase orders
4th year $360,000 gross purchase orders
5th year $432,000 gross purchase orders
As with our exclusive license agreement with Biowell, our UK sub-licensee
will have the opportunity to apply for new product licenses, which can remain
exclusive in its territory for the first eighteen months.
Biowell DNA Technologies
Each individual plant and animal has a unique DNA code in its cells. By
taking the DNA from a plant or animal, Biowell is able to tailor a group of DNA
codes that can be turned into a unique and traceable marking for any product.
In the early 1980's the primary emphasis in DNA research was applied to
pharmaceutical applications. There was very little focus in the living
biotechnology arena. During the l990's, a group of scientists, led by Dr. Sheu
Jun-Jei of Taiwan, focused research and development on a DNA based
anti-counterfeit biotechnology. In the late 1990's, Dr. Sheu made a major
breakthrough in biotechnology, and patents with commercial applications were
filed and pending, and additional patent applications will be filed in the
future. Biowell was formed in Taiwan in October of 1999 to hold these pending
patents and continues to advance in the areas of DNA anti-counterfeiting
biotechnology.
The key to this biotechnology is the ability to preserve and
protect the specially tailored plant DNA This patent pending, scientifically
processed and protected DNA biotechnology, can be mixed with or attached to
various types of media including, but not limited to:
o Paint
o Glue
o Polymer
o Ink In
In doing so, the unique characteristics of DNA enable us to distinguish genuine
products from counterfeits. This technology is also utilized in another
proprietary fabrication process that allows use of the specially encapsulated
DNA in a non-silicon based microchip. This proprietary DNA microchip can then be
used on circuit boards, ID cards, etc. to electronically authenticate the
products that contain them. The DNA AC (anti-counterfeit) biochip is a Biowell
product in which DNA is embedded into a microchip. When these biochips are
embedded into products, the biological data can be read electronically and the
product can be authenticated. Without authentication, the product will be
rejected.
Biowell DNA biotechnologies are also used to produce DNA AC
(anti-counterfeit) biochips -- glass or nylon materials with biological
macromolecules such as nucleic acids, proteins, antibodies, or even cells that
are then spotted on the surface of the chip in a high-density micro-array.
When electricity is passed through these biochips, a unique electrical
signature is returned. This electrical signature response is then used to verify
the authenticity of the products that contain these DNA embedded chips.
5
Patents Pending
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Patent Name Application No. Filed by Date Filed Jurisdiction
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
A Method of Utilizing 089108443 Biowell March 17, 2000 Taiwan
Ribonucleic Acid as
Markers for Product 00107580.2 May 18, 2000 China
Anti-Counterfeit Labeling
and Verification 09/832,048; April 9, 2001 United States
published 20020187263-A1
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
EppenLocker (A 089204158 Biowell March 10, 2000 Taiwan
Leakage-Prevention Apparatus
of Microcentrifuge)
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Multiple Tube Structure for 089210575 Biowell June 20, 2000 Taiwan
Multiple in a Closed
Container
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Method for Processing 89111477 Biowell June 12, 2000 Taiwan
Multi-PCR in Closed Vessel
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Method for Mixing Nucleic 2002-294229 Biowell August 31, 2002 Japan
Acid in
Water Insoluble Media and 03007023.9 March 27, 2003 European
Application Thereof Patent Office
92121973 August 11, 2003 Taiwan
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Method for Hiding Secret 92121490 Biowell August 6, 2003 Taiwan
Message Carrying a DNA
Molecule and a Method for pending August 6, 2003 China
Decoding the Secret Message
Hiding by thereof
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Method for Transferring 92119302 Biowell July 15, 2003 Taiwan
Giveback Funds by
Recognizing Plurality of 03150071.4 July 31, 2003 China
Objects
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
Anti-Counterfeit Chip None Biowell To be filed Taiwan
Recognizing Device
China
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
A System and Method for 60/463215 Biowell April 16, 2003 United States
Marking Textiles Using DNA
Applied DNA Sciences
------------------------------ --------------------------- --------------------------- --------------------------- -----------------
6
We regard our patents, trademarks, trade secrets and other intellectual property
as an integral component of our success. We rely on patent law, trademark law,
trade secret protection and confidentiality and/or license agreements with
employees, customers, partners and others to protect our intellectual property.
Effective patent, trademark and trade secret protection may not be available in
every country in which our products are available. We cannot be certain that we
have taken adequate steps to protect our intellectual property, especially in
countries where the laws may not protect our rights as fully as in the United
States. In addition, if our third-party confidentiality agreements are breached
there may not be an adequate remedy available to us. If our trade secrets become
publicly known, we may lose our competitive position.
Additionally, 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.
7
Our Products
With our exclusive licensing of Biowell's DNA technologies, we will be
working to provide complete DNA anti-counterfeit and fraud prevention solutions.
We will offer comprehensive and price-competitive products and solutions. The
key characteristics of the DNA biotechnology are as follows:
Unique and Impossible to Replicate DNA Codes -- specially processed DNA
fragments, with unique characteristics and one-of-a-kind sequences, are
used. The embedded DNA concentration is extremely small and cannot be
analyzed through cloning methods; therefore, the technique is both highly
secure and specific.
Easy to Customize -- We can tailor the DNA tagging to meet the customer's
product requirements. For example, the DNA codes can be generated based on
one or more DNA sources and one or more anti-counterfeit technologies.
Easy and Quick to Use -- With the DNA instant verification kit or scanner,
instant verification can be obtained at the point-of-purchase. Hence, the
authentication process can be performed quickly. Traditional
anti-counterfeit technology analysis requires anywhere from 24 to 48 hours.
Our technology will achieve an effective and timesaving deterrent against
counterfeiters.
Broad Applications -- DNA anti-counterfeiting technology can be applied to
almost any product on the market. The edible ink can be tagged and used on
tablets or capsules ensuring against counterfeiting pharmaceuticals.
DNA Marker
Our first anti-counterfeiting product is the DNA Marker, an agent that can
be used to authenticate textile products. The DNA Marker can be applied at any
point in the manufacturing process, from the freshly cut raw fibers through to
the finished garment. Since the DNA Marker can be applied to any fabric from
cotton to wool, it could help textile vendors and governments determine the
origin of thread, yarn and fabric as well as high-end garment manufacturers who
suffer lost sales at the hands of counterfeiters.
Our research leads us to believe that the DNA Marker will remain effective
into the 22nd century and will be detectable throughout the different
manufacturing stages without degrading. It can be detected in a variety of
manners from inspection under infrared light to laboratory forensic analysis
that authenticates it to a certainty of 99.9999 percent. We have filed one
provisional patent application (60/463215) for the DNA Marker with the USPTO on
April 16, 2003. The provisional application cover sheet lists Lawrence C. Lee
(CEO, Applied DNA) and Jun-Jei Sheu (CEO, Biowell, Taiwan) as the inventors.
Driven by market needs, this is the first of what we hope will be a number
of products and services based upon the DNA Marker technology. We will
continuously assess the anti-counterfeiting needs of markets, companies and
governmental organizations and will work to develop proprietary technologies,
solutions and products for these opportunities. When there is an opportunity, we
will develop new applications for our technology and apply for patents to
protect these new applications.
Inks
DNA anti-counterfeit ink has been developed as two major applications. The
first ink is Biowell's unique anti-counterfeit ink (covert ink), which can be
authenticated at a forensic-science level of certainty, in a lab, with detailed
DNA analysis. The second application is an enhanced version of the first,
integrated into the original anti-counterfeit ink and an additional instant
detection function for on-site authentication (overt ink).
8
The instant verification process has been designed to allow sampling at any
point in the product supply chain. By swabbing testing fluid containing a
special activation buffer across the authentic DNA ink surface, a biochemical
reaction occurs between the coating of the DNA molecules in the ink and the
buffer fluid. This reaction manifests as a reversible color change, with the ink
changing color from blue to pink, and back to blue within seconds. Testing can
be repeated at various checkpoints throughout the product supply chain.
Proprietary production techniques are used to manufacture DNA with the
unique property for integration with ink. The key to utilizing DNA for
anti-counterfeit purposes lies in the preservation of DNA. The system of
production ensures that the proprietary encapsulated DNA can survive for many
years. Our Ongoing tests indicate protection and stability should last at least
100 years. Special proprietary processes and materials are used to shield
specially tailored DNA from environmental variation, which allows for
preservation of the encapsulated DNA and proof of authenticity for genuine
products.
DNA ink can be applied to:
o General Company Use: trade marks, patents, company logos, important
documents
o Financial industry: currency, stocks, checks, bills, bonds, checks
o Retail: event tickets, VIP tickets, clothing labels
o Medicines: capsule and pill surface printing
o Inner package: foil blister packs
o Outer package: boxes, bottles
o Arts: paintings, artifacts
o Others: lottery tickets, stamps, custom seals, passports, visas, etc.
Virtually any item that can be duplicated now can be protected with any of
these DNA ink applications. These applications can be adapted to any company's
current branding, product tracking, or other anti-counterfeiting program.
DNA Labels
DNA anti-counterfeit ink can be applied to garment labels. It can also be
printed onto logos or on any other surface. Labels are printed with the
proprietary ink containing the specific authentication DNA code for a
manufacturer. The labels can then be easily tested for authenticity.
Knowledge that the labels are DNA-imprinted and can be quickly and easily
verified also serves as a deterrent to counterfeiters. We anticipate this in
itself will create a demand for the proprietary DNA ink-embedded label
technology.
DNA Chip
Computer and electronic signals constitute most corporate security systems.
These systems are of similar function and design, and are susceptible to
duplication and counterfeit. The polymorphism of DNA is significantly more
complex than electronic signals, and better suited for security systems.
9
The DNA chip will be used in a card and is intended for both authentication
of the card and identification of the individual. For that purpose, a set of DNA
chip cards are assigned with specific DNA (group ID), along with the
individual's identification information and recorded in the chip's memory. A
reader module is configured to recognize (and therefore verify) only the chip
carrying the correct group ID. Any DNA chip card with different group ID, or any
other chip card, will be rejected.
The DNA chip uses a combination of different plant species DNA, each one
being custom tailored, and with each user group having the same combination of
DNA codes. Individuals are differentiated in the system by identification codes
stored in the chip's memory. In addition, the DNA chip can be configured for the
customer to have a particular person have their own DNA as the source, which is
then custom tailored and used for that user group. The DNA chip generates unique
signals and will not function properly once removed from the casing.
The signal of a DNA chip is generated through an interaction between DNA
and a specially devised mechanism known as a DNA Chip Reader. A real DNA chip
will generate an analog signal and be received by the reader after the chip is
stimulated. The reader is specifically matched to read only the predetermined
signal from a specific DNA code(s). An LCD display screen provides immediate
authentication by reading the unique DNA signals embedded in the chip.
The DNA chip function is versatile, which allows it to be integrated into
the form of slot reader, slide through reader, or contact point reader for
instant authentication. Biowell has also developed a portable, lightweight,
hand-held scanner that can be used to authenticate the DNA chips. The cost of
the DNA chip, card, and reader system is comparable to existing smart card
systems. Above all, the reader can be linked externally with existing card
readers to save replacement costs.
We believe that the DNA chip system is more secure than all other systems;
since it cannot be copied or hacked, and works with specially configured
readers. The specification of the AC chip and the microchip reader module are
listed below.
DNA AC Chip Specifications
Size 5 mm x 3 mm x 0.675 mm
Memory 128 bits ~ 64k bytes
DNA AC Chip Reader Specifications
Temperature -60 ~ 100oC
Humidity 0 ~ 100%
Size 11 cm x 17 cm x 5.5 cm
Power source 5V DC
9V, 120V, 220V, 240V AC
Authentication method Contact
Card insertion Max. thickness: 0.81 mm
Recognition 0.5 seconds
Display type LCD, 16 characters (8 x 2 rows)
Communication Standard RS-232 port, Wiegand
The DNA AC chip can be applied to many products. For example:
o Security ID cards o Passports o Licenses o Credit and ATM cards o
Debit cards
o Consumer merchandise (CDs, VCDs, DVDs, notebook computers, PDAs,
handbags, etc.)
o Other applications where authentication is required (antiques,
paintings, etc.)
10
Demands for Security and Positive Identification
As nations are threatened by terrorism and corporations try to prevent
corporate fraud and espionage, the need for secure anti-counterfeiting and
identification systems increases. We believe that our technology can be utilized
to provide important and cost-effective support for local, state, and federal
governments as well as corporations doing business with highly sensitive
information. Our anti-counterfeiting technology can be used for the following
types of identification and important government documents:
o Passports
o Green cards
o Visas
o Driver's licenses
o Social Security cards
o Student visas
o Military ID's
o Other important Identity cards and official documents
We intend to explore contracting with consultants in Washington D.C. that
will assist with identifying and securing potential Government contracts that
will utilize the DNA technology for identity verification and authentication.
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 of ours and is currently
underway in the Biowell labs.
Sales and Marketing
We employ a multi-tier sales and marketing strategy. We 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 provide anti-counterfeiting and security solutions through our sales
force covering a multitude of potential clients either directly or via
resellers.
Customers
We do not currently have any customers at this point. Our client base will
consist of major corporations, government entities and educational institutions.
We will provide DNA chip technology, DNA ink technology as well as DNA
profiling/tagging technology through various types of resale agreements. We will
apply these technologies to labels and security ink, to a chip and reader as
well as textile markers and agriculture profiling.
11
Competition
The anti-counterfeit and fraud prevention market is highly competitive and
diverse. Since we believe that other forms of anti-counterfeiting and security
measures can be easily defeated, we expect that utilizing DNA which cannot be
replicated will garner great demand from the market. Some examples of
biotechnology and other security technologies include:
FINGERPRINT- a systems scans fingerprints before granting access to
computer files.
VOICE- Off-the-shelf software authenticates users based on individual vocal
patterns.
CORNEA- Scanners that scan the iris of a user's eye to match compared to a
computer database.
FACIAL SCAN- Computers can use complex algorithms to distinguish one face
from another.
IC CHIP & MAGNETIC STRIP- Integrated circuit chip that runs an electric
current through a circuit and is verified by a IC card. Is used in many parts of
Europe and Asia.
HOLOGRAPH- Optical security elements ('holograms') constitute a family of
optically variable microstructures, which are difficult to copy. Most of them
are difficult to reproduce using advanced color photocopiers and printing
techniques. This is why they are so widely used as anti-counterfeit devices.
Holograms are only one member of a family of optically variable devices which
all have several features in common. These are:
o Highly visible to the naked eye under good or reasonable conditions of
illumination.
o Colorful and change their colors with viewing angle.
o They derive their colorful effects from microstructures within the
devices, which cause interference or diffraction of the light falling
upon them.
FLUORESCENCE- X-ray Fluorescence (XRF) and elemental taggant technologies
were developed as a unique method for assaying uranium ore. Later on was used as
a handheld alloy grade identification and spectral analysis instrument. Its use
is limited to label/printing applications.
RADIOACTIVITY& RARE MOLECULES- a method of Radiation detection is very
effective but limited to use on crude oil.
12
Some of the bigger competitors in the field of anti-counterfeiting and
fraud protection include:
DNA Technologies. Inc.
Art Guard International
Theft Protection Systems
Cypher Science (United Kingdom)
Mt. Sinai Hospital
ChemTAG (Norway)
NTT DATA Labs (Japan)
November AG
Management Strategy
In anticipation of internal growth, we will organize resources to manage
our development effectively. Our Chief Executive Officer is responsible for the
strategic direction, coordinating with our overseas technology partner Biowell
and others as well as operations. Our President is responsible for government
entity relations, corporate governance and building shareholder value. Our Chief
Financial Officer covers overall financial management, financial reporting,
corporate administration, investors relations. Our Vice President covers
specific industries, such as the pharmaceutical, 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 Applied DNA Science's anti-counterfeit, diversion and piracy
applications and products. Our Vice President, Sales and Marketing, is
responsible for the national sales force.
Employees
As of December 5, 2003, we employed 10 full-time employees, of which 5 are
in management, four are sales & marketing executives and one is in
administration as office manager.
ITEM 2. DESCRIPTION OF PROPERTY
Offices
Presently, we maintain our principal office at 9229 W. Sunset Boulevard,
Suite 830, Los Angeles, California 90069. We signed a lease for our office space
in November 2003. The office space, which is provided to us for $11,312.70 per
month for the first twelve months of the lease, for $ 11,635.92 for the second
12 months and $ 12,031.01 for the last 12 months of the lease, has approximately
5,387 square feet. We consider the premises adequate for our purposes for the
immediate future. We have an option to expand to the adjacent vacant space
consisting of 1,024 square feet. This option, however, will expire on February
5, 2004.
Our Web address is www.adnas.com.
ITEM 3. 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. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders for the year
ended September 30, 2003.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Market Information
Our Common Stock is traded over-the-counter on the Over the Counter Bulletin
Board maintained by the National Association of Securities Dealers under the
symbol "APDN". There is no certainty assurance that the Common Stock will
continue to be quoted or that any liquidity exists for our shareholders.
The following table sets forth the quarterly quotes of high and low prices for
our Common Stock on the OTC Bulletin Board during the fiscal years September 30,
2002 and September 30, 2003. In February of 2003, we changed our year end to
September 30.
Year ended 9/30/03 High Low
December 31, 2002 $2.25 $0.02
March 31, 2003 $2.80 $2.00
June 30, 2003 $2.84 $2.25
September 30, 2003 $3.25 $2.36
Year ended 9/30/02* High Low
December 31, 2001 $0.04 $0.03
March 31, 2002 $0.03 $0.03
June 30, 2002 $0.03 $0.03
September 30, 2002 $0.05 $0.05
* We have disclosed the numbers with both years ending on September 30 for
comparative purposes. Our prior year end was December 31.
The source of this information is NASDAQ Over the Counter Bulletin Board
Research Reports and Yahoo Finance Historical Prices reports, as well as
broker-dealers making a market in our Common Stock. These prices reflect
inter-dealer prices, without retail markup, mark-down or commission and may not
represent actual transactions. Number of Stockholders
As of December 5, 2003, the approximate number of holders of record of our
Common Stock, which is our only class of common equity, is 399. This number does
not include holders of securities in street name.
Dividends
We are in the developmental stage and accordingly have not generated any
revenues nor had net profits on operations and therefore are currently
proscribed under the Nevada Revised Statutes from declaring dividends. We have
not paid any cash dividends on our Common Stock or our Preferred Stock. Our
Board of Directors has no present intention of declaring any cash dividends, as
we expect to re-invest all profits in the business for additional working
capital for continuity and growth. The declaration and payment of dividends in
the future will be determined by our Board of Directors considering the
conditions then existing, including our earnings, financial condition,
capital requirements, and other factors.
OUR CAPITAL STRUCTURE
We are authorized to issue 10,000,000 shares of Preferred Stock and 100,000,000
shares of Common Stock. We have designated one series of convertible preferred
stock, however, no shares from that series has been issued.
Both our Preferred Stock and Common Stock had a par value of $0.0001 per share
through December 3, 2003. On December 12, 2003, we increased the par value of
our Common and Preferred Stock to $0.50 per share by filing Articles of
Amendment to our Articles of Incorporation. This action will be filed on a
current report on Form 8-K as soon as we properly notify NASDAQ Market
Regulation.
14
The authorized classes, and the amount or number of each, which are authorized
and outstanding as of December 12, 2003 are as follows:
---------------------------------- -------------------- ---------------------------------
Security Authorized Issued and Outstanding
---------------------------------- -------------------- ---------------------------------
---------------------------------- -------------------- ---------------------------------
Preferred Stock 10,000,000 -0-
---------------------------------- -------------------- ---------------------------------
Common Stock 100,000,000 18,329,921
---------------------------------- -------------------- ---------------------------------
2003 Offering Units 2,000 183.5
---------------------------------- -------------------- ---------------------------------
Underlying Common Stock 3,200,000 293,600
---------------------------------- -------------------- ---------------------------------
Underlying Warrants 1,000,000 91,750
---------------------------------- -------------------- ---------------------------------
Bridge Unit Offering 30 23.25
---------------------------------- -------------------- ---------------------------------
Underlying Notes 30 23.25
---------------------------------- -------------------- ---------------------------------
Underlying 1,500,000 1,162,599
Warrants
($3.20/share)
---------------------------------- -------------------- ---------------------------------
Underlying 300,000 232,500
Warrants
($0.10/share)
---------------------------------- -------------------- ---------------------------------
Preferred Stock
The 10,000,000 shares of Preferred Stock authorized are undesignated as to
preferences, privileges and restrictions. As the shares are issued, the Board of
Directors must establish a "series" of the shares to be issued and designate the
preferences, privileges and restrictions applicable to that series. To date, the
Board has designated a Founders' Series of Convertible Preferred Stock, which,
in six months from the date of issuance, shall be convertible at the option of
the holder and upon our reaching certain financial objectives, into shares of
our restricted Common Stock. Each share, when eligible, is convertible into 25
fully paid and non-assessable shares of our Common Stock, subject to a leak out
agreement that extends the 144 Rule to two years. Holders will be permitted to
sell, after a one year holding period through a three year holding period, 1% of
the issued and outstanding shares of the Company's Common Stock every 90 days.
This series has been authorized by the Board of Directors.
Common Stock
Our authorized common equity consists of One Hundred Million (100,000,000)
shares of a single class of Common Stock, having a par value of $0.50 per share.
As of December 9, 2003 there are 18,329,921 shares issued and outstanding. The
holders of our Common Stock (i) have general ratable rights to dividends from
funds legally available therefore, when, as and if declared by the Board of
Directors; (ii) are entitled to share ratably. In all assets available for
distribution to shareholders upon liquidation, dissolution or winding up of our
affairs; (iii) do not have preemptive, subscription or conversion rights, nor
are there any redemption or sinking fund provisions applicable thereto; and (iv)
are entitled to one vote per share on all matters on which shareholders may vote
at all shareholder meetings. The Common Stock does not have cumulative voting
rights, which means that the holders of more than fifty percent of the Common
Stock voting for election of directors can elect one hundred percent of our
directors if they choose to do so.
15
2003 Offering Units
In September 2003, we sold 16 units at $4,000 a unit, for a total of $64,000,
and between October and December 2003, we sold 167.5 units for a total of
$670,000 in a private offering of its securities under Regulation D of the
Securities Act of 1933, and Rule 506 promulgated thereunder.
Each Unit consisted of 1,600
shares of our Common Stock plus 500 Common Stock Purchase Warrants.
The Warrants are exercisable on a one for one basis at an exercise price of
$3.50 per share for a two year exercise period from the date of issuance. The
Units, and their constituent securities, were granted piggyback registration
rights.
Bridge Unit Offering
From November through December 2003, we sold 23.25 units (the "Units")
to accredited investors at a price of $50,000 per Unit (the "Offering") for a
total of $1,162,500. 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.
Notes
The aggregate principal amount of Notes sold was $1,162,500. 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.
16
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
17
(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 bythe 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.
18
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 $3.20 Warrant offered entitled the registered holder to purchase
50,000 shares of Common Stock at an exercise price of $3.20 per share during a
five-year period commencing on the initial closing of the Offering. Each $0.10
Warrant offered entitled the registered holder to purchase 10,000 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.
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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
In November of 2002, we created a special compensation plan to pay the founders,
consultants and professionals that had been contributing valuable services to
the Company during the previous nine months. The plan is called the
Professional/Employee/Consultant Compensation Plan (the "Plan"). Share and
option issuances from the Plan were to be staggered over the following six to
eight months, and consultants that were to continue providing services
thereafter either became employees or received renewed contracts from us in July
of 2003, which contracts contained a more traditional cash compensation
component. The Plan was designed by the Board to meet the Company's important
team building objectives in its early stages, and to be temporary. As of
December 5, 2003, a total of 1,346,809 shares have been issued from the Plan and
560,000 options, 222,000 of which were exercised as of September 30, 2003; and
as of December 5, 2003, an additional 32,000 options were exercised.
Each qualified and eligible recipient of shares and/or options under the Plan
received securities in lieu of cash payment for services. Each recipient agreed,
in his or her respective consulting contract with us, to sell a limited number
of shares monthly. Management feels that this carefully designed Plan was
successful in attracting and retaining a strong team at a time when the Company
had no established revenue stream and limited or no outside financing. Because
recipients sold their respective shares in a controlled manner, there was also
no apparent negative impact to the market from sales of these unrestricted
securities, which was an important objective of the Board when the Plan was
contemplated.
In our financial statements, shares that were issued from November 2002 through
June 30, 2003 that were valued at $0.065 per share were shares issued from this
Plan created in November of 2002 on the basis of contracts executed at that time
for previously rendered services. Common Stock disclosed as being issued in
exchange for cash at $1.00 per share represents options that were exercised
under this Plan.
Any other unrestricted shares that were issued either before or after July 1,
2003 were valued at the fair market value.
19
------------------ ------------------- ------------------------- ------------------
Plan Category Number of Securities to be Weighted Average Exercise Number of Securities
Issued Upon Exercise of Price of Outstanding Options, Remaining Available
Outstanding Options, Warrants and Rights for Future Issuance
Warrants and Rights
------------------- ------------------- --------------------- -----------------
(a) (b) (c)
------------------- ------------------- --------------------- -----------------
Professional/Consultant/
Employee Stock and Stock
Option Compensation Plan 2,000,000 $254,000
------------------------ -------------------------- --------------------- ------------------
Total 2,000,000 $254,000 399,191**
------------------------ -------------------------- --------------------- ------------------
**This total represents shares plus shares into which options can be exercised.
A total of 222,000 options from this Plan have been exercised as of December 5,
2003.
20
SALES OF UNREGISTERED SECURITIES DURING FISCAL YEAR ENDED SEPTEMBER 30, 2003
The issuances of unregistered securities which occurred during the fiscal year
were as follows:
Unless otherwise noted, each of the issuances described below is considered by
the Company to be exempt from registration by reason of Section 4(2) of the
Securities Act of 1933.
On September 16, 2002, our predecessor issued 100,000 unregistered shares of
common stock to its founders in exchange for services rendered, which we valued
at $1,000.
On October 21, 2002, we issued 10,178,352 unregistered shares of common stock in
connection with the merger with Applied DNA Sciences, Inc. We valued the shares
at $1,018. our predecessor cancelled the previously issued and outstanding
100,000 shares of common stock in October, 2002.
In October, 2002, we issued 602,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $39,130.
In October, 2002, we issued 876,000 unregistered shares of common stock in
connection with a subscription agreement, which we valued at $ 56,940.
In January, 2003, we issued 1,500,000 unregistered shares of common stock to
Biowell Technology, Inc. as consideration for technology licensing agreement,
which we valued at $ 97,500.
In January, 2003, we issued 586,250 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $ 76,213.
In February, 2003, we issued 9,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $ 585.
In March, 2003, we issued 10,140,000 unregistered shares of common stock to its
Founders as consideration for services rendered, which we valued at $ 1,014.
In March, 2003, we issued 91,060 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $
230,634.
In March, 2003, we issued 6,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $ 390.
In March, 2003, we issued 860,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $ 55,900.
21
In April, 2003, we issued 18,000 unregistered shares of common stock in exchange
for $18,000.
In April, 2003, we issued 9,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $ 585.
In April, 2003, we issued 5,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $ 12,500.
In June, 2003, we issued 10,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $ 25,000.
In June, 2003, we issued 50,000 unregistered shares of common stock in exchange
for $50,000.
In June, 2003, we issued 270,000 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $ 17,550.
In July, 2003, we issued 213,060 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $
428,818.
In July, 2003, we issued 20,000 unregistered shares of common stock in exchange
for $20,000.
In July, 2003, we issued 10,000 unregistered shares of common stock in exchange
for $10,000.
In August, 2003, we issued 172,500 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $
410,930.
In August, 2003, we issued 29,000 unregistered shares of common stock in
exchange for $29,000.
In September, 2003, we issued 395,260 unregistered shares of common stock to
consultants as consideration for services rendered, which we valued at $
952,997.
In September 2003, we sold 16 units at $4,000 a unit, for a total of $64,000.
Each Unit consisted of 1,600 shares of our Common Stock plus 500 Common Stock
Purchase Warrants, exercisable for a period of two years at a price of $3.50 a
share.
The Warrants are exercisable on a one for one basis at an exercise price of
$3.50 per share for a two year exercise period from the date of issuance. In
September, 2003, we issued 95,000 unregistered shares of common stock in
exchange for $95,000.
Between October and December 2003, we sold 167.5 units for a total of $670,000.
Each Unit consisted of 1,600 shares of our Common Stock plus 500 Common Stock
Purchase Warrants, exercisable for a period of two years at a price of $3.50 a
share.
From November through December 2003, we sold 23.25 units to accredited investors
at a price of $50,000 per Unit for a total of $1,162,500. Each Unit consists of
(i) a $50,000 Principal Amount 10% Secured Convertible Promissory Note, (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 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. The Notes are convertible into shares of our common
stock at a price of $2.50 per share.
ITEM 6. PLAN OF OPERATIONS
The following discussion contains forward-looking statements that are subject to
significant risks and uncertainties about us, our current and planned products,
our current and proposed marketing and sales, and our projected results of
operations. There are several important factors that could cause actual results
to differ materially from historical results and percentages and results
anticipated by the forward-looking statements. The Company has sought to
identify the most significant risks to its business, but cannot predict whether
or to what extent any of such risks may be realized nor can there be any
assurance that the Company has identified all possible risks that might arise.
Investors should carefully consider all of such risks before making an
investment decision with respect to the Company's stock. In particular,
investors should refer to the section entitled, "Risk Factors that May Affect
Future Results and Market Price of Stock." The following discussion and analysis
should be read in conjunction with the financial statements of the Company and
notes thereto. This discussion should not be construed to imply that the results
discussed herein will necessarily continue into the future, or that any
conclusion reached herein will necessarily be indicative of actual operating
results in the future. Such discussion represents only the best present
assessment from our Management.
22
Business Strategy and Approach
The Company's goal is to establish three integrated business operations
addressing and servicing the needs of the marketplace for anti-counterfeit,
fraud prevention, and homeland security solutions.
Intellectual Property Development, Product Operations & Partnerships
We are a developer of security solutions that protects corporate and
intellectual property from counterfeiting, fraud, piracy and product diversion
using a proprietary line of DNA embedded biotechnology products accompanied by
monitoring and enforcement support, we produce solutions customized to our
customer's need. We intend to market and sell DNA anti-counterfeit and fraud
prevention products and oversee laboratory facilities where consumer and
corporate products can be tested for authenticity. We plan to oversee the
development of new product lines that will address specific and individual
customer needs. Additionally, this division will seek to identify strategic
licensees and partnerships in multiple sectors that will license and sell our
products and biotechnologies. This will include sub-licensing the technology to
key partners in each sector with an established base of customers. These new
partners will be able to enhance their client services by adding our technology
to the existing product line or current security methods to deter fraud and
counterfeiting.
Consultant & Enforcement Operations
As a service to our clients, we plan to consult with them on how to best
protect their intellectual property and products. We plan to offer worldwide
investigative and DNA analysis services for the enforcement and prosecution of
counterfeiters and fraud itself and through our subcontractors or sub-licensees.
International Sub-License Operations
This division will oversee the activities of all international sub-license
alliances and partnerships. This division will also develop a corporate policy
for all marketing and promotional activities.
We intend to seek alliances with existing anti-counterfeit networks in each
market. We will train these networks to use its technology to detect and monitor
counterfeit and fraud, and it will use its own anti-counterfeit and security
experts to help detect counterfeiting attempts against corporations and
government agencies.
Between our three operations, we will provide multiple security solutions.
Each division will produce separate revenue streams and integrated
organizational structures.
Our management and advisory board have knowledge and skills for providing
integrated DNA anti-counterfeit and fraud prevention systems for the protection
and tracking of documents, products, and intellectual property, including:
Strong Security Knowledge Base -- Our team has experience in analyzing and
providing solutions that address the security needs of companies in such diverse
market segments as pharmaceuticals, designer clothing, and chip manufacturing.
Several team members are published authors in the area of security and are
respected for their work in their field.
Developing Technology - We have exclusive rights to all patent pending,
developing, DNA anti-counterfeit, and fraud prevention technologies created by
Biowell. We also have an in-depth understanding of microchip design and
applications.
Strategic Corporate Relationships - We have personal and corporate
relationships with leaders in key industries such as: high-end fashion retail,
computers, entertainment, automobiles, and pharmaceuticals. The Company hopes to
utilize these existing relationships to introduce its anti-counterfeiting
products and generate contracts, although no discussions have yet been held.
Each industry has multiple facets for the anti-counterfeit DNA technology. For
example, fashion retail can use the Company's anti-counterfeit chip in its
high-end fashion handbags, while a company producing fine wines can take
advantage of the Company's DNA-embedded label. The Company's proprietary
technologies offer immediate and affordable detection and security for all of
their trademarks and products.
Strong Technology Alliances - Our products can also work with and
supplement products in key anti-fraud and security industries, such as:
o Electronics security
o Hologram manufacturing
o Radio Frequency Identification (RFID) systems
o Security papers and printing
o Other security-related products, systems, and services
23
Law Enforcement Expertise -- Our team includes former federal law
enforcement, security, and intelligence officers who provide us with
extensive 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
Cautionary Factors that may Affect Future Results
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products. These
are factors that we think could cause our actual results to differ materially
from expected results. Other factors besides those listed here could adversely
affect us.
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 business combinations
o stock-based compensation.
24
Business combinations
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, which
established accounting and reporting standards for business combinations and
requires that all business combinations be accounted for by the purchase method.
Under the purchase method of accounting, the cost, including transaction costs,
is allocated to the underlying net assets, based on their respective estimated
fair values. The excess of the purchase price over the estimated fair values of
the net assets acquired is recorded as goodwill.
The judgments made in determining the estimated fair values and expected
useful lives assigned to each class of assets and liabilities acquired can
significantly impact net income. For example, different classes of assets will
have useful lives that differ. Consequently, to the extent a longer-lived asset
is ascribed greater value under the purchase method than a shorter-lived asset,
there may be less amortization recorded in a given period.
Determining the fair value of certain assets and liabilities acquired is
subjective in nature and often involves the use of significant estimates and
assumptions. We use a one-year period following the consummation of acquisitions
to finalize estimates of the fair values of assets and liabilities acquired. Two
areas, in particular, that require significant judgment are estimating the fair
values and related useful lives of identifiable intangible assets. While there
are a number of different methods used in estimating the value of acquired
intangibles, there are two approaches primarily used: the discounted cash flow
and market comparison approaches. Some of the more significant estimates and
assumptions inherent in the two approaches include: projected future cash flows
(including timing); discount rate reflecting the risk inherent in the future
cash flows; perpetual growth rate; determination of appropriate market
comparables; and the determination of whether a premium or a discount should be
applied to comparables. Most of the foregoing assumptions are made based on
available historical information.
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, 2002.
25
The Company 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.
Results of Operations
The Company is in the development stage. The risks specifically discussed are
not the only factors that could affect future performance and results. In
addition the discussion in this annual report concerning us, our business and
our operations contain forward-looking statements. Such forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements. We do not have a
policy of updating or revising forward-looking statements and thus it should not
be assumed that silence by our Management over time means that actual events or
results are occurring as estimated in the forward-looking statements herein. As
a development stage company, we have yet to earn revenues from operations. We
may experience fluctuations in operating results in future periods due to a
variety of factors including, but not limited to, customer acceptance of our
licensed products, the global economy, government regulations, our ability to
acquire and deliver high quality products, our ability to obtain additional
financing in a timely manner and on terms favorable to us, our ability to
successfully attract biotechnology licensees and customers, our promotions,
branding and sales programs, the amount and timing of operating costs and
capital expenditures relating to the expansion of our business, operations and
infrastructure and the implementation of marketing programs, key agreements, and
strategic alliances, the number of products offered by us, the number of
cancellations we experience, and general economic conditions specific to our
business. As a result of limited capital resources and no revenues from
operations from its inception, the Company has relied on the issuance of equity
securities to non-employees in exchange for services. The Company's management
enters into equity compensation agreements with non-employees if it is in the
best interest of the Company under terms and conditions consistent with the
requirements of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation." In order to conserve its limited operating capital
resources, the Company anticipates continuing to compensate non-employees for
services during the next twelve months. This policy may have a material effect
on the Company's results of operations during the next twelve months.
Revenues
We have generated no operating revenues since September 16, 2002 (date of
inception) through September 30, 2003. In August of 2003, Applied DNA, Biowell
and G. A. Corporate Finance Ltd. entered into a Sub-License Agreement for the
United Kingdom in exchange for $3,000,000. G. A. Corporate Finance Ltd. paid
$25,000 to us upon its execution of the Agreement, and the remaining $2,975,000
payment to us is contingent upon G.A. Corporate Finance Ltd. achieving gross
revenues. The remaining principal is subject to an interest bearing promissory
note, payable in twenty (20) consecutive quarterly installments of principal and
interest in the amount equal to the lower of $185,937.50 or 35% of Gross
Revenues (as defined therein) for that quarter due on the final day of the
quarter. In the event that the sub-license agreement is terminated for any
reason, the remaining amount due under the Note will cease to be due. We
anticipate generating minimal revenues from operations during the January-March
2004 quarter as the Company transitions from a development stage company to that
of a fully operational Company.
Costs and Expenses
From our inception through September 30, 2003, we have not generated any
revenues. We have incurred losses of $ 3,456,776. These expenses were associated
principally with equity-based compensation to employees and consultants, product
development costs and professional services.
26
Liquidity and Capital Resources
As of September 30, 2003, we had a working capital deficit of $502,816. As a
result of our operating losses from September 16, 2002 (date of inception)
through September 30, 2003, we generated a cash flow deficit of $(502,121) from
operating activities. Cash flows used in investing activities was $0 during the
period September 16, 2002 (date of inception) through September 30, 2003. We met
our cash requirements during this period through the issuance of common stock
and stock options of $586,000 and $109,592 from advances from the Company's
shareholders. 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 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. However, if during that period or thereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations liquidity and
financial condition.
The independent auditor's report on the Company's September 30, 2003 financial
statements included in this Annual Report states that the Company's recurring
losses raise substantial doubts about the Company's ability to continue as a
going concern.
Recent Accounting Pronouncements
The Company adopted SFAS No. 142. Under the new rules, the Company will no
longer amortize goodwill and other intangible assets with indefinite lives, but
such assets will be subject to periodic testing for impairment. On an annual
basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs to be included in results from operations may be necessary. SFAS No.
142 also requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption.
Any goodwill impairment loss recognized as a result of the transitional goodwill
impairment test will be recorded as a cumulative effect of a change in
accounting principle no later than the end of fiscal year 2002. The adoption of
SFAS No. 142 had no material impact on the Company's consolidated financial
statements SFAS No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS No. 143 is
effective in fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company expects that the provisions of SFAS No. 143 will not have
a material impact on its consolidated results of operations and financial
position upon adoption. The Company plans to adopt SFAS No. 143 effective
January 1, 2003.
SFAS No. 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS No. 144
superseded Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS No. 121), and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". The Company adopted
SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 had no
material impact on Company's consolidated financial statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for sale-
leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale- leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
27
In October 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions-an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", which removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with Statements No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. In addition,
this Statement amends SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
The requirements relating to acquisitions of financial institutions are
effective for acquisitions for which the date of acquisition is on or after
October 1, 2002. The provisions related to accounting for the impairment or
disposal of certain long-term customer-relationship intangible assets are
effective on October 1, 2002. The adoption of this Statement did not have a
material impact to the Company's financial position or results of operations as
the Company has not engaged in either of these activities.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", which amends FASB Statement 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 Statement 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 transition guidance and annual disclosure provisions of Statement
148 are effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations as the Company has not elected to change to the fair value
based method of accounting for stock-based employee compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities . SFAS 149 amends SFAS No. 133 to provide clarification on
the financial accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar characteristics be accounted
for on a comparable basis. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS 150 did not have a material impact on the Company's results
of operations or financial position.
28
Acquisition or Disposition of Plant and Equipment
We do not anticipate the sale of any significant property, plant or equipment
during the next twelve months. We do not anticipate the acquisition of any
significant property, plant or equipment during the next 12 months, other than
diminutive computer equipment and peripherals used in our day-to-day operations.
We believe we have sufficient resources available to meet these acquisition
needs.
Number of Employees
From our inception through the period ended September 30, 2003, we have relied
on the services of outside consultants and professionals for most of our needs,
but we do have six full time employees. In order for us to attract and retain
quality personnel, we anticipate we will have to offer competitive salaries to
future employees. As we continue to expand, we will incur additional cost for
personnel We anticipate an employment of 14 full and part time employees during
the next 12 months.
Management: 4
Business Development: 6
Technical Support: 2
Administrative Personnel: 2
The Company also plans to use the advice of its Advisory Board on an as needed
basis. As we continue to expand, we will incur additional cost for personnel.
This projected increase in personnel is dependent upon our generating revenues
and obtaining 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.
Change in Fiscal Year End
In February of 2003, we changed our fiscal year end from December 31 to
September 30.
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 our Common Stock.
RISKS RELATED TO OUR BUSINESS
We Have A Limited Operating History With Which To Judge Our Performance.
We have only been engaged in our current and proposed business operations since
October of 2002. Accordingly, we have a limited operating history. We may
encounter risks and difficulties frequently encountered by early stage companies
in new and rapidly evolving markets. We cannot assure stockholders that our
business strategy will be successful or that we will successfully address these
risks. Our failure to do so could materially adversely affect our business,
financial condition and operating results.
We Have A History Of Losses And We Anticipate Future Losses And Negative Cash
Flow.
We incurred net losses from operations of $ 3,456,776 from the date of our
inception through September 30, 2003. We cannot assure you that we can achieve
or sustain profitability on a quarterly or annual basis in the future. If
revenues grow more slowly than we anticipate, or if operating expenses exceed
our expectations or cannot be adjusted accordingly, we will continue to incur
losses. In addition, we require additional funds to implement, sustain and
expand our manufacturing, sales and marketing activities, research and
development, and our strategic alliances, particularly if a well-financed
competitor emerges or if there is a rapid technological shift in our industry.
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 sufficient funds from
operations or external sources would require us to curtail or cease operations.
29
We Need Additional Financing. We have insufficient capital resources to fully
develop and implement our business plan and need to raise additional capital
through equity or debt financings, research and development financings or
collaborative relationships. There is no assurance that additional capital will
be available or be on terms acceptable to us. If additional capital is
unavailable, we may be forced to limit or cease our business operations
accordingly. In such event, it will adversely and materially effect our business
operations.
Given that we are primarily a research and development company, certain economic
and strategic factors may require us to raise additional capital in order to:
o Finance our biotechnology or DNA development programs; o Fund our operating
expenses; o Pursue regulatory approvals; o License or acquire additional DNA
entity candidates or technologies; o Develop manufacturing, marketing and sales
capabilities; and o Prosecute and defend our intellectual property rights.
Doubt About Our Ability To Continue Operations as a "Going Concern"; You May
Lose All Of Your Investment If We Are Unable to Continue Operations.
The Company's ability to continue as a going concern is subject to substantial
doubt given its current financial condition and requirements for additional
funding. There can be no assurance that we will be able to obtain sufficient
funds to continue the development of and, if successful, to commence the sale of
our products and services under development. As a result of the foregoing, our
auditors have expressed substantial doubt about our ability to continue as a
going concern. If we cannot continue as a going concern, then you may lose all
of your investment.
If we raise additional funds by issuing equity securities, existing stockholders
may experience a dilution in their ownership. In addition, as a condition to
giving additional funds to us, future investors may demand, and may be granted,
rights superior to those of existing stockholders.
Our Research And Development Efforts For New Products May Be Unsuccessful. We
incur significant research and development expenses to develop new products and
technologies. There can be no assurance that any of these products or
technologies will be successfully developed or that if developed they will be
commercially successful. In the event that we are unable to develop
commercialized products from our research and development efforts or we are
unable or unwilling to allocate amounts beyond our currently anticipated
research and development investment, we could lose our entire investment in
these new products and this may materially and adversely affect our business
operations.
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 obtain 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
commercialization, 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 do not always receive significant indemnification
from a licensor against third party claims of intellectual property
infringement.
We are currently in the process of negotiating several of these licenses and
expect that we will also negotiate these types of licenses in the future. There
can be no assurances that we will be able to negotiate these licenses on
favorable terms, or at all.
Our Future Success May Depend On The Timely Introduction Of New Products And The
Acceptance Of These New Products In The Marketplace.
30
Our ability to gain access to technologies needed for new products and services
depends in part on our ability to convince licensors that we can successfully
commercialize their inventions. We cannot assure that we will be able to
continue to 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 Fail To Introduce New Products, Or Our New Products Are Not Accepted By
Potential Customers, We May Lose Market Share.
Rapid technological changes and frequent new product introductions are typical
for the markets we serve. Our future success will depend in part on continuous,
timely development and introduction of new products that address evolving market
requirements. We believe successful new product introductions provide a
significant competitive advantage because customers invest their time in
selecting and learning to use new products, and are often reluctant to switch
products. To the extent we fail to introduce new and innovative products, we may
lose market share to our competitors, which will be difficult or impossible to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could reduce our growth rate or damage our
business.
We may experience delays in the development and introduction of products. We
cannot assure that we will keep pace with the rapid rate of change in life
sciences research or that our new products will adequately meet the requirements
of the marketplace or achieve market acceptance. Some of the factors affecting
market acceptance of new products include:
o Availability, quality and price relative to competitive products;
o The timing of introduction of the product relative to competitive
products;
o Customers' opinions of the products' utility;
o Ease of use;
o Consistency with prior practices;
o Scientists' opinions of the products' usefulness;
o Citation of the product in published research; and
o General trends in life sciences research.
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.
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 will place a significant strain on our
current management resources. To manage this expected growth, we will need to
improve our:
o operations and financial systems;
o procedures and controls; and
o training and management of our employees.
Our future growth may be attributable to acquisitions of and new product lines
and new businesses. We expect that future acquisitions, if successfully
consummated, will create increased working capital requirements, which will
likely precede by several months any material contribution of an acquisition to
our net income.
31
Dependence On Key Personnel.
Our success depends on the continuing services of our management team, the loss
of any of which could have a material and adverse effect on our business
operations. In particular, our success depends on our Chairman of the Board,
Robin (Rob) Hutchison, our President Stephen Rossetti, our Chief Executive
Officer , Lawrence Lee, our Chief Financial Officer and Treasurer, Gerhard Wehr
and our Vice President Dr. Julia Hunter. We do not maintain any "key man"
insurance policies regarding any of these individuals. We may not be able to
retain the services of our executive officers and key personnel or attract
additional qualified members to management in the future. The loss of services
of these individuals, or of any of our other key management or employees, could
have a material adverse effect upon our business.
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.
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, 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.
Limited Board of Directors.
We currently have five directors on our Board of Directors, two of which are
independent outside (non-employee) directors. We have allocated necessary
capital and are actively seeking to purchase a Director and Officers Insurance
Policy and will actively recruit 1-2 additional qualified outside directors
upon purchase of the insurance policy.
After we purchase an appropriate D&O policy, however, we cannot guarantee that
we will be able to attract or retain qualified directors.
Our officers and directors will own a controlling interest in our voting stock
and investors will not have any voice in our management. Our officers and
directors, in the aggregate, beneficially own approximately 58.45% of our
outstanding common stock. As a result, these stockholders, acting together, will
have the ability to control substantially all matters submitted to our
stockholders for approval, including:
o election of our board of directors;
o removal of any of our directors;
o amendment of our certificate of incorporation or bylaws; and o
adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving
us.
32
As a result of their ownership and positions, our directors and executive
officers collectively are able to influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Additionally, there are key employees and consultants of the Company that are
holders of our series of convertible preferred stock, and such holders have the
option of converting their preferred stock into fully paid and nonassessable
shares of common stock in accordance with their respective employment or
consulting agreements. Although the preferred shares cannot be converted to
Common Stock until six months from their issuance, and the converted shares will
be restricted, such conversion to Common Stock will, nonetheless, dilute the
shares issued and outstanding.
Limitation of Officers' and Directors' Liabilities
The Company's by-laws limit directors' and officers' liabilities to the maximum
extent permitted under Nevada Law. In addition, the Company is obligated under
its by-laws to indemnify its directors and officers against certain liabilities
incurred with respect to their service in such capacities. Each of these
measures could reduce the legal remedies available to the Company and the
shareholders against such individuals.
We Depend Upon Our Third Party Suppliers.
We will rely on third party suppliers to supply the raw materials that we will
utilize in our manufacturing processes.
We cannot assure our ability to obtain adequate supplies of raw materials on
time to manufacture our products. Our inability to obtain adequate supplies of
product may materially and adversely affect our business operations.
33
Reduction Or Delays In Research And Development Budgets And In Government
Funding May Negatively Impact Our Sales.
Our future customers may include researchers at pharmaceutical and biotechnology
companies, 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 the demand for our
products. Research and development budgets fluctuate due to numerous factors
that are outside our control and are difficult to predict, including changes in
available resources, spending priorities and institutional budgetary policies.
Our business could be seriously damaged by any significant decrease in life
sciences research and development expenditures by pharmaceutical and
biotechnology companies, academic institutions or government and private
laboratories. A portion of our future sales may be to researchers, universities,
government laboratories and private foundations whose funding is dependent upon
grants from government agencies such as the U.S. National Institute of Health
("NIH") and similar domestic and international agencies. 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 unpredictable. Our
revenues may be adversely affected if our customers delay purchases as a result
of uncertainties surrounding the approval of government budget proposals. Also,
government proposals to reduce or eliminate budget deficits have sometimes
included reduced allocations to the NIH and other government agencies that fund
research and development activities. A reduction in government funding for the
NIH or other government research agencies could seriously damage our business.
Also, our potential customers receive funds from government-approved grants at
particular times of the year. In the past, grants have been frozen for extended
periods or have otherwise become unavailable to various institutions without
advance notice. The timing of the 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 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. We expect this competition to
continue and intensify in the future. Competition in our markets is primarily
driven by:
o Product performance, features and liability;
o Price;
o Timing of product introductions;
o Ability to develop, maintain and protect proprietary products and
technologies;
o Sales and distribution capabilities; o Technical support and service; o Brand
loyalty; o Applications support; and o Breadth of product line.
If a competitor develops superior technology or cost-effective alternatives to
our products, our business, financial condition and results of operations could
be materially adversely affected.
34
We May Be Unable To Protect Our Trademarks, Trade Secrets And Other Intellectual
Property Rights That Are Important To Our Business.
We regard our trademarks, trade secrets and other intellectual property as an
integral component of our success. We rely on trademark law, trade secret
protection and confidentiality and/or license agreements with employees,
customers, partners and others to protect our intellectual property. Effective
trademark and trade secret protection may not be available in every country in
which our products are available. We cannot be certain that we have taken
adequate steps to protect our intellectual property, especially in countries
where the laws may not protect our rights as fully as in the United States. In
addition, if our third-party confidentiality agreements are breached there may
not be an adequate remedy available to us. If our trade secrets become publicly
known, we may lose our competitive position.
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.
Accidents Related To Hazardous Materials Could Adversely Affect Our Business.
Some of our operations require the controlled use of hazardous materials.
Although we believe our safety procedures comply with the standards prescribed
by federal, state, local and foreign regulations, the risk of accidental
contamination of property or injury to individuals from these materials cannot
be completely eliminated. In the event of an accident, we could be liable for
any damages that result, which could seriously damage our business and results
of operations.
Potential Product Liability Claims Could Affect Our Earnings And Financial
Condition
We face a potential risk of liability claims based on our products and
services, and we have faced such claims in the past. We carry product liability
insurance coverage which is limited in scope and amount but which we believe to
be adequate. We cannot assure, however, that we will be able to maintain this
insurance at reasonable cost and on reasonable terms. We also cannot assure that
this insurance will be adequate to protect us against a product liability claim,
should one arise.
We Are Currently Subject To Governmental Regulation
Our business is currently subject to regulation, supervision and licensing by
federal, state and local governmental authorities. We must also expend resources
from time to time to comply with newly adopted regulations, as well as changes
in existing regulations. If we fail to comply with these regulations, we could
be subject to disciplinary actions or administrative enforcement actions. These
actions could result in penalties, including fines.
35
RISKS RELATED TO OUR COMMON STOCK
Effect of Issuance of Preferred Stock.
Our authorized capital consists of 100,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock.
The Board of Directors, without any action by our shareholders, is authorized to
designate and issue shares of Preferred Stock in such series as it deems
appropriate and to establish the rights, preferences and privileges of such
shares, including dividends, liquidation and voting rights. The rights of
holders of shares of Preferred Stock that may be issued may be superior to the
rights granted to the holders of existing Shares of Common Stock. The ability of
the Board of Directors to designate and issue such undesignated shares could
impede or deter an unsolicited tender offer or takeover proposal regarding the
Company, and the issuance of additional shares having preferential rights could
adversely affect the voting power and other rights of holders of Common Stock.
The Lack of a Mature Trading Market for our Common Stock May Cause our Stock
Price to Decline Significantly and Limit the Liquidity of our Common Stock.
We do not meet the listing requirements for the listing or quotation of our
common stock on any national or regional securities exchange or on NASDAQ.
Currently, our common stock is traded on the Over-The-Counter Bulletin Board. As
a result, accurate current quotations as to the value of our common stock are
unavailable making it more difficult for investors to dispose of our common
stock. The lack of current quotations and liquidity can cause our stock price to
decline or to trade lower than the prices that might prevail if our securities
were listed or quoted on an exchange or on NASDAQ.
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.
Since our common stock is not listed or quoted on any exchange or on NASDAQ, and
no other exemptions currently apply, trading in our common stock on the
Over-The-Counter Bulletin Board is subject to the "penny stock" rules of the
SEC. These rules require, among other things, that any broker engaging in a
transaction in our securities provide its customers with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker and its salespersons in the transaction, and monthly
account statements showing the market values of our securities held in the
customer's accounts. The brokers must provide bid and offer quotations and
compensation information before making any purchase or sale of a penny stock and
also provide this information in the customer's confirmation. 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.
We Have Paid No Dividends On Our Common Stock
We have paid no cash dividends on our Common Stock in the past and do not intend
to pay any dividends on our Common Stock in the foreseeable future. Our Board of
Directors is empowered to declare dividends, if any, to holders of the common
stock, based on our earnings, capital requirements, financial condition, and
other relevant factors. We anticipate that we will reinvest profits from our
operations, if any, into our business. We cannot assure you that we will ever
pay dividends to holders of our common stock.
36
ITEM 7. FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FINANCIAL STATEMENTS AND SCHEDULES
SEPTEMBER 30, 2003 AND 2002
APPLIED DNA SCIENCES, INC.
(A development Stage Company)
APPLIED DNA SCIENCES , INC.
Index to Financial Statements
Page
Report of Independent Certified Public Accountants
F-3
Consolidated Balance Sheet as of September 30, 2003 and 2002 F-4
Consolidated Statement of Losses for the year ended September 30, 2003 , the period September
16, 2002 (date of inception) to September 30, 2002 and the period September 16, 2002 (date of
inception) to September 30, 2003 F-5
Consolidated Statement of Deficiency in Stockholders' Equity for the period September 16, 2002
(date of inception) to September 30, 2003 F-6~ F-8
Consolidated Statements of Cash Flows for the year ended September 30, 2003 , the period
September 16, 2002 (date of inception) to September 30, 2002 and the period September 16, F-9
2002 (date of inception) to September 30, 2003
Notes to Consolidated Financial Statements F-10 to F-26
F-2
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Applied DNA Sciences, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Applied DNA
Sciences, Inc. (a development stage company) as of September 30, 2003 and 2002
and the related consolidated statements of losses, deficiency in stockholders'
equity, and cash flows for the year ended September 30, 2003 , the period
September 16, 2002 (date of inception) through September 30, 2002 and the period
September 16, 2002 (date of inception) through September 30, 2003. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the financial statements based upon
our audits.
We have conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Applied DNA Sciences , Inc.
(a development stage company) at September 30, 2003 and 2002 and the results of
its operations and its cash flows for the year ended September 30, 2003 , the
period September 16, 2002 (date of inception) through September 30, 2002, and
the period September 16, 2002 (date of inception) through September 30, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the Note J to the
accompanying financial statements, the Company is in the development stage and
has not established a source of revenues. This raises substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
Russell Bedford Stefanou Mirchandani LLP
Certified Public Accountants
McLean, Virginia
December 9, 2003
F-3
APPLIED DNA SCIENCES , INC
(A development stage company)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 and 2002
2003 2002
------------- -------------
ASSETS
Current Assets:
Cash $ 193,471 $ -
------------- -------------
Total current assets 193,471 -
Other Assets:
Patents 13,890 -
------------- -------------
Total other assets 13,890 -
$ 207,361 $ -
============= =============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 454,000 $ -
Accrued expenses-related parties (Note C) 132,696 -
Advance from shareholders and related parties (Note C) 109,592 10,612
------------- -------------
Total current liabilities 696,288 10,612
Note payable (Note B) 88,500 -
Commitments and contingencies ( Note H)
DEFICIENCY IN STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.0001 per share; 10,000,000 shares authorized; none
issued at September 30, 2003 and September 30, 2002. - -
Common Stock, par value $0.0001 per share; 100,000,000 authorized;
17,811,082 and 100,000 shares issued and outstanding at September 30, 2003 and
2002, respectively 1,781 10
Additional paid in capital 2,577,568 990
Common stock subscribed 300,000 -
Deficit accumulated during development stage (3,456,776) (11,612)
------------- -------------
Total deficiency in stockholders' equity (577,427) (10,612)
$ 207,361 $ -
============= =============
See accompanying notes to consolidated financial statements
F-4
APPLIED DNA SCIENCES , INC.
( A development stage company)
CONSOLIDATED STATEMENT OF LOSSES
For the Period For the Period September
September 16, 2002 16, 2002 (Date Of
For the year ended (Date Of Inception) Inception) through
September 30, through September 30, September 30,
2003 2002 2003
------------------ --------------------- ------------------------
Operating expenses:
General and administrative $ 3,468,363 $ 11,612 $ 3,479,975
------------------ --------------------- ------------------------
Total expenses 3,468,363 11,612 3,479,975
Loss from operations (3,468,363) (11,612) (3,479,975)
------------------ --------------------- ------------------------
Other income(expense) 25,000 - 25,000
Interest (expense) (1,801) - (1,801)
Income (taxes) benefit - - -
------------------ --------------------- ------------------------
Net loss $ (3,445,164) $ (11,612) $ (3,456,776)
================== ===================== ========================
Basic and diluted loss per common share
(Note E) $ (0.27) $ (0.12)
================== =====================
Weighted average common shares
outstanding 12,955,358 100,000
================== =====================
See accompanying notes to consolidated financial statements
F-5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2003
Deficit
Additional Accumulated
Preferred Paid in Common Stock During
Preferred Shares Common Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share - $ - 100,000 $ 10 $ 990 - $ - $ - $ 1,000
Net Loss - - - - - - - (11,612) (11,612)
-------- -------- -------- --------- -------- ------------ ---------- ---------- -----------
Balance at September 30,
2002 - - 100,000 10 990 - - (11,612) (10,612)
Issuance of common stock
in connection with merger
with Prohealth Medical
Technologies , Inc on
October 21, 2002 - - 10,178,352 1,018 - - - - 1,018
Cancellation of Common
stock in connection with
merger with Prohealth
Medical Technologies,
Inc on October
21, 2002 - - (100,000) (10) (990) - - - (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) (84) (54,264) - 54,348 - -
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 1in 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
$2.53 per share in March 2003 - - 91,060 9 230,625 - - - 230,634
See accompanying notes to consolidated financial statements
F-6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2003
(Continued)
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 17,998 (18,000) - - -
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 21 428,797 - - - 428,818
See accompanying notes to consolidated financial statements
F-7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY
FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH
SEPTEMBER 30, 2003
(Continued)
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 17 410,913 - - - 410,930
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 9 94,991 - - - 95,000
Common stock and
subscription
receivable
reclassification
adjustment - 1 6 - 2,292 - 2,585
Common Stock subscribed to
at $2.50 per share in
September 2003 - - - 300,000 - - 300,000
Net Loss for the year
ended September 30, 2002 - - - - - - - (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 consolidated financial statements
F-8
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period For the Period
September 16, 2002 September 16, 2002
(Date Of Inception) (Date of Inception)
For the year ended through through
September 30, September 30, September 30,
2003 2002 2003
------------------ -------------------- -------------------
Cash Flows from operating activities:
Net loss $ (3,445,164) $ (11,612) $ (3,456,776)
Adjustments to reconcile net loss to net cash used
in operating activities:
Common stock issued in exchange for services 2,292,350 1,000 2,293,350
rendered
Organization expenses convertible note issued in
exchange of common shares 88,500 - 88,500
Changes in assets and liabilities:
Increase in Other Assets (13,890) - (13,890)
Increase in due to related parties 132,696 - 132,695
Increase in Accounts payable and accrued liabilities 454,000 - 454,000
------------------ -------------------- -------------------
Net cash used in operating activities (491,509) (10,612) (502,121)
Cash Provided by Financing Activities:
Proceeds from sale of common stock 432,000 -
432,000
Proceeds from sale of options 154,000 - 154,000
Advances from shareholders 98,980 10,612 109,592
------------------ -------------------- -------------------
Net cash provided by financing activities 684,980 10,612 695,592
------------------ -------------------- -------------------
Increase in cash and cash equivalents 193,471 - 193,471
Cash and cash equivalents, beginning of year
- - -
- - -
Cash and cash equivalents, end of year $ 193,471 $ - $ 193,471
================== ==================== ===================
Supplemental Information:
Cash paid during the period for interest $ - $ - $ -
Cash paid during the year for taxes - -
-
Non cash disclosures:
Common stock issued for services 2,292,350 1,000 2,293,350
Organization expenses- note issued in exchange 88,500 - 88,500
of shares retired
Acquistion:
Common stock retained - 1,015 1,015
Assets acquired - (135) (135)
------------------ -------------------- -------------------
Total consideration paid - 880 880
================== ==================== ===================
See accompanying notes to consolidated financial statements
F-9
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
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 September 30, 2003, the Company has accumulated losses of $
3,456,776.
Estimates
The preparation of the financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Revenue Recognition
The Company follows a policy of recognizing income as revenue in the period the
services are provided and the products shipped.
Cash Equivalents
For the purpose of the accompanying financial statements, all highly liquid
investments with a maturity of three months or less are considered to be cash
equivalents.
Income Taxes
The Company has adopted Financial Accounting Standard No. 109 (SFAS 109) which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Temporary differences between
taxable income reported for financial reporting purposes and income tax purposes
are insignificant.
F-10
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted undercounted cash flows. Should an impairment in value be indicated,
the carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset. SFAS No. 144 also requires assets to be disposed of be reported at
the lower of the carrying amount or the fair value less costs to sell.
Comprehensive Income
The Company does not have any items of comprehensive income in any of the
periods presented.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," specifying the computation, presentation and disclosure
requirements of earnings per share information. Basic earnings per share has
been calculated based upon the weighted average number of common shares
outstanding. Stock options and warrants have been excluded as common stock
equivalents in the diluted earnings per share because they are either
antidilutive, or their effect is not material.
F-11
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
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.
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):
For the Period September 16, 2002
For the Year Ended September 30,2003 (Date of Inception) through
September 30, 2002
Net loss - as reported $ (3,445,164) $ (11,612)
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 $ (3,445,164) $ (11,612)
Net loss attributable to common stockholders - Pro forma
$ (3,445,164) $ (11,612)
Basic (and assuming dilution) loss per share - as reported $ (0.27) $ (0.12)
Basic (and assuming dilution) loss per share - Pro forma $ (0.27) $ (0.12)
F-12
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Liquidity
As shown in the accompanying financial statements, the Company incurred a net
loss of $ 3,456,776 during the period September 16, 2002 (date of inception)
through September 30, 2003 . The Company's current liabilities assets exceeded
its current assets by $ 502,816 as of September 30, 2003.
Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company
to concentrations of credit risk, consist primarily of cash, cash equivalents
and trade receivables. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such investments
may be in excess of the FDIC insurance limit.
Research and Development
The Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs.
Under SFAS 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and developments costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. The Company did not incur
any research and development expenses from September 16, 2002(date of inception)
through September 30, 2003.
Advertising
The Company will follow a policy of charging the costs of advertising to
expenses incurred. The Company did not occur any advertising costs during the
year ended September 30, 2003 or for the period September 16, 2002 (date if
inception) through September 30, 2002.
Reclassifications
Certain reclassifications have been made in prior year's financial statements to
conform to classifications used in the current year.
F-13
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Intangible Assets
Intangible assets are amortized using the straight-line method over their
estimated period of benefit, ranging from one to ten years. We periodically
evaluate the recoverability of intangible assets and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that an impairment exists. All of our intangible assets are subject to
amortization
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No.
141), and Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142). The FASB also issued Statement of
Financial Accounting Standards No. 143, "Accounting for Obligations Associated
with the Retirement of Long-Lived Assets" (SFAS No. 143), and Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144), in August and October 2001,
respectively.
SFAS No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method. The adoption of SFAS No. 141 had no material impact
on the Company's financial statements.
SFAS No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS No. 143 is
effective in fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company expects that the provisions of SFAS No. 143 will not have
a material impact on its consolidated results of operations and financial
position upon adoption. The Company plans to adopt SFAS No. 143 effective
January 1, 2003.
SFAS No. 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS No. 144
superseded Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS No. 121), and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". The Company adopted
SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 had no
material impact on Company's financial statements.
F-14
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement No. 133 on Derivative Instruments and
Hedging Activities . SFAS 149 amends SFAS No. 133 to provide clarification on
the financial accounting and reporting of derivative instruments and hedging
activities and requires that contracts with similar characteristics be accounted
for on a comparable basis. The provisions of SFAS 149 are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
have a material impact on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS 150 did not have a material impact on the Company's results
of operations or financial position.
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.
Effective with the Merger, ProHealth changed its name to Applied DNA Sciences,
Inc.
F-15
APPLIED DNA SCIENCES , Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE B - MERGER (continued)
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
Assets acquired (135)
Total consideration paid $ 880
In accordance with SOP 98-5, the Company expensed $880 as organization costs.
Note Payable
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 D). The option
expires on December 10, 2004. On June 30, 2003, the Company exercised its option
and acquired 7,500,000 common shares under this agreement in exchange for a
$88,500 convertible promissory note payable to the former controlling owner.
The terms of the note payable are as follows:
2003 2002
Note payable on October 31, 2004, together with interest at 8% per annum,
unsecured. Should the Company default under the terms of the Note, Noteholder
has the option to convert the unpaid principal at maturity to 7,500,000
shares of the Company's common stock and receive additional common shares in
exchange for accrued and unpaid interest at a conversion rate equal to the
then fair market value of the Company's common stock. $88,500 $ -
Less: current portion -
-
$ 88,500 $ -
The Company accounted for the acquisition of the shares as an organization cost
and charged $88,500 to operations and retired the 7,500,000 shares acquired
common stock.
F-16
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE C - RELATED PARTY TRANSACTIONS
Included in current liabilities is $109,592 and $ 10,612 at September 30, 2003
and 2002, respectively , which represents advances from the stockholders of the
Company. No formal agreements or repayment terms exist.
Also, the Company owed $132,696 and $0, at September 30, 2003 and 2002,
respectively 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 (see Note H).
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 (see Note H).
NOTE D- CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock , with
$0.0001 par value per share. As of September 30, 2003, there are no preferred
shares issued and outstanding. The Company is authorized to issue 100,000,000
shares of common stock , with $0.0001 par value per share. As of September 30,
2003, the Company has issued and outstanding 17,811,082 common share.
During the period September 16, 2002 through September 30, 2002, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately $1,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc (see Note
B).
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
In October 2002 the Company issued 602,000 shares of common stock in exchange
for services valued at $ 0.065 per share. In accordance with EITF 96-18 the
measurement date to determine fair value was in October 2002. This was the date
at which a commitment for performance by the counter party to earn the equity
instrument was reached. The Company valued the shares issued at approximately
$0.065 per share, which presents the fair value of the services received which
did not differ materially from the value of the stock issued.
F-17
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE D- CAPITAL STOCK (continued)
In November and December 2002, the Company issued 876,000 shares of common stock
in exchange for subscription at $ 0.065 per share. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
In January 2003, the Company canceled 836,000 shares of common stock previously
issued in exchange for consulting services .
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement (see Note H). The Company valued the shares issued at
approximately $ .065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In January 2003, the Company issued 586,250 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.13 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In February 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services. In accordance with EITF 96-18 the measurement date to
determine fair value was in October 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.065 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In March 2003, the Company issued 91,060 shares of common stock in exchange for
consulting services . The Company valued the shares issued at approximately
$2.53 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued.
F-18
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE D- CAPITAL STOCK (continued)
In March 2003, the Company issued 6,000 shares of common stock in exchange for
consulting services. The Company valued the shares issued at approximately $
0.065 per share, which represents the fair value of the services received which
did not differ materially from the value of the stock issued.
In March 2003, the Company received subscription for 18,000 shares of common
stock in exchange for cash at $1 per share.
On April 1, 2003, the Company issued 860,000 shares of common stock in exchange
for consulting services provided to the Company. In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 9, 2003, the Company issued 18,000 shares of common stock in exchange
for previously issued options to purchase the Company's common stock at $1.00
per share.
On April 9, 2003, the Company issued 9,000 shares of common stock in exchange
for consulting services provided to the Company . In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
On April 23, 2003, the Company issued 5,000 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 12, 2003, the Company issued 10,000 shares common stock in exchange for
consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.50 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
On June 17 2003, the Company issued 50,000 shares of common stock in exchange
for cash at $1.00 per share
On June 30, 2003, the Company issued 270,000 shares of common stock in exchange
for consulting services provided to the Company . In accordance with EITF 96-18
the measurement date to determine fair value was in October 2002. This was the
date at which a commitment for performance by the counter party to earn the
equity instrument was reached. The Company valued the shares issued at
approximately $0.065 per share, which presents the fair value of the services
received which did not differ materially from the value of the stock issued.
F-19
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE D- CAPITAL STOCK (continued)
On June 30, 2003, the Company received $10,000 as subscription for options to
purchase the Company's common stock at $1.00 per share.
In June, 2003, the Company received $48,000 in connection with a subscription to
purchase the Company's common stock pursuant to a private placement.
In connection with the Company's acquisition of ProHealth , the controlling
owner of ProHealth granted the Company an option to acquire up to 8,500,000
shares of the Company's common stock in exchange for $100,000 (see Note B). The
option expires on December 10, 2004. On June 30, 2003, the Company exercised its
option and acquired 7,500,000 common shares under this agreement in exchange for
a $88,500 convertible promissory note payable to the former controlling owner.
The Company has an option through December 10, 2004 to acquire the remaining
1,000,000 shares from the former controlling owner in exchange for $11,500. On
June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant
to the option agreement.
In July 2003 the Company issued 213,060 shares of common stock for consulting
services provided to the Company. The Company valued the shares issued at
approximately $ 2.01 per share, which represents the fair value of the services
received which did not differ materially from the value of the stock issued
In July 2003, the Company canceled 24,000 shares of common stock, previously
issued for services valued at $2.50 per share.
In July 2003, the Company received $20,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
In July 2003, the Company issued 10,000 shares of common stock for cash
previously subscribed at $1.00 per share.
In August 2003, the Company issued 172,500 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.38 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued
In August 2003, the Company received $29,000 in exchange for previously issued
options to purchase the Company's common stock at $1.00 per share.
In September 2003, the Company issued 395,260 shares of common stock in exchange
for consulting services provided to the Company. The Company valued the shares
issued at approximately $ 2.42 per share, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
F-20
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE D- CAPITAL STOCK (continued)
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
In September 2003, the Company issued 6,400 shares of common stock issued in
exchange for cash at $2.50 per share pursuant to private placement.
In September 2003, the Company received $ 95,000 in exchange for previously
issued options to purchase the Company's common stock at $1.00 per share.
In September 2003, the Company received $300,000 in connection with a
subscription to purchase the Company's common stock pursuant to a private
placement.
The Company valued the shares issued for consulting services at the rate which
represents the fair value of the services received which did not differ
materially from the value of the stock issued.
NOTE E - STOCK OPTIONS AND WARRANTS
Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company. These warrants were granted in lieu of cash
compensation for services performed or financing expenses in connection with the
sale of the Company's common stock.
Warrants Outstanding Warrants Exercisable
Weighted Average Weighed Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
$1.00 338,000 5.00 $ 1.00 338,000 $ 1.00
$3.50 45,500 2.00 $ 3.50 45,500 $ 3.50
383,500 383,500
F-21
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE E- STOCK OPTIONS AND WARRANTS (continued)
Transactions involving warrants are summarized as follows:
Number of Shares Weighted Average
Price Per Share
Outstanding at September 30, 2002 - $ -
Granted 605,500 1.19
Exercised 1.00
(222,000)
Canceled or expired - -
Outstanding at September 30, 2003 383,500 $ 1.30
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 1.25%, a dividend yield of 0% and
volatility of 9%. The amount of the expense charged to operations for
compensatory warrants granted in exchange for services was $0 for the years
ended September 30, 2003 and 2002.
NOTE F- INCOME TAXES
The Company has adopted Financial Accounting Standard No. 109 which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statement or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant.
At September 30, 2003, the Company has available for federal income tax purposes
a net operating loss carryforward of approximately $3,456,776, expiring in the
year 2023, that may be used to offset future taxable income. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, since in the opinion of management based upon the earnings history of
the Company , it is more likely than not that the benefits will not be realized.
Due to significant changes in the Company's ownership, the future use of its
existing net operating losses may be limited.
F-22
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE F- INCOME TAXES (continued)
Components of deferred tax assets as of September 30, 2003 are as follows:
Non current:
Net operating loss carryforward
$1,210,000
Valuation allowance (1,210,000)
Net deferred tax asset $ -
NOTE G-LOSSES PER SHARE
The following table presents the computation of basic and diluted losses per
share:
For the Year Ended For the Period September 16,
September 30,2003 2002 (Date of Inception)
through September 30, 2002
Loss available for common shareholders $ (3,445,164) $ (11,612)
Basic and fully diluted loss per share $ (0.27) $ (0.12)
Weighted average common shares outstanding 12,955,358 100,000
Net loss per share is based upon the weighted average of shares of common stock
outstanding
F-23
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE H- COMMITMENTS AND CONTINGENCIES
Licensing Agreement
In October 2002, the Company entered into an exclusive Licensing Agreement
("License") with Biowell Technology, Inc., a company formed under the laws of
Taiwan, Republic of China. The initial term of the License expires in 2007 with
renewal options under certain terms and conditions. The License grants the
Company the exclusive use of certain patented DNA technology, along with the
rights to future technology, in exchange for an initial payment of 1,500,000
shares of the Company's restricted common stock (see Note D). The Company is
obligated to order minimum purchase orders or make certain minimum annual
royalty payments beginning in 2003 as follows:
Year ending Minimum purchase orders Alternative Minimum
October 8, Royalty Payable
2003 $ 50,000 $ 25,000
2004 300,000 100,000
2005 360,000 -
2006 432,000 -
2007 518,400 -
Franchising and Distribution Agreements
The Company has entered into a Distribution and Franchising Agreement
("Franchise Agreement") in July 2003. Under the terms of the Franchise
Agreement, the franchisee is obligated to pay the Company $3,000,000 payable
$25,000 upon execution of the Franchise Agreement and the balance of $2,975,000
payable over five (5) years with interest accruing at 8% per annum. Payments
under the Franchise Agreement are subject to franchisee's net profits, as
defined, under the Franchise Agreement. During the year ended September 30,
2003, the Company has received the initial $25,000 installment and has
recognized the receipt as other income in the accompanying financial statements.
F-24
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE H- COMMITMENTS AND CONTINGENCIES (continued)
Lease Commitments
The Company sub-lets office space in Los Angeles, California on a year to year
basis from an entity controlled by a significant former shareholder of the
Company.
Rental expense for the year ended September 30, 2003 and the period September
16, 2002 (date of inception) through September 30, 2002 charged to operations
was $ 30,000 and $ 0, respectively.
Employment and Consulting Agreements
The Company has employment agreements with the Company's officers and certain
employees. These employment agreements provide for salaries and benefits,
including stock options and extend up to seven years. In addition to salary and
benefit provisions, the agreements include defined commitments should the
employer terminate the employee with or without cause.
The Company has a consulting agreement with an entity controlled by a former
significant shareholder of the Company. The consulting agreement provides for
compensation and certain benefits, including stock options and extend up to
seven years. In addition to compensation and benefit provisions, the agreements
include defined commitments should the employer terminate the consultant with or
without cause.
The Company has consulting agreements with outside contractors to provide
marketing and financial advisory services. The Agreements are generally for a
term of 12 months from inception and renewable automatically from year to year
unless either the Company or consultant terminates such engagement by written
notice.
F-25
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
NOTE I- SUBSEQUENT EVENTS
Subsequent to the date of the financial statements, the Company received
approximately $ 690,000 in connection with the private placement of the
Company's common stock, convertible debentures and the exercise of previously
issued warrants. In addition, the Company's agent has received in escrow
$769,500 in connection with the placement of short term convertible debentures.
The proceeds from the placement, less costs of approximately $100,000 shall be
released to the Company when certain conditions of closing are met.
NOTE J- GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements during the period September 16, 2002 through September 30,
2003, the Company incurred a loss of $3,456,776. In addition, the Company has a
deficiency in stockholder's equity of $577,427. These factors among others may
indicate that the Company will be unable to continue as a going concern for a
reasonable period of time.
The Company's existence is dependent upon management's ability to develop
profitable operations. Management is devoting substantially all of its efforts
to developing DNA embedded biotechnology security solutions in the United States
and there can be no assurance that the Company's efforts will be successful.
However, the planned principal operations have not commenced and no assurance
can be given that management's actions will result in profitable operations or
the resolution of its liquidity problems. The accompanying statements do not
include any adjustments that might result should the Company be unable to
continue as a going concern.
In order to improve the Company's liquidity, the Company's management is
actively pursing additional equity financing through discussions with investment
bankers and private investors. There can be no assurance the Company will be
successful in its effort to secure additional equity financing.
F-26
PART III
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 11, 2002 the Company dismissed its certifying accountant, S.W.
Hatfield, CPA ("Hatfield"). Hatfield's reports on the financial statements for
the years ended December 31, 2001 and 2000 did not contain an adverse opinion or
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles; however, the audit report for the years
ended December 31, 2001 and 2000 contained an explanatory paragraph regarding
the substantial doubt about the Company's ability to continue as a going
concern. The decision to change its certifying accountant was approved by the
Company's Board of Directors.
There were no disagreements with Hatfield on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
during the two fiscal years ended December 31, 2001 and 2000 and during the
interim period ended November 11, 2002, which, if not resolved to Hatfield's
satisfaction, would have caused it to make reference to the subject matter of
the disagreement in connection with its report, as required by Item
304(a)(1)(iv) of Regulation S-B.
The Company has engaged Russell Bedford Stefanou Mirchandani LLP ("Russell
Bedford Stefanou Mirchandani ") as its certifying accountant as of November 1,
2002 for the Company's fiscal year ending December 31, 2002. The Company has not
consulted Russell Bedford Stefanou Mirchandani previously to Russell Bedford
Stefanou Mirchandani retention on either the application of accounting
principles or the type of opinion Russell Bedford Stefanou Mirchandani might
render on the Company's financial statements.
ITEM 8(a) CONTROLS AND PROCEDURES
The Company has established and maintains disclosure controls and procedures
that are designed to ensure that material information required to be disclosed
by Applied DNA Sciences, Inc. in the reports that it files under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. As of September 30, 2003, under the supervision and with the
participation of Applied DNA Sciences, Inc.'s Chief Executive Officer and Chief
Financial Officer, the Company carried out an evaluation of the effectiveness of
the design and operation of disclosure controls and procedures. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective as of the date of such
evaluation in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings. There have been no significant changes to the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
37
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers. The position(s) held by each of our executive
officers and Directors as of December 8, 2003 are shown in the following table.
Biographical information for each is set forth following the table.
MANAGEMENT
Our senior executive officers and directors, and their ages as of December 15,
2003, are as follows:
Names: Ages Titles: Member of Board of
Directors
Lawrence C. Lee 43 CEO Director
Stephen Rossetti 53 President
Gerhard Wehr 57 CFO, Treasurer Director
Dr. Julia Hunter 48 VP Director
Michael Hill 43 Outside Director
Rob Hutchison 48 Outside Director
Jaime Cardona 37 Secretary
Chairman of the Board, Robin Hutchison
In November of 2003, Robin "Rob" Hutchison joined the Board of Directors of the
Company. On December 12, 2003, he was appointed Chairman of the Board.
Previously, Hutchison served on Board of Directors of PowerHouse Technologies
Group, Inc., the developer of mobile computing solutions that enhance personal
productivity. He is the founder of several companies, including eCharge
Corporation of Seattle, Washington, specialists in alternative payment methods
for the Internet. Mr. Hutchison served as eCharge's president and chief
technical officer and played an integral role in raising in excess of $90
million in private funding. Mr. Hutchison pioneered, and holds the patent
pending on, unique digital certificate technology using Bio-metrics that enabled
eCharge to provide secure Internet commerce ransactions.
Prior to co-founding eCharge, Mr. Hutchison was president of Canada-based SNI
Corporation, specialists in the integration of SUN Microsystems UNIX-based
systems and Internet and computer firewall security. Mr. Hutchison also served
as the western regional director of sales and operations for Everex Canada Inc.,
and as vice president and co-founder of Vivox International Inc.
Mr. Hutchison, remains on the Board of Directors of eCharge. He retired from the
company in 2002 to assist in the development of several start-ups and mature
technology companies, including Bit Learning, Via Vis Technologies Inc., One
Person Health Inc. and Applied DNA Canada. Mr. Hutchison is member of the Board
of Directors of Golden Goliath Resources and Serebra Learning Corporations.
CEO & Director- Lawrence C. Lee
Lawrence C. Lee has served as President, CEO and Director since September of
2002. In September of 2003, Stephen Rossetti became President, and Mr. Lee
continues to serve as Director and CEO.
Prior to becoming president and CEO of the Company, Mr. Lee held management
positions at Hughes Aircraft, Boeing and General Motors where he worked on
innovative and cutting-edge new technology.
38
Mr. Lee currently serves on the board of advisors and/or partners for several
U.S. and international companies including: Dery Resources Inc.; IMC, and VO
Management, LLC.
Mr. Lee has a Master of Science in Computer/Electronic Engineering from
California State University and a Bachelor of Science in Mechanical/Biomedical
Engineering from Virginia Tech. He has also received advanced training in
Business Executive Management and Finance from University of California, Los
Angeles and the Hughes Education Center.
President, Stephen Rossetti
Steven Rossetti is our President, having served in this capacity since September
of 2003. He previously served on our Advisory Board of Directors from October of
2002 through September of 2003. Mr. Rossetti has also served as our special
Washington consultant since October of 2002. Prior to that, Mr. Rossetti served
as the President of Markquest, a Washington D.C. based consulting practice with
emphasis on national security and technology issues., from January 2001 to
October 2003.
From November 1998 through January 2001, Mr. Rossetti worked for the United
States Department of Defenses as the Director of Defense Integrated Travel.
Prior to that, he spent 10 years on the staff of the House Armed Services
Committee working with readiness and infrastructure issues including special
operations forces, National Guard and Reserve preparedness, chemical and
biological weapons preparedness and response, and missions other than war such
as counter-drug and counter-terror.
Chief Financial Officer, Treasurer and Director--Gerhard Wehr
Mr. Wehr joined Applied DNA Sciences as Chief Financial Officer, Treasurer and
member of the board of directors in December 2002. From June 2002 until December
2002, Mr. Wehr was the President and Chief Executive Officer of Vo Management,
LLC, a Reno, Nevada based hedge fund. From June 2001 until June 2002, Mr. Wehr
was the Director of Pacific Overture KK, based in Tokyo, Japan. From May 2000
through May 2001, Mr. Wehr was a Managing Member of Alexus Capital, LLC, based
in San Mateo, California. Between March 1997 and April 2000, Mr. Wehr was the
President and member of the board of directors of BNP Paribas Asset Management
(Japan) Ltd., in Tokyo, Japan.
Previously, Mr. Wehr has also served as the Director and a member of the board
for Barclays de Zoete Wedd Ltd., in London, England, Managing Director of
Barclays Trust and Banking (Japan) Ltd., Chief Executive Officer of Dresdner
Securities (Asia) Ltd., in Tokyo, and Chief Executive Officer of ING Barings
Securities in Tokyo.
In Singapore, Mr. Wehr was appointed Member of the Singapore Securities Industry
Council for a two-year-term (1985-1986) by invitation of the Ministry of
Finance. The Securities Industry Council is the regulatory agency for the
financial market.
Mr. Wehr is a certified Director (Anderson School of Business- UCLA)
Vice President and Director -- Julia Hunter, MD
39
Dr. Julia Hunter, was appointed to the Board of Directors in October of 2003,
and was also named Vice President and serves on the Company's management team.
Previously, Dr. Hunter served as a special advisor to the Company from November
of 2002 through October of 2003 She has been involved from the genesis of
Applied DNA Sciences as medical counsel, and currently leads the company's
pharmaceutical, cosmetic and comestible team.
Dr. Hunter is a Board certified anesthesiologist with further concentration in
acute and chronic pain management. Early in her career, she was drafted as
interim, then Acting Chief Executive Officer, of several privately held
small-cap corporations. She has advised a large Internet medical information
outlet from its inception, is ongoing with niche market pharmaceutical
corporations and published on the physician panels of Scott-Levin and The Harris
Poll.
Secretary- Jaime Cardona
Jaime Cardona is our Company's Secretary, having served in this capacity since
October of 2002. Prior to joining the Applied DNA Sciences team, from 1998
through October of 2002, he was a General Partner at Phazon, Inc., a multimedia
company in North America, specializing in digital technology. Jaime was employed
as an assistant to Mr. Gianni Versace, founder and world-renowned designer of
Versace, Spa from 1992-1997. In addition, during the period of 1995 through
1998, Jaime founded and operated South Beach Web, Inc.
Mr. Cardona holds dual Associate Degrees in Architecture and in Computer Science
from Miami Community College.
Director--Michael E. Hill
He is also serving as the trustee and governor for the
Shawnigan Lake School, a top ranked, international private school in Canada.
Hill was an Investment Banker at Research Capital from 1997-2002 where he
managed a portfolio exceeding $300 million. Prior to working with Research
Capital, Hill performed similar tasks with Scotia Capital Markets and Burns Fry
Ltd. He was employed with these companies from 1987 until 1997.
Our directors serve for a one-year term or until successors are elected and
qualified. Our officers hold office until the first meeting of directors
following the Annual Meeting of Shareholders and until their successors are
elected and qualified, subject to earlier removal by the Board of Directors..
Advisory Board
We have several people who serve as advisors on an as needed basis. These
individuals are well respected in their fields and provide answers and guidance
to our officers and directors. Each advisory board member receives 1,000 shares
of our common stock a month for their services. We do not have any written
agreements between us and the members of the advisory board.
Consulting Agreements
Following is a summary of the various consulting agreements we currently have
executed.
Global Elite Partners
We entered into a consulting agreement with Global Elite on August 25, 2003 for
a term of seven years. Global receives $20,000 a month plus 200,000 stock
options per year exercisable at the lower of 55% of closing stock price for the
year or $1.00. Global Elite provides business development and product licensing
services.
Jeffrey Brown
We entered into a consulting agreement with Jeffrey Brown on April 9, 2003 for
an initial term of six months with automatic renewals for a term of two months.
Mr. Brown receives 4,000 shares of our common stock per month which we have
agreed to provide on a Form S-8. Mr. Brown provides us with marketing, media and
technology services.
Larry Bocock
We entered into a consulting agreement with Larry Bocock on September 15, 2002
for a term of two years. Mr. Bocock received 40,000 shares of our common stock
which we have agreed to provide on a Form S-8 and 100,000 shares of restricted
common stock. Mr. Bocock provides us with business operations services.
Rick Lucas
We entered into a consulting agreement with Rick Lucas on March 15, 2003 on a
month to month basis. Mr. Lucas receives $55 per hour in cash plus 7,500 shares
of restricted common stock for every six months of service. Mr. Lucas provides
us with marketing services.
40
Kristin Gabriel
We entered into a consulting agreement with Kristin Gabriel on November 1, 2002
for a term of one year. Ms. Gabriel received $3,000 per month from November 2002
through December 2003, and $4,300 from March 2002 until November 2003. Ms.
Gabriel is currently working on a month to month basis for $4,300 per month. Ms.
Gabriel provides us with public relations services.
Janet Margolis
We entered into a consulting agreement with Janet Margolis on March 1, 2003 for
a term of nine months. Ms. Margolis received $3,000 per month from March through
August, and $3,750 per month from September through December. Ms. Margolis
provides us with sales and marketing services.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
In September of 2003, we reviewed the holdings of our officers and directors to
determine if any purchase, sales or transfers were made throughout the year that
may not have been disclosed properly on a Form 4. Any such sales were properly
disclosed on Form 5.
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Directors
Currently, our inside Directors are not compensated for their services, although
their expenses in attending meetings are reimbursed.
Compensation of Management
Name & Principal Other
Position Year Bonus Compensation
Salary
(Annual)
Lawrence C. Lee, CEO 2002 $-0-(1) 182,000
2003 $300,000
Stephen Rossetti, President 2002 -0-
2003 -0-(2)
Gerhard Wehr, CFO 2002 -0-(1)-0- 40,000
2003 $180,000
Jaime Cardona, Secretary 2002 -0-(1) 66,000
2003 $90,000
Julia Hunter, Vice President 2002 -0-
2003 -0- (3)
(1) From October 2002 through July 2003, Larry Lee, Gerhard Wehr and Jaime
Cardona received shares in lieu of salaries from the Company's
Professional/Employee/ Consultant compensation plan. The No. of shares
is indicated under "Other Compensation."
(2) Stephen Rossetti entered into an employment agreement with the Company
in October of 2003. His compensation for his first three months of
employment was $5,000 per month. This was during a 90 day review
period, which will be completed on January 25 2003. Going forward, if
the Company' Board elects to continue with the contract after the
conclusion of the review period, Mr. Rossetti's annual salary, for his
initial term of 2 years, will be $120,000 per year.
(3) Julia Hunter entered into an employment agreement with the Company on
October 22, 2003. Her annual compensation for the two year term of the
agreement is $120,000
Compensation of Advisors
The members of our Advisory Board are compensated by the issuance of shares of
our Common Stock, at the rate of 1,000 shares for each month of service.
41
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 5, 2003, information regarding
the beneficial ownership of shares of Common Stock by each person known by the
Company to own five percent or more of the outstanding shares of Common Stock,
by each of the Officers, by each of the Directors, and by the Officers and
Directors as a group. At the close of business on December 5, 2003, there were
18,218,521 shares issued and outstanding of record.
Name And Address Shares of Percentage
Of Beneficial Owners Common Stock as of 12/15/03(1)
Lawrence Lee 9,915,550(2) 54.43%
P O Box 88715
Los Angeles, CA 90009
Stephen Rossetti 32,000 0.17%
5408 Duvall Drive
Bethesda, MD 20816
Gerhard Wehr 115,700 0.64%
522 Beresford Ave.
Redwood City, CA 94061
Michael Hill 200,000 1.09%
44 Sierra Vista Close SW
Calgary, Alberta T3H3A3
Jaime Cardona 150,750 0.83%
1285 Crescent Heights
Boulevard Apt. D
Los Angeles, CA 900046
Julia Hunter 234,000 (3) 1.28%
8251 Roxbury Road
Los Angeles, CA 90069-1629
Rob Hutchison -0-(4)
3489 Canterbury Place
S. Surrey, British Columbia
Canada V35 0G8
Glenn Little 2,285,000(5) 12.54%
211 West Wall
Midland, Texas 79701
Biowell Technology, Inc. 1,500,000 8.23%
18F, No.959, Chung-Cheng Rd.
Chung-Ho City, Taipei County
Taiwan, R.O.C
All Executive Officers and 10,648,000 58.45% Directors as a group (7 persons)
(1) Based upon 18,218,521 shares issued and outstanding on December 5, 2003.
(2) Of this total, 5,320,000 shares were acquired from RHL Management, Inc. in
August of 2003. The transaction was properly disclosed on forms 13D and 4.
(3) Dr. Julia Hunter became an affiliate on October 22, 2003 when she was
appointed to the Board of Directors and was hired as Vice President.
(4) Robin H. ("Rob"") Hutchison became an affiliate on November 8, 2003 when he
was appointed to the Board of Directors.
(5) Of this total, 1,000,000 shares remain subject to an option agreement with
the founders of the Company. The exercise period is two years from the date
of the grant, expiring in December of 2004. For $11,764.71, the founders
can exercise the remainder of the option and return the 1,000,000 shares to
the Company's authorized stock for cancellation.
42
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March of 2003, RHL Management entered into a stock purchase agreement with
O'Dwyer Management, Inc. (the "O'Dwyer Transaction") wherein RHL sold 4,920,000
of its shares of the Company's Common Stock to O'Dwyer for $7,970,400, which was
to be paid over a period of 10 years and was secured by an interest bearing
promissory note. In August of 2003, that transaction was rescinded, and shortly
thereafter, on August 28, 2003, Larry Lee acquired the 4,920,000 shares from RHL
Management, Inc. in a private transaction for a purchase price of Five Million
Dollars ($5,000,000), which was paid as follows: (i) Fifty Thousand Dollars
($50,000), via certified check from personal funds at the time of transfer of
the Stock; (ii) Fifty Thousand Dollars to be paid within 60 days of the
execution of the stock purchase agreement; and (iii) Four Million Nine Hundred
Thousand Dollars ($4,900,000) in the form of a promissory note. As part of a
grant of Option and Voting Rights Agreement between Glenn Little and the Initial
Shareholders of Applied DNA Sciences, Lawrence Lee and Rick Langley were granted
the voting rights of 8,500,000 of the shares held by Glenn Little. Additionally,
those grantees had the option to purchase 8,500,000 of Little's shares for the
sum of $100,000. Rick Langley transferred his voting rights to Richard Langley,
Sr. in March of 2003. After the rescission of the O'Dwyer Transaction, the
voting right reverted to Rick Langley and he, in turn, transferred the rights to
Larry Lee in August of 2003. On or about June, 6, 2003, the grantees partially
exercised their option with Glenn Little, and cancelled or returned 7,500,000 to
the Company's authorized Common Stock. We have no policy regarding entering into
transactions with affiliated parties.
43
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The exhibits listed below are required by Item 601 of Regulation S-B. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K has been identified.
EXHIBIT INDEX:
2.1 Articles of Merger of Foreign and Domestic Corporations, filed December 26,
1998 with the Florida Secretary of State;
2.2 Articles of Merger of Foreign and Domestic Corporations, filed December 19,
1998 with the Nevada Secretary of State;
3.1 Articles of Incorporation of DCC Acquisition Corporation, filed April 20,
1998 with the Nevada Secretary of State;
3.2* Articles of Amendment of Articles of Incorporation of DCC Acquisition
Corp. changing corporation name to ProHealth Medical Technologies, Inc.
3.3 Certificate of Designations, Powers, preferences and Rights of the
Founders' Series of Convertible Preferred Stock, filed March 19, 2003 with
the Nevada Secretary of State;
3.4 Articles of Amendment of Articles of Incorporation of Applied DNA Sciences,
Inc. increasing the par value of the company's common stock, filed on
December 3, 2003 with the Nevada Secretary of State.
3.5 By-Laws of Applied DNA Sciences, Inc.
4.1* 2004 Combined Incentive and Nonqualified Sock Option Plan
44
10.1** Exclusive License Agreement between Biowell Technology Corp. and Applied
DNA Sciences, Inc. executed on October 8, 2002;
10.2** Sub-License Agreement with G. A. Corporate Finance Ltd. Applied DNA
Sciences, Inc., executed on July 29, 2003, and amended.
10.3** Indemnification Agreement with Larry Lee;
10.4* Indemnification Agreement with Robin Hutchison
10.5* Indemnification Agreement with Gerhard Wehr;
10.6* Indemnification Agreement with Dr. Julia Hunter;
10.7** Indemnification Agreement with Jaime Cardona;
10.8* Indemnification Agreement with Michael Hill;
10.9 Indemnification Agreement with Stephen Rossetti;
10.10* Employment Agreement between the Company and Larry Lee
10.11* Employment Agreement between the Company and Gerhard Wehr;
10.12* Employment Agreement between the Company and Stephen Rossetti
10.13* Employment Agreement between the Company and Dr. Julia Hunter
10.14* Lease Agreement with SUNSET SIERRA PROPERTIES INC.,
23.1 Consent of Russell Bedford Stefanou Mirchandani LLP
31.1 Chief Executive Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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.
45
* To be filed by amendment
** Previously filed in current reports on Form 8Ks
b) Reports on Form 8-K
On July 21, 2003, the Company filed a Current Report on Form 8-K dated June 30,
2003, reporting under Item 5, the repurchase of 7,500,000 shares of the
Company's common stock from Glenn Little in exchange for the issuance of a
$88,500 promissory note due in October 2004
On September 29, 2003, the Company filed a Current Report on Form 8-K dated
September 29, 2003, reporting under Item 5, the execution of a technology
sublicense agreement in the United Kingdom.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
The following is a summary of the fees billed to Applied DNA Sciences, Inc. by
Russell Bedford Stefanou Mirchandani LLP for professional services rendered for
the fiscal years ended September 30, 2003 and 2002:
Fee Category Fiscal 2003 Fees Fiscal 2002 Fees
------------- ----------------- -----------------
Audit Fees $ 17,925 $ -
Audit-Related Fees - -
Tax Fees - -
-
- -
All Other Fees
Total Fees $ 17,925 $ -
46
Audit Fees. Consists of fees billed for professional services rendered for
the audit of Applied DNA Sciences, Inc.'s consolidated financial statements and
review of the interim consolidated financial statements included in quarterly
reports and services that are normally provided by Russell Bedford Stefanou
Mirchandani LLP in connection with statutory and regulatory filings or
engagements.
Audit-Related Fees. Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of Applied DNA Sciences Inc.'s consolidated financial statements and are not
reported under "Audit Fees." There were no Audit-Related services provided in
fiscal 2003 or 2002.
Tax Fees. Consists of fees billed for professional services for tax
compliance, tax advice and tax planning..
All Other Fees. Consists of fees for products and services other than the
services reported above. There were no management consulting services provided
in fiscal 2003 or 2002.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors
The Audit Committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The independent auditors and management are
required to periodically report to the Audit Committee regarding the extent of
services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The Audit
Committee may also pre-approve particular services on a case-by-case basis.
47
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: December 29, 2003. Applied DNA Sciences, Inc.
/s/ Lawrence C. Lee
----------------
Lawrence C. Lee
Chief Executive Officer
/s/ Gerhard Wehr
------------------
Gerhard Wehr
Chief Financial Officer
48
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Position Date
/s/ Lawrence C. Lee Chief Executive Officer and Director December 22, 2003
Lawrence Lee
/s/ Gerhard Wehr Chief Financial Officer and Director December 22, 2003
Gerhard Wehr
/s/ Dr. Julia A. Hunter, MD Vice President and Director December 22, 2003
Dr. Julia A. Hunter, M.D.
/s/ Robin Hutchinson Chairman of the Board December 22, 2003
Robin Hutchinson
/s/ Michael Hill Director December 22, 2003
Michael Hill
49