As filed with the Securities and Exchange Commission on November 13, 2006
An Exhibit List can be found on page II-9
Registration No. 333-122848
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. 8)
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APPLIED DNA SCIENCES, INC.
(Name of small business issuer in its charter)
Nevada 2836 59-2262718
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
(631) 444-6862
(Address and telephone number of principal executive offices
and principal place of business)
James A. Hayward, Ph.D., Sc.D., Chief Executive Officer
APPLIED DNA SCIENCES, INC.
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
(631) 444-6862
(Name, address and telephone number of agent for service)
Copies to:
Merrill Kraines, Esq.
Joseph F. Daniels, Esq.
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Telephone: 212.318.3000
Facsimile: 212.318.3400
APPROXIMATE DATE OF PROPOSED
SALE TO THE PUBLIC: From time to time
after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |X|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
------------------------------- -------------------- ---------------- -------------------- ------------------
Title of each class of Amount to be Proposed Proposed maximum Amount of
securities to be registered registered maximum aggregate registration
offering offering price fee
price per
share (1)
------------------------------- -------------------- ---------------- -------------------- ------------------
Common stock, $.001 par value 21,727,967 $0.095 $2,064,156.87 $220.86
------------------------------- -------------------- ---------------- -------------------- ------------------
Common stock, $.001 par 5,000 $0.095 $475 $0.05
value issuable upon exercise
of Warrants exercisable at
$0.20 per share
------------------------------- -------------------- ---------------- -------------------- ------------------
Common stock, $.001 par 1,207,500 $0.095 $114,713 $12.27
value issuable upon exercise
of Warrants exercisable at
$0.60 per share
------------------------------- -------------------- ---------------- -------------------- ------------------
Common stock, $.001 par 750,000 $0.095 $71,250 $7.62
value issuable upon exercise
of Warrants exercisable at
$0.70 per share
------------------------------- -------------------- ---------------- -------------------- ------------------
Common stock, $.001 par 17,727,000 $0.095 $1,684,065 $180.19
value issuable upon exercise
of Warrants exercisable at
$0.75 per share
------------------------------- -------------------- ---------------- -------------------- ------------------
Total 41,417,467 $3,934,659.87 $420.99 (2)
------------------------------- -------------------- ---------------- -------------------- ------------------
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, using the average of the high and low price as reported on The Over
The Counter Bulletin Board on November 9, 2006, which was $0.095 per share.
(2) A filing fee of $6,639.68 was previously paid by the Registrant.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 13, 2006
APPLIED DNA SCIENCES, INC.
41,417,467 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
41,417,467 shares of our common stock, including up to 19,689,500 shares
issuable upon the exercise of common stock purchase warrants and 21,727,967
shares of common stock. The selling stockholders may sell common stock from time
to time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions. We will pay the expenses of
registering these shares.
The following selling stockholders are deemed an "underwriter" within the
meaning of the Securities Act of 1933 in connection with the sale of their
common stock under this prospectus: VC Arjent Ltd., formerly known as Vertical
Capital Partners, Inc. and a registered broker-dealer ("VC Arjent"), Michael
Morris, Susan Diamond, and Ronald Heineman, all of whom are employees of VC
Arjent. With the exception of VC Arjent, Michael Morris, Susan Diamond and
Ronald Heineman, no other underwriter or person has been engaged to facilitate
the sale of shares of common stock in this offering.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, and is listed on The Over The Counter Bulletin
Board under the symbol "APDN." The last reported sales price per share of our
common stock as reported by The Over The Counter Bulletin Board on November 9,
2006 was $0.095.
Investing in these securities involves significant risks. See "Risk
Factors" beginning on page 3.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ______________ ___, 2006.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by Applied
DNA Sciences, Inc. with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
TABLE OF CONTENTS
Page
Prospectus Summary 1
Risk Factors 3
Use of Proceeds 10
Market For Common Equity and Related Stockholder Matters 10
Management's Discussion and Analysis of Financial
Condition and Plan of Operations 12
Business 19
Facilities 30
Legal Proceedings 30
Management 32
Executive Compensation 34
Certain Relationships and Related Transactions 35
Security Ownership of Certain Beneficial Owners and Management 36
Description of Securities 37
Indemnification for Securities Act Liabilities 40
Plan of Distribution 41
Penny Stock 43
Selling Stockholders 44
Legal Matters 49
Experts 49
Available Information 49
Index to Financial Statements F-1
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
common stock.
In this prospectus "Applied DNA," "we," "us" and "our" refer to Applied DNA
Sciences, Inc. and its subsidiaries. Applied DNA and SigNature are the subject
of our trademark applications pending registration with the United States Patent
and Trademark Office. This prospectus contains other product names, trade names
and trademarks of Applied DNA Sciences, Inc. and of other organizations.
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
APPLIED DNA SCIENCES, INC.
We provide botanical DNA encryption, embedment and authentication solutions
that can help protect companies, governments and consumers from counterfeiting,
fraud, piracy, product diversion, identity theft, and unauthorized intrusion
into physical locations and databases. Our SigNature Program provides a secure,
accurate and cost-effective means for customers to incorporate our SigNature DNA
Markers in, and then quickly and reliably authenticate and identify, a broad
range of items such as artwork and collectibles, fine wine, consumer products,
digital media, financial instruments, identity cards and other official
documents. Having the ability to reliably authenticate and identify counterfeit
versions of such items enables companies and governments to detect, deter,
interdict and prosecute counterfeiting enterprises and individuals.
Our SigNature Program enables our potential clients to cost-effectively:
o give assurance to manufacturers, suppliers, distributors, retailers
and end-users that their products are authentic and can be
forensically authenticated;
o integrate our SigNature DNA Markers with existing security solutions
such as barcodes, radio frequency identification (RFID) tags,
holograms, microchips and other security measures; and,
o add value to the "bottom-line" by helping to diminish product
diversion and counterfeiting.
Counterfeit and diverted products continue to pose a significant and
growing problem with consumer packaged goods, especially for prestige and
established brands worldwide. Piracy, identity theft and forged documents and
items are also highly prevalent in vertical markets such as digital media, fine
art, luxury goods, and alcoholic beverages. Key aspects of our strategy include:
o continuing to improve and customize our solution to meet our potential
customers' needs;
o continuing to develop and enhance our existing DNA marker
authentication technologies;
o expanding our customer base both domestically and abroad by targeting
high volume markets; and,
o augmenting our competitive position through strategic acquisitions and
alliances.
For the nine months ended June 30, 2006, we generated revenues of
$18,900 and had net losses of $5,606,849. As a result of recurring losses from
operations of $89,924,553 from our inception through September 30, 2005, our
auditors, in their report dated October 21, 2005, expressed substantial doubt
about our ability to continue as going concern.
Our principal offices are located at 25 Health Sciences Drive, Suite 113,
Stony Brook, New York 11790, and our telephone number is (631) 444-6862. We are
a Nevada corporation. We maintain a website at www.adnas.com. The information
contained on that website is not deemed to be a part of this prospectus.
THE OFFERING
Common stock offered by selling stockholders......... Up to 41,417,467 shares, including the following:
- 10,122,555 shares of common stock
issued upon the conversion of the
promissory notes issued in
connection with the January and
February 2005 offering;
2,130,015 shares of common stock
issued upon the conversion of the
promissory notes issued in
connection with the December 2004
offering.
- 3,807,375 shares of common stock
issued in payment of liquidated
damages pursuant to the
registration rights agreement
entered into in connection with the
January and February 2005 offering;
- 5,668,022 other shares of common
stock;
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- up to 5,000 shares of common stock
issuable upon the exercise of
common stock purchase warrants at
an exercise price of $.20 per
share;
- up to 1,207,500 shares of common
stock issuable upon the exercise of
common stock purchase warrants at
an exercise price of $.60 per
share;
- up to 750,000 shares of common
stock issuable upon the exercise of
common stock purchase warrants at
an exercise price of $.70 per
share;
- up to 14,742,000 shares of common
stock issuable upon the exercise of
common stock purchase warrants,
which were issued in connection
with the January and February 2005
offering, at an exercise price of
$.75 per share;
- up to 2,930,000 shares of common
stock issuable upon the exercise of
common stock purchase warrants,
which were issued in connection
with the December 2004 offering, at
an exercise price of $.75 per
share;
up to 55,000 shares of common stock
issuable upon the exercise of other
common stock purchase warrants at
an exercise price of $.75 per
share.
This number represents 34% of our
current outstanding stock.
Common stock to be outstanding after the offering............... Up to 140,671,885 shares
Use of proceeds................................................. We will not receive any proceeds
from the sale of the common stock.
However, we will receive the sale
price of any common stock we sell
to the selling stockholders upon
exercise of the warrants. We expect
to use the proceeds received from
the exercise of the warrants, if
any, for working capital, including
general corporate purposes.
The Over The Counter Bulletin Board symbol...................... APDN
The above information regarding common stock to be outstanding after the
offering is based on 120,982,385 shares of common stock outstanding as of
October 31, 2006, and assumes the subsequent exercise of warrants by our selling
stockholders.
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RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATING TO OUR BUSINESS
We have a Short Operating History, a Relatively New Business Model, and Have Not
Produced Significant Revenues. This Makes it Difficult to Evaluate Our Future
Prospects and Increases the Risk That We Will Not Be Successful.
We have a short operating history with our current business model, which
involves the marketing, sale and distribution of botanical DNA encryption,
embedment and authentication products and services, which are based on
technologies that we acquired in July 12, 2005 from, and some of which are
manufactured for us by, Biowell Technology, Inc. ("Biowell"). We first derived
revenue from this model in the second calendar quarter of 2006, which was
insignificant. Prior to the July 12, 2005 acquisition, our operations consisted
principally of providing marketing and business development services to Biowell.
As a result, we have a very limited operating history for you to evaluate in
assessing our future prospects. We are in the process of transitioning from a
developmental stage to an early-stage growth enterprise. Our operations since
inception have not produced significant revenues, and may not produce
significant revenues in the near term, or at all, which may harm our ability to
obtain additional financing and may require us to reduce or discontinue our
operations. If we create revenues in the future, prior to our introduction of
any new products, we will derive all such revenues from the sale of botanical
DNA encryption, encapsulation, embedment and authentication products and
services, which is an immature industry. You must consider our business and
prospects in light of the risks and difficulties we will encounter as an
early-stage company in a new and rapidly evolving industry. We may not be able
to successfully address these risks and difficulties, which could significantly
harm our business, operating results, and financial condition.
We Have a History Of Losses Which May Continue, and Which May Harm Our Ability
to Obtain Financing and Continue Our Operations.
We incurred net losses of $5,606,849 for the nine month period ended June
30, 2006 and $67,109,519 for the fiscal year ended September 30, 2005. These net
losses have principally been the result of the various costs associated with our
selling, general and administrative expenses as we commenced operations,
acquired, developed and validated technologies, began marketing activities, and
our interest expense on notes and warrants we issued to obtain financing. Our
operations are subject to the risks and competition inherent in a company moving
from the development stage to a new growth enterprise. We may not generate
sufficient revenues from operations to achieve or sustain profitability on a
quarterly, annual or any other basis in the future. Our revenues and profits, if
any, will depend upon various factors, including whether our existing products
and services or any new products and services we develop will achieve any level
of market acceptance. If we continue to incur losses, our accumulated deficit
will continue to increase, which might significantly impair our ability to
obtain additional financing. As a result, our business, results of operations
and financial condition would be significantly harmed, and we may be required to
reduce or terminate our operations.
If We Are Unable to Obtain Additional Financing Our Business Operations Will be
Harmed or Discontinued, and If We Do Obtain Additional Financing Our
Shareholders May Suffer Substantial Dilution.
We believe that our existing capital resources will enable us to fund our
operations until approximately April, 2007. We believe we will be required to
seek additional capital to sustain or expand our prototype and sample
manufacturing, and sales and marketing activities, and to otherwise continue our
business operations beyond that date. We have no commitments for any future
funding, and may not be able to obtain additional financing or grants on terms
acceptable to us, if at all, in the future. If we are unable to obtain
additional capital this would restrict our ability to grow and may require us to
curtail or discontinue our business operations. Additionally, while a reduction
in our business operations may prolong our ability to operate, that reduction
would harm our ability to implement our business strategy. If we can obtain any
equity financing, it may involve substantial dilution to our then existing
shareholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated October 21, 2005, our independent auditors stated
that our financial statements for the year ended September 30, 2005 were
prepared assuming that we would continue as a going concern, and that they have
substantial doubt about our ability to continue as a going concern. Our
auditors' doubts are based on our incurring net losses of $89,924,553 during the
period from September 16, 2002 (date of inception) to September 30, 2005. We
continue to experience net operating losses. Our ability to continue as a going
concern is subject to our ability to generate a profit and/or obtain necessary
funding from outside sources,
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including by the sale of our securities, obtaining loans from financial
institutions, or obtaining grants from various organizations or governments,
where possible. Our continued net operating losses and our auditors doubts
increase the difficulty of our meeting such goals and our efforts to continue as
a going concern may not prove successful.
If Our Existing Products and Services are Not Accepted by Potential Customers or
We Fail to Introduce New Products and Services, Our Business, Results of
Operations and Financial Condition Will be Harmed.
There has been limited or no market acceptance of our botanical DNA
encryption, encapsulation, embedment and authentication products and services to
date. Some of the factors that will affect whether we achieve market acceptance
of our solutions include:
o availability, quality and price relative to competitive solutions;
o customers' opinions of the solutions' utility;
o ease of use;
o consistency with prior practices;
o scientists' opinions of the solutions' usefulness;
o citation of the solutions in published research; and
o general trends in anti-counterfeit and security solutions' research.
The expenses or losses associated with the continued lack of market
acceptance of our solutions will harm our business, operating results and
financial condition.
Rapid technological changes and frequent new product introductions are
typical for the markets we serve. Our future success may depend in part on
continuous, timely development and introduction of new products that address
evolving market requirements. We believe successful new product introductions
may 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 any market share we then have 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 may not keep pace with the rapid rate of change
in anti-counterfeiting and security products' research, and any new products
acquired or developed by us may not meet the requirements of the marketplace or
achieve market acceptance.
If We Are Unable to Retain the Services of Drs. Hayward or Liang We May Not Be
Able to Continue Our Operations.
Our success depends to a significant extent upon the continued service Dr.
James A. Hayward, our Chief Executive Officer; and Dr. Benjamin Liang, our
Secretary and Strategic Technology Development Officer. We do not have
employment agreements with Drs. Hayward or Liang. Loss of the services of Drs.
Hayward or Liang could significantly harm our business, results of operations
and financial condition. We do not maintain key-man insurance on the lives of
Drs. Hayward or Liang.
The Markets for our SigNature Program are Very Competitive, and We May be Unable
to Continue to Compete Effectively in this Industry in the Future.
The principal markets for our SigNature Program are intensely competitive.
We compete with many existing 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, or have
strategic alliances with such 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 existing
products. Some of our competitors that operate in the anti-counterfeiting and
fraud prevention markets include: Art Guard International, Applied Optical
Technologies, Authentix, ChemTAG, Collectors Universe Inc., Cypher Science, Data
Dot Technology, Digimarc Corp., DNA Technologies, Inc., Inksure Technologies,
L-1 Identity Solutions, NTT DATA Labs, SureTrace , Theft Protection Systems, and
Tracetag.
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;
4
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 significantly harmed.
We Need to Expand Our Sales, Marketing and Support Organizations and Our
Distribution Arrangements to Increase Market Acceptance of Our Products and
Services.
We currently have few sales, marketing, customer service and support
personnel and will need to increase our staff to generate a greater volume of
sales and to support any new customers or the expanding needs of existing
customers. The employment market for sales, marketing, customer service and
support personnel in our industry is very competitive, and we may not be able to
hire the kind and number of sales, marketing, customer service and support
personnel we are targeting. Our inability to hire qualified sales, marketing,
customer service and support personnel may harm our business, operating results
and financial condition. We do not currently have any arrangements with any
distributors and we may not be able to enter into arrangements with qualified
distributors on acceptable terms or at all. If we are not able to develop
greater distribution capacity, we may not be able to generate sufficient revenue
to support our operations.
A Manufacturer's Inability or Willingness to Produce Our Goods on Time and to
Our Specifications Could Result in Lost Revenue and Net Losses.
Though we manufacture prototypes, samples and some of our own products, we
currently do not own or operate any significant manufacturing facilities and
depend upon independent third parties for the manufacture of some of our
products to our specifications. The inability of a manufacturer to ship orders
of such products in a timely manner or to meet our quality standards could cause
us to miss the delivery date requirements of our customers for those items,
which could result in cancellation of orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could harm our business by resulting
in decreased revenues or net losses upon sales of products, if any sales could
be made.
If We Need to Replace Manufacturers, Our Expenses Could Increase, Resulting in
Smaller Profit Margins.
We compete with other companies for the production capacity of our
manufacturers and import quota capacity. Some of these competitors have greater
financial and other resources than we have, and thus may have an advantage in
the competition for production and import quota capacity. If we experience a
significant increase in demand, or if our existing manufacturers must be
replaced, we will need to establish new relationships with another or multiple
manufacturers. We cannot assure you that this additional third party
manufacturing capacity will be available when required on terms that are
acceptable to us or terms similar to those we have with our existing
manufacturers, either from a production standpoint or a financial standpoint. We
do not have long-term contracts with our manufacturers, and our manufacturers do
not produce our products exclusively. Should we be forced to replace our
manufacturers, we may experience an adverse financial impact, or an adverse
operational impact, such as being forced to pay increased costs for such
replacement manufacturing or delays upon distribution and delivery of our
products to our customers, which could cause us to lose customers or lose
revenues because of late shipments.
If a Manufacturer Fails to Use Acceptable Labor Practices, We Might Have Delays
in Shipments or Face Joint Liability for Violations, Resulting in Decreased
Revenue and Increased Expenses.
While we require our independent manufacturers to operate in compliance
with applicable laws and regulations, we have no control over their ultimate
actions. While our internal and vendor operating guidelines promote ethical
business practices and our staff and buying agents periodically visit and
monitor the operations of our independent manufacturers, we do not control these
manufacturers or their labor practices. The violation of labor or other laws by
our independent manufacturers, or by one of our licensing partners, or the
divergence of an independent manufacturer's or licensing partner's labor
practices from those generally accepted as ethical in the United States, could
interrupt, or otherwise disrupt the shipment of finished products to us or
damage our reputation. Any of these, in turn, could have a material adverse
effect on our financial condition and results of operations, such as the loss of
potential revenue and incurring additional expenses.
Failure to License New Technologies Could Impair Sales of Our Existing Products
or Any New Product Development We Undertake in the Future.
To generate broad product lines, it is advantageous to sometimes license
technologies from third parties rather than depend exclusively on the
development efforts of our own employees. As a result, we believe our ability to
license new technologies from third parties is and will continue to be important
to our ability to offer new products. In addition, from time to time we are
notified or become aware of patents held by third parties that are related to
technologies we are selling or may sell in the future. After a review of these
patents, we may decide to seek a license for these technologies from these third
parties. There can be no assurance that we will
5
be able 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. Intellectual property licenses
would 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, and we may not
receive significant indemnification from a licensor against third party claims
of intellectual property infringement.
Our Failure To Manage Our Growth In Operations and Acquisitions of New Product
Lines and New Businesses Could Harm our Business.
Any growth in our operations, if any, will place a significant strain on
our current management resources. To manage such growth, we would need to
improve our:
o operations and financial systems;
o procedures and controls; and
o training and management of our employees.
Our future growth, if any, may be attributable to acquisitions of new
product lines and new businesses. Future acquisitions, if successfully
consummated, would likely create increased working capital requirements, which
would likely precede by several months any material contribution of an
acquisition to our net income. Our failure to manage growth or future
acquisitions successfully could seriously harm our operating results. Also,
acquisition costs could cause our quarterly operating results to vary
significantly. Furthermore, our stockholders would be diluted if we financed the
acquisitions by incurring convertible debt or issuing securities.
Although we currently only have operations within the United States, if we
were to acquire an international operation; we would face additional risks,
including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
Failure to Attract and Retain Qualified Scientific, Production and Managerial
Personnel Could Harm Our Business.
Recruiting and retaining qualified scientific and production personnel to
perform and manage prototype, sample, and product manufacturing and business
development personnel to conduct business development are critical to our
success. In addition, our desired 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.
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, we may not be able to continue to successfully attract qualified
personnel. The failure to attract and retain these personnel or, alternatively,
to develop this expertise internally would harm our business since our ability
to conduct business development and manufacturing will be reduced or eliminated,
resulting in lower revenues. We generally do not enter into employment
agreements requiring our employees to continue in our employment for any period
of time.
Our Intellectual Property Rights Are Valuable, and Any Inability to Protect Them
Could Reduce the Value of Our Products, Services and Brand.
Our patents, trademarks, trade secrets, copyrights and all of our other
intellectual property rights are important assets for us. There are events that
are outside of our control that pose a threat to our intellectual property
rights as well as to our products and services. For example, effective
intellectual property protection may not be available in every country in which
our products and services are distributed. The efforts we have taken to protect
our proprietary rights may not be sufficient or effective. Any significant
impairment of our intellectual property rights could harm our business or our
ability to compete. Protecting our intellectual property rights is costly and
time consuming. Any increase in the unauthorized use of our intellectual
property could make it more expensive to do business and harm our operating
results. Although we seek to obtain patent protection for our innovations, it is
possible we may not be able to protect some of these innovations. Given the
costs of obtaining patent protection, we may choose not to protect certain
innovations that later turn out to be important. There is always the possibility
that the scope of the protection gained from one of our issued patents will be
insufficient or deemed invalid or unenforceable. We also seek to maintain
certain intellectual property as trade
6
secrets. The secrecy could be compromised by third parties, or intentionally or
accidentally by our employees, which would cause us to lose the competitive
advantage resulting from these trade secrets.
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. Furthermore, a third party may claim that we are using
inventions covered by the third party's patent rights and may go to court to
stop us from engaging in our normal operations and activities, including making
or selling our product candidates. These lawsuits are costly and could affect
our results of operations and divert the attention of managerial and technical
personnel. A court may decide that we are infringing the third party's patents
and would order us to stop the activities covered by the patents. In addition, a
court may order us to pay the other party damages for having violated the other
party's patents. The biotechnology industry has produced a proliferation of
patents, and it is not always clear to industry participants, including us,
which patents cover various types of products or methods of use. The coverage of
patents is subject to interpretation by the courts, and the interpretation is
not always uniform. If we are sued for patent infringement, we would need to
demonstrate that our products or methods of use either do not infringe the
patent claims of the relevant patent and/or that the patent claims are invalid,
and we may not be able to do this. Proving invalidity, in particular, is
difficult since it requires a showing of clear and convincing evidence to
overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in the United States may be maintained in
secrecy until the patents are issued, because patent applications in the United
States and many foreign jurisdictions are typically not published until eighteen
months after filing, and because publications in the scientific literature often
lag behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our or our licensor's issued
patents or pending applications or that we or our licensors were the first to
invent the technology. Our competitors may have filed, and may in the future
file, patent applications covering technology similar to ours. Any such patent
application may have priority over our or our licensors' patent applications and
could further require us to obtain rights to issued patents covering such
technologies. If another party has filed a United States patent application on
inventions similar to ours, we may have to participate in an interference
proceeding declared by the United States Patent and Trademark Office to
determine priority of invention in the United States. The costs of these
proceedings could be substantial, and it is possible that such efforts would be
unsuccessful, resulting in a loss of our United States patent position with
respect to such inventions.
Some of our competitors may be able to sustain the costs of complex patent
litigation more effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the initiation and
continuation of any litigation could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.
Accidents Related to Hazardous Materials Could Adversely Affect Our Business.
Some of our operations require the controlled use of hazardous materials.
Although we believe our safety procedures comply with the standards prescribed
by federal, state, local and foreign regulations, the risk of accidental
contamination of property or injury to individuals from these materials cannot
be completely eliminated. In the event of an accident, we could be liable for
any damages that result, which could seriously damage our business and results
of operations.
Potential Product Liability Claims Could Affect Our Earnings and Financial
Condition.
We face a potential risk of liability claims based on our products and
services, and we have faced such claims in the past. Though we have product
liability insurance coverage which we will believe is adequate, we may not be
able to maintain this insurance at reasonable cost and on reasonable terms. We
also cannot assure that this insurance, if obtained, will be adequate to protect
us against a product liability claim, should one arise. In the event that a
product liability claim is successfully brought against us, it could result in a
significant decrease in our liquidity or assets, which could result in the
reduction or termination of our business.
Litigation Generally Could Affect Our Financial Condition and Results of
Operations.
We generally may be subject to claims made by and required to respond to
litigation brought by customers, former employees, former officers and
directors, former distributors and sales representatives, and vendors and
service providers. We have
7
faced such claims and litigation in the past and we cannot assure that we will
not be subject to claims in the future. In the event that a claim is
successfully brought against us, considering our lack of revenue and the losses
our business has incurred for the period from our inception to June 30, 2006,
this could result in a significant decrease in our liquidity or assets, which
could result in the reduction or termination of our business.
We Are Obligated to Pay Liquidated Damages As a Result of Our Failure to
Have this Registration Statement Declared Effective Prior to June 15, 2005, and
any Payment of Liquidated Damages Will Either Result in Depletion of Our Limited
Working Capital or Issuance of Shares of Common Stock Which Would Cause Dilution
to Our Existing Shareholders.
Pursuant to the terms of a registration rights agreement with respect to
common stock underlying convertible notes and warrants we issued in private
placements in November and December, 2003, December, 2004, and January and
February, 2005, if we did not have a registration statement registering the
shares underlying these convertible notes and warrants declared effective on or
before June 15, 2005, we are obligated to pay liquidated damages in the amount
of 3.5% per month of the face amount of the notes, which equals $367,885, until
the registration statement is declared effective. At our option, these
liquidated damages can be paid in cash or restricted shares of our common stock.
To date we have decided to pay certain of these liquidated damages in common
stock, although any future payments of liquidated damages may, at our option, be
made in cash. If we decide to pay such liquidated damages in cash, we would be
required to use our limited working capital and potentially raise additional
funds. If we decide to pay the liquidated damages in shares of common stock, the
number of shares issued would depend on our stock price at the time that payment
is due. Based on the closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32
and $0.20 for our common stock on July 15, 2005, August 15, 2005, September 15,
2005, October 17, 2005, November 15, 2005 and December 15, 2005, respectively,
we issued a total of 3,807,375 shares of common stock in liquidated damages from
August, 2005 to January, 2006 to persons who invested in the January and
February, 2005 private placements. The issuance of shares upon any payment by us
of further liquidated damages will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
We paid liquidated damages in the form of common stock only for the period
from June 15, 2005 to December 15, 2005, and only to persons who invested in the
January and February, 2005 private placements. We believe that we have no
enforceable obligation to pay liquidated damages to holders of any shares we
agreed to register under the registration rights agreement for periods after the
first anniversary of the date of issuance of such shares, since they were
eligible for resale under Rule 144 of the Securities Act during such periods,
and such liquidated damages are grossly inconsistent with actual damages to such
persons. Nonetheless, as of June 30, 2006 we have accrued $2,921,660 in
penalties representing further liquidated damages associated with our failure to
have the registration statement declared effective by the deadline, and have
included this amount in accounts payable and accrued expenses.
Matter Voluntarily Reported to the Securities and Exchange Commission
During the months of March, May, July and August 2005, we issued a total of
8,550,000 shares of our common stock to certain employees and consultants
pursuant to the 2005 Incentive Stock Plan. We engaged our outside counsel to
conduct an investigation of the circumstances surrounding the issuance of these
shares. On April 26, 2006, we voluntarily reported the findings from this
investigation to the Securities and Exchange Commission (SEC), and agreed to
provide the SEC with further information arising from the investigation. We
believe that the issuance of 8,000,000 shares to employees in July 2005 was
effectuated by both our former President and our former Chief Financial
Officer/Chief Operating Officer without approval of our board of directors.
These former officers received a total of 3,000,000 of these shares. In
addition, it appears that the 8,000,000 shares issued in July 2005, as well as
an additional 550,000 shares issued to employees and consultants in March, May
and August 2005, were improperly issued without a restrictive legend stating
that the shares could not be resold legally except in compliance with the
Securities Act of 1933, as amended. The members of the Company's management who
effectuated the stock issuances no longer work for the Company. These shares
were not registered under the Securities Act of 1933, or the securities laws of
any state, and we believe that certain of these shares may have been sold on the
open market, though we have been unable to determine the magnitude of such
sales. If violations of securities laws occurred in connection with the resale
of certain of these shares, the employees and consultants or persons who
purchased shares from them may have rights to have their purchase rescinded or
other claims against us for violation of securities laws, which could harm our
business, results of operations, and financial condition.
RISKS RELATING TO OUR COMMON STOCK
There Are a Large Number of Shares Underlying Our Options and Warrants That May
be Available for Future Sale and the Sale of These Shares May Depress the Market
Price of Our Common Stock and Will Cause Immediate and Substantial Dilution to
Our Existing Stockholders.
As of October 31, 2006, we had 120,982,385 shares of common stock issued
and outstanding and outstanding options and warrants to purchase 77,929,464
shares of common stock. All of the shares issuable upon exercise of our options
and warrants may be
8
sold without restriction. The sale of these shares may adversely affect the
market price of our common stock. The issuance of shares upon exercise of
options and warrants will cause immediate and substantial dilution to the
interests of other stockholders since the selling stockholders may convert and
sell the full amount issuable on exercise.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on The Over The Counter Bulletin Board (the "OTC Bulletin
Board"), such as us, must be reporting issuers under Section 12 of the
Securities Exchange Act of 1934, as amended, and must be current in their
reports under Section 13, in order to maintain price quotation privileges on the
OTC Bulletin Board. If we fail to remain current on our reporting requirements,
we could be removed from the OTC Bulletin Board. As a result, the market
liquidity for our securities could be severely adversely affected by limiting
the ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market. Prior to May
2001, we were delinquent in our reporting requirements, having failed to file
our quarterly and annual reports for the years ended 1998 - 2000 (except the
quarterly reports for the first two quarters of 1999). We have been current in
our reporting requirements for the last five years, however, there can be no
assurance that in the future we will always be current in our reporting
requirements.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a "penny
stock," for the purposes relevant to us, as any equity security that has a
market price of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the SEC relating to the penny stock
market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
9
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded over-the-counter on The Over The Counter
Bulletin Board (the "OTC Bulletin Board") maintained by the National Association
of Securities Dealers under the symbol "APDN." There is no certainty 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 ended
September 30, 2004 and September 30, 2005 and the first three fiscal quarters of
the fiscal year ending September 30, 2006. In February of 2003, we changed our
year end to September 30. We changed our fiscal year end in connection with a
reverse merger we entered into in December 2002, in which the acquirer for
accounting purposes had a fiscal year end of September 30. For ease of fiscal
reporting, we adopted the same fiscal year end.
Year ended 9/30/04 High Low
------------------ ---- ---
December 31, 2003 $3.54 $2.45
March 31, 2004 $3.55 $1.51
June 30, 2004 $2.55 $0.71
September 30, 2004 $0.96 $0.43
Year ended 9/30/05 High Low
------------------ ---- ---
December 31, 2004 $2.39 $0.42
March 31, 2005 $1.83 $0.78
June 30, 2005 $1.01 $0.58
September 30, 2005 $0.74 $0.48
Year ended 9/30/06 High Low
------------------ ---- ---
December 31, 2005 $0.58 $0.16
March 31, 2006 $0.37 $0.15
June 30, 2006 $0.27 $0.10
September 30, 2006 $0.17 $0.07
HOLDERS
As of October 31, 2006, we had approximately 1,336 holders of our common
stock. The number of record holders was determined from the records of our
transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock is American
Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219.
DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends to stockholders in the foreseeable
future. In addition, any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deem relevant.
EQUITY COMPENSATION PLAN INFORMATION
2002 Professional/Employee/Consultant Compensation Plan
In November of 2002, we created a special compensation plan to pay the
founders, consultants and professionals that had been contributing valuable
services to us during the previous nine months. This plan, under which 2,000,000
shares of our common stock were reserved for issuance, is called the
Professional/Employee/Consultant Compensation Plan (the "Compensation Plan").
Share and option issuances from the Compensation 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,
10
which contracts contained a more traditional cash compensation component. Each
qualified and eligible recipient of shares and/or options under the Compensation
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.
In our financial statements, shares that are disclosed as having been
issued from November 2002 through June 30, 2003 that were valued at $0.065 per
share were shares issued from the Compensation Plan 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 represent options that
were exercised under the Compensation Plan. In December of 2004, we adjusted the
exercise price of options under the Compensation Plan to $0.60 per share. As of
October 31, 2006, a total of 1,440,000 shares have been issued from, and options
to purchase 560,000 shares have been issued under the Compensation Plan, and
options to purchase 264,000 shares have been exercised as of that date.
2005 Incentive Stock Plan
On January 26, 2005, the Board of Directors, and on February 15, 2005, the
holders of a majority of the outstanding common stock of the Company approved
the Company's 2005 Incentive Stock Plan and authorized the issuance of
16,000,000 shares of common stock as stock awards and stock options thereunder.
The 2005 Incentive Stock Plan is designed to retain directors, executives, and
selected employees and consultants by rewarding them for making contributions to
our success with an award of shares of our common stock. As of October 31, 2006,
a total of 8,550,000 shares have been issued and options to purchase 5,660,000
shares have been granted under the 2005 Incentive Stock Plan.
During the months of March, May, July and August 2005, we issued a total of
8,550,000 shares of our common stock to certain employees and consultants
pursuant to the 2005 Incentive Stock Plan. We engaged our outside counsel to
conduct an investigation of the circumstances surrounding the issuance of these
shares. On April 26, 2006, we voluntarily reported the findings from this
investigation to the SEC, and agreed to provide the SEC with further information
arising from the investigation. We believe that the issuance of 8,000,000 shares
to employees in July 2005 was effectuated by both our former President and our
former Chief Financial Officer/Chief Operating Officer without approval of our
board of directors. These former officers received a total of 3,000,000 of these
shares. In addition, it appears that the 8,000,000 shares issued in July 2005,
as well as an additional 550,000 shares issued to employees and consultants in
March, May and August 2005, were improperly issued without a restrictive legend
stating that the shares could not be resold legally except in compliance with
the Securities Act of 1933, as amended. The members of the Company's management
who effectuated the stock issuances no longer work for the Company. These shares
were not registered under the Securities Act of 1933, or the securities laws of
any state, and we believe that certain of these shares may have been sold on the
open market, though we have been unable to determine the magnitude of such
sales. If violations of securities laws occurred in connection with the resale
of certain of these shares, the employees and consultants or persons who
purchased shares from them may have rights to have their purchase rescinded or
other claims against us for violation of securities laws, which could harm our
business, results of operations, and financial condition.
Plan Category Number of Securities Weighted-Average Number of Securities
to be Issued Upon Exercise Price of Remaining Available for
Exercise of Outstanding Options, Future Issuance Under
Outstanding Options, Warrants and Rights Equity Compensation Plans
Warrants and Rights (Excluding Securities
Reflected in Column (a))
---------------------- -------------------- -------------------------
(a) (b) (c)
Professional/Consultant/ Employee 296,000 $0.60 0
Stock and Stock Option Compensation
Plan approved in November 2002
2005 Incentive Stock Plan approved 5,660,000 $0.47 1,790,000
on January 26, 2005
------------------------------------ ---------------------- ------------------- -------------------------
Total 5,956,000 $0.59 1,790,000
------------------------------------ ---------------------- ------------------- -------------------------
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and Notes thereto, included elsewhere within
this report. The quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, including statements using
terminology such as "can", "may", "believe", "designated to", "will", "expect",
"plan", "anticipate", "estimate", "potential" or "continue", or the negative
thereof or other comparable terminology regarding beliefs, plans, expectations
or intentions regarding the future. You should read statements that contain
these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
forward looking statements involve risks and uncertainties and our actual
results and the timing of certain events could differ materially from those
discussed in forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors," "Business" and elsewhere in this
prospectus. All forward-looking statements and risk factors included in this
document are made as of the date hereof, based on information available to us as
of the date thereof, and we assume no obligations to update any forward-looking
statement or risk factor, unless we are required to do so by law.
INTRODUCTION
We provide botanical DNA encryption, embedment and authentication solutions
that can help protect companies, governments and consumers from counterfeiting,
fraud, piracy, product diversion, identity theft, and unauthorized intrusion
into physical locations and databases. Our SigNature Program provides a secure,
accurate and cost-effective means for customers to incorporate our SigNature DNA
Markers in, and then quickly and reliably authenticate and identify, a broad
range of items such as artwork and collectibles, fine wine, consumer products,
digital media, financial instruments, identity cards and other official
documents. Having the ability to reliably authenticate and identify counterfeit
versions of such items enables companies and governments to detect, deter,
interdict and prosecute counterfeiting enterprises and individuals.
Our SigNature Program enables our potential clients to cost-effectively:
o assure manufacturers, suppliers, distributors, retailers and end-users
that their products are authentic and can be forensically
authenticated;
o integrate our SigNature DNA Markers with existing security solutions
such as barcodes, radio frequency identification (RFID) tags,
holograms, microchips and other securities measures; and
o add value to the "bottom-line" by helping to diminish product
diversion and counterfeiting.
Counterfeit and diverted products continue to pose a significant and
growing problem with consumer packaged goods, especially for prestige and
established brands worldwide. Piracy, identity theft and forged documents and
items are also highly prevalent in vertical markets such as digital media, fine
art, luxury goods, and alcoholic beverages. Key aspects of our strategy include:
o continuing to improve and customize our solution to meet our potential
customers' needs;
o continuing to develop and enhance our existing DNA marker
authentication technologies;
o expanding our customer base both domestically and abroad by targeting
high volume markets; and
o augmenting our competitive position through strategic acquisitions and
alliances.
PLAN OF OPERATIONS
General
We expect to generate revenues principally from sales of our SigNature
Program. We are currently attempting to develop business in six target markets:
art and collectibles, fine wine, consumer products, digital recording media,
pharmaceuticals, and homeland security driven programs. We intend to pursue both
domestic and international sales opportunities in each of these vertical
markets.
We believe that our existing capital resources will enable us to fund our
operations until approximately April 2007. We believe we may be required to seek
additional capital to sustain or expand our prototype and sample manufacturing,
and sales and marketing activities, and to otherwise continue our business
operations beyond that date. We have no commitments for any future
12
funding, and may not be able to obtain additional financing or grants on terms
acceptable to us, if at all, in the future. If we are unable to obtain
additional capital this would restrict our ability to grow and may require us to
curtail or discontinue our business operations. Additionally, while a reduction
in our business operations may prolong our ability to operate, that reduction
would harm our ability to implement our business strategy. If we can obtain any
equity financing, it may involve substantial dilution to our then existing
shareholders.
Product Research and Development
We anticipate spending approximately $200,000 for product research and
development activities during the next twelve (12) months.
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the sale of any material property, plant or equipment
during the next 12 months. We do anticipate spending approximately $100,000 on
the acquisition of leasehold improvements during the next 12 months. We believe
our current leased space is adequate to manage our growth, if any, over the next
2 to 3 years.
Number of Employees
From our inception through the period ended June 30, 2006, we have
principally relied on the services of outside consultants for services. We
currently have seven employees. Specifically, the company expects to increase
its staffing dedicated to sales, product prototyping, manufacturing of DNA
markers and forensic authentication services. Expenses related to travel,
marketing, salaries, and general overhead will be increased as necessary to
support our growth in revenue. In order for us to attract and retain quality
personnel, we anticipate we will have to offer competitive salaries to future
employees. We anticipate that it may become desirable to add additional full and
or part time employees to discharge certain critical functions during the next
12 months. This projected increase in personnel is dependent upon our ability to
generate revenues and obtain sources of financing. There is no guarantee that we
will be successful in raising the funds required or generating revenues
sufficient to fund the projected increase in the number of employees. As we
continue to expand, we will incur additional cost for personnel.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, published by the SEC, recommends that
all companies include a discussion of critical accounting policies used in the
preparation of their financial statements. While all these significant
accounting policies impact our financial condition and results of operations, we
view certain of these policies as critical. Policies determined to be critical
are those policies that have the most significant impact on our consolidated
financial statements and require management to use a greater degree of judgment
and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause a
material effect on our consolidated results of operations, financial position or
liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
o Equity issued with registration rights
o Warrant liability
o Fair value of intangible assets
EQUITY ISSUED WITH REGISTRATION RIGHTS
In connection with placement of our convertible notes and warrants to
certain investors during the fiscal quarters ended December 31, 2003, December
31, 2004 and March 31, 2005, we granted certain registration rights that provide
for liquidated damages in the event of failure to timely perform under the
agreements. Although these notes and warrants do not provide for net-cash
settlement, the existence of liquidated damages provides for a defacto net-cash
settlement option. Therefore, the common stock underlying the notes and warrants
subject to such liquidated damages does not meet the tests required for
shareholders' equity classification, and accordingly has been reflected between
liabilities and equity in the accompanying consolidated balance sheet until such
time as the conditions are eliminated.
WARRANT LIABILITY
In connection with the placement of certain debt instruments during the
fiscal quarter ended June 30, 2005, as described above, we issued freestanding
warrants. Although the terms of the warrants do not provide for net-cash
settlement, in certain circumstances, physical or net-share settlement is deemed
to not be within our control and, accordingly, we are required to account for
these freestanding warrants as a derivative financial instrument liability,
rather than as shareholders' equity.
13
The warrant liability is initially measured and recorded at its fair value,
and is then re-valued at each reporting date, with changes in the fair value
reported as non-cash charges or credits to earnings. For warrant-based
derivative financial instruments, the Black-Scholes option pricing model is used
to value the warrant liability.
The classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is re-assessed at
the end of each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether or
not net-cash settlement of the derivative instrument could be required within 12
months of the balance sheet date.
We do not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.
FAIR VALUE OF INTANGIBLE ASSETS
We have adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby
we periodically test our intangible assets for impairment. On an annual basis,
and when there is reason to suspect that their values have been diminished or
impaired, these assets are tested for impairment, and write-downs will be
included in results from operations.
On July 12, 2005, we acquired certain intellectual properties from Biowell
through an Asset Purchase Agreement in exchange for 36 million shares of our
restricted common stock having an aggregate fair value at the date of issuance
of $24.12 million. The value of the acquired intangible assets was $9,430,900,
with the balance of the purchase price, or $14,689,100, charged to operations as
a cost of the transaction.
USE OF ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenue and expenses during the reporting
period. The most significant estimates relate to the estimation of percentage of
completion on uncompleted contracts, valuation of inventory, allowance for
doubtful accounts and estimated life of customer lists. Actual results could
differ from those estimates.
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its consolidated financial statements as of
September 30, 2005 and for the year ended September 30, 2005 and the quarterly
unaudited data for the first three quarters of 2006 and all of 2005.
These restatements and resulting revisions relate to the accounting
treatment for and disclosing the issuance by the Company of options and warrants
to acquire the Company's common stock. In addition the Company corrected certain
errors in accounting for the exchange of its common stock for previously
incurred debt with a Company director. These errors were discovered in
connection with comments raised by the SEC in their review and comment on this
Registration Statement.
In this regard, you should rely on the restated financial results for the
year and each of the quarters in the years 2005 and the first, second and third
quarters of 2006 and, as the Company previously reported in its Current Report
on Form 8-K, dated May 16, 2006, you should not rely on the Company's previously
issued consolidated financial statements and other financial information for
these reporting periods.
As a result, the accompanying consolidated financial statements for the
year ended September 30, 2005 and the quarterly periods ended December 31, 2005,
March 31, 2006 and June 30, 2006 have been restated from the amounts previously
reported to correct the accounting for financial derivatives. While the effect
of the corrections to the financial statements is fully described in
accompanying notes to the restated consolidated financial statements, the
following is a summary of the net effect of the errors on these consolidated
financial statements:
o the Company's net loss for the year ended September 30, 2005 increased
by $14,499,139 from $52,610,380 to $67,109,519;
o the Company's current liabilities as of September 30, 2005 increased
by $384,651 from $2,595,897 to $2,980,548; and,
o the Company's other liabilities, representing warranty liabilities, as
of September 30, 2005 increased by $13,673,574 from $0 to $13,673,574.
REVENUES
From our inception on September 16, 2002, we did not generate material
revenues from operations. We have, however, generated $0.019 million in sales of
our products for the three months ended June 30, 2006. Our cost of sales for the
same period was $0.016 million netting us a gross profit of $0.003 million. We
believe we will not generate material revenues from operations in the
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current fiscal year as we transition from a development stage enterprise to an
active growth stage company, and we may not generate any additional revenues
from operations.
COSTS AND EXPENSES
Selling, General and Administrative
Selling, general and administrative expenses for the three month period
ended June 30, 2006 compared to the same period in 2005 decreased $284,664 or
15% to $1.581 million from $1.866 million. For the nine months ended June 30,
2006, selling, general and administrative expenses decreased $19.798 million or
82% to $4.391 million from $24.189 million in the prior period. These deceases
are due to non-recurring financing and related costs incurred in the prior year.
Research and Development
Research and development expenses for the three months ended June 30, 2006
decreased $88,870 or 100% to $-0- from $88,870 in the same period in 2005. For
the nine months ended June 30, 2006, research and development expenses deceased
$270,682 million or 78.3% to $75,276 from $345,958 million for the same period
in 2005. Prior year's costs were primarily due to costs associated with
establishing our headquarters and laboratories at the Long Island High
Technology Incubator at Stony Brook University.
Depreciation and Amortization
In the three month period ended June 30, 2006, depreciation and
amortization increased $333,664 compared to the same period in 2005 from $3,160
to $336,824. For the nine month period ended June 30, 2006, depreciation and
amortization increased $1.006 million to $1.021 million from $15,187 in the same
period last year. In the year ended September 30, 2005, we capitalized $9.431
million related to an intellectual property asset acquisition. As a result, we
recorded amortization expense totaling $1,010,454 for the nine month period
ended June 30, 2006 compared to no intangible asset amortization in the nine
months ended June 30, 2005. We estimate a seven year useful life that commenced
during the fourth fiscal quarter of 2005.
Total Operating Expenses
Total operating expenses during the three and nine months ended June 30,
2006 decreased to $1.918 million from $1.958 million and $5.488 million from
$24.550 million, respectively as a result of the combination of factors listed
above.
Other Income/Loss
Gain on revaluation of warrant and debt derivative liability during the
three month period ended June 30, 2006 deceased $2.185 million to $3.494 million
from $5.679 million for the same period last year. For the nine month period
ended June 30, 2006, the gain on revaluation of warrant and debt derivative
liability decreased $2.204 million to $14.251 from $16.455 the prior same
period.
Interest Expenses
Interest expense for the three month period ended June 30, 2006 increased
$805,270 to $826,827 from $21,557 for the same period in 2005. For the nine
month period ended June 30, 2006, interest decreased $29.200 million to $3.177
million from $32.373 million in same period 2005. The increase in three months
ended June 30, 2006 is a result of additional financing costs incurred in the
current period. The decease in the current nine month period ended June 30, 2006
is a result of a net reduction in finance related costs incurred the prior
period in 2005 as compared to the current period.
Net Income (loss)
Net income for the three month period ended June 30, 2006 decreased $2.939
million to $0.761 million from $3.701 million for the same period last year. For
the nine months ended June 30, 2006, net income increased $46.072 million to a
net income of $5.607 million from a same period prior year loss of $40.465
million. These changes are a result of the combination of factors described
above.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity needs consist of our working capital requirements,
indebtedness payments and research and development expenditure funding.
Historically, we have financed our operations through the sale of equity and
convertible debt as well as borrowings from various credit sources.
In fiscal 2005, we completed two private placements of convertible debt and
associated warrants. In November and December, 2004 we issued and sold $1.465
million in aggregate principal amount of promissory notes, convertible at $0.50
per share,
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and associated warrants to purchase up to 2,930,000 shares of our common stock,
exercisable at $0.75 per share for three years from their date of issuance, to
13 investors (the "December 2004 Placement"). Each promissory note was
automatically convertible into shares of our common stock at a price of $0.50
per share upon the closing of a subsequent private placement by us for at least
$1 million. In January and February of 2005, we issued and sold $7.371 million
in aggregate principal amount of 10% Secured Convertible Promissory Notes,
convertible at $0.50 per share, and associated warrants to purchase up to
14,742,000 shares of our common stock, exercisable at $0.75 per share until five
years from their date of issuance, to 61 investors (the "January and February
2005 Placement"). Upon the closing of the January and February 2005 Offering,
the notes issued in the December 2004 Placement automatically converted into an
aggregate of 2,930,000 shares of our common stock, and upon the filing of this
registration statement on February 15, 2005, the notes issued in the January and
February 2005 Placement automatically converted into an aggregate of 14,742,000
shares of our common stock. Additional private placements in fiscal 2005 raised
$243,000. We also received proceeds of $60,000 from the exercise of a warrant to
purchase 100,000 shares of our common stock in fiscal 2005. The $9.135 million
in gross proceeds from these private placements and warrant exercises were used
to fund commissions, fees and expenses associated with the placements,
consultants and public reporting costs, salaries and wages, royalties, research
and development, facility costs as well as general working capital needs. Since
the conversion price of the notes issued in the November and December 2003,
December 2004, December 2005 and the January and February 2005 placements were
less than the market price of our common stock at the time these notes were
issued, we recognized a charge relating to the beneficial conversion feature of
these notes during the quarter in which they are issued.
In the nine month period ended June 30, 2006, we completed three additional
private placements of convertible debt and associated warrants. On November 3,
2005, we issued and sold a promissory note in the principal amount of $550,000
to Allied International Fund, Inc. ("Allied"). Allied in turn financed a portion
of the making of this loan by borrowing $450,000 from certain persons, including
$100,000 from James A. Hayward, a director and our Chief Executive Officer. The
terms of the promissory note provided that we issue upon the funding of the note
warrants to purchase 5,000,000 shares of our common stock at an exercise price
of $0.50 per share to certain persons designated by Allied. On November 9, 2005,
we issued nine warrants to Allied and eight other persons to purchase an
aggregate of 5,500,000 shares of our common stock at an exercise price of $0.50
per share. These warrants included a warrant to purchase 1,100,000 shares that
was issued to James A. Hayward, a director and our Chief Executive Officer. We
paid $55,000 in cash to VC Arjent, Ltd. for its services as the placement agent
with respect to this placement. All principal and accrued but unpaid interest
under the promissory note was paid in full shortly after the closing of and from
the proceeds of a private placement we completed on March 8, 2006. On March 8,
2006, we issued and sold an aggregate of 30 units consisting of (i) a $50,000
principal amount secured convertible promissory note bearing interest at 10% per
annum and convertible at $0.50 per share, and (ii) a warrant to purchase 100,000
shares of our common stock at an exercise price of $0.50 per share, for
aggregate gross proceeds of $1.5 million. The units were sold pursuant to
subscription agreements by and between each of the purchasers and Applied DNA
Operations Management, Inc., a Nevada corporation and our wholly owned
subsidiary (our "Subsidiary"). The $2.050 million in gross proceeds from these
first two offerings were held by our Subsidiary for our benefit and used to fund
commissions, fees and expenses associated with the placements, to repay the
outstanding promissory note described above plus accrued interest thereunder, to
fund financing fees, consultants and public reporting costs, salaries and wages,
research and development, facility costs as well as and general working capital
needs. On March 24, 2006, we commenced an offering (the "Offshore Offering") of
up to 140 units, at a price of $50,000 per unit, for a maximum offering of $7
million for sale to "accredited investors" who are not "U.S. persons." The units
being sold as part of the Offshore Offering consist of (i) a $50,000 principal
amount secured convertible promissory note, and (ii) a warrant to purchase
100,000 shares of our common stock at a price of $0.50 per share. On May 2,
2006, we closed on the first tranche of the Offshore Offering in which we sold
20 units for aggregate gross proceeds of $1,000,000. We paid Arjent Limited
$375,000 in commissions, fees and expenses from these gross proceeds. On June
15, 2006, we completed the second tranche of the Offshore Offering in which we
sold 59 units for aggregate gross proceeds of $2,950,000. We paid Arjent Limited
$442,500 in commissions, fees and expenses from these gross proceeds.
Additionally, on July 10, 2006 we issued 2.4 million shares of our common stock
to Arjent Limited at $0.001 per share as partial consideration for its services
in connection with the Offshore Offering.
On March 29, 2006 and April 13, 2006, we borrowed $200,000 in the
aggregate, at a rate of 7.5% per annum, from BioCogent, whose President and
Chief Executive Officer and sole stockholder is James A. Hayward, one of our
directors and our Chief Executive Officer. These loans were due and payable upon
the earlier to occur of (1) the close of business on June 30, 2006, or (2) the
closing of the issuance and sale of our securities for gross proceeds of at
least $250,000. The proceeds from the loans were used for general corporate
purposes. The note issued on March 29, 2006 was repaid with interest in May,
2006. The note issued on April 13, 2006 was repaid with interest in June, 2006.
Substantially all of the real property used in our business is leased under
operating lease agreements.
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As of June 30, 2006, we had a working capital deficit of $2,982,927. For
the nine months ended June 30, 2006, we generated a net cash flow deficit from
operating activities of $2,306,666 consisting primarily of year to date income
of $5.607 million net with a non cash gain on repricing of warrants and debt
derivatives of $14.251 million. Non cash equity adjustments totaling a net
$3,275,158 included $2,271,000 in expensed warrants issued in connection with
the November, 2005 financing, $710,200 in net stock issued for consulting
services, $773,958 in penalty stock issued pursuant to the registration rights
agreement from the private placement in January and February, 2005, and $480,000
in cancelled shares for services previously rendered. Finally, non cash
depreciation and amortization including amortization of capitalized financing
costs totaled $1,268,437 while net assets and liabilities decreased by $1.474
million. Cash used in investing activities totaled $35,851 primarily for
increased acquisition of furniture and equipment. Cash provided by financing
activities for the nine months ended June 30, 2006 resulted from the financing
discussed above of $4.243 million.
As of June 30, 2006, we had $3,306,371 in outstanding notes payable. Please
see Note C in our unaudited financial statements for the terms of such notes
payable. We expect capital expenditures to total no more than $200,000 during
the 2006 fiscal year. Our primary investments will be in laboratory equipment to
support prototyping and our authentication services.
We have raised capital to meet our working capital needs in the past, and
will likely require additional financing within the next 5 months in order to
meet our current and projected cash flow deficits from operations and
development. We presently do not have any available credit, bank financing or
other readily available external sources of liquidity. Financing transactions
may include the issuance of equity or debt securities, obtaining credit
facilities, or other financing mechanisms. However, the trading price of our
common stock, a downturn in the U.S. or global stock and debt markets and other
reasons could make it more difficult to obtain financing through the issuance of
equity securities or borrowing. Further, if we issue additional equity or
convertible debt securities, stockholders may experience additional dilution or
the new equity securities may have rights, preferences or privileges senior to
those of existing holders of our common stock. If additional financing is not
available or is not available on acceptable terms, this could have a material
adverse effect on our business, results of operations liquidity and financial
condition.
Our registered independent certified public accountants stated in their
report dated October 21, 2005, that we incurred operating losses in the last two
years, and that we are dependent upon management's ability to develop profitable
operations. These factors among others may raise substantial doubt about our
ability to continue as a going concern.
Pursuant to the terms of a registration rights agreement with respect to
common stock underlying convertible notes and warrants we issued in private
placements in November and December, 2003, December, 2004, and January and
February, 2005, if we did not have a registration statement registering the
shares underlying these convertible notes and warrants declared effective on or
before June 15, 2005, we are obligated to pay liquidated damages in the amount
of 3.5% per month of the face amount of the notes, which equals $367,885, until
the registration statement is declared effective. At our option, these
liquidated damages can be paid in cash or restricted shares of our common stock.
To date we have decided to pay certain of these liquidated damages in common
stock, although any future payments of liquidated damages may, at our option, be
made in cash. If we decide to pay such liquidated damages in cash, we would be
required to use our limited working capital and potentially raise additional
funds. If we decide to pay the liquidated damages in shares of common stock, the
number of shares issued would depend on our stock price at the time that payment
is due. Based on the closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32
and $0.20 for our common stock on July 15, 2005, August 15, 2005, September 15,
2005, October 17, 2005, November 15, 2005 and December 15, 2005, respectively,
we issued a total of 3,807,375 shares of common stock in liquidated damages from
August, 2005 to January, 2006 to persons who invested in the January and
February, 2005 private placements. The issuance of shares upon any payment by us
of further liquidated damages will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
We paid liquidated damages in the form of common stock only for the period
from June 15, 2005 to December 15, 2005, and only to persons who invested in the
January and February, 2005 private placements. We believe that we have no
enforceable obligation to pay liquidated damages to holders of any shares we
agreed to register under the registration rights agreement for periods after the
first anniversary of the date of issuance of such shares, since they were
eligible for resale under Rule 144 of the Securities Act during such periods,
and such liquidated damages are grossly inconsistent with actual damages to such
persons. Nonetheless, as of June 30, 2006 we have accrued $2,921,660 in
penalties representing further liquidated damages associated with our failure to
have the registration statement declared effective by the deadline, and have
included this amount in accounts payable and accrued expenses.
MATTER VOLUNTARILY REPORTED TO THE SEC AND SECURITIES ACT VIOLATIONS
During the months of March, May, July and August 2005, we issued a total of
8,550,000 shares of our common stock to certain employees and consultants
pursuant to the 2005 Incentive Stock Plan. We engaged our outside counsel to
conduct an investigation of the circumstances surrounding the issuance of these
shares. On April 26, 2006, we voluntarily reported the findings
17
from this investigation to the SEC, and agreed to provide the SEC with further
information arising from the investigation. We believe that the issuance of
8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of our board of directors. These former officers received a total of
3,000,000 of these shares. In addition, it appears that the 8,000,000 shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance with the Securities Act of 1933, as amended. The members of the
Company's management who effectuated the stock issuances no longer work for the
Company. These shares were not registered under the Securities Act of 1933, or
the securities laws of any state, and we believe that certain of these shares
may have been sold on the open market, though we have been unable to determine
the magnitude of such sales. If violations of securities laws occurred in
connection with the resale of certain of these shares, the employees and
consultants or persons who purchased shares from them may have rights to have
their purchase rescinded or other claims against us for violation of securities
laws, which could harm our business, results of operations, and financial
condition.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
GOING CONCERN
The financial statements included in this filing have been prepared in
conformity with generally accepted accounting principles that contemplate our
continuance as a going concern. Our auditors, in their report dated October 21,
2005, have expressed substantial doubt about our ability to continue as going
concern. Our cash position may be inadequate to pay all of the costs associated
with the testing, production and marketing of our products. Management intends
to use borrowings and the sale of equity or convertible debt to mitigate the
effects of its cash position, however no assurance can be given that debt or
equity financing, if and when required will be available. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets and classification of liabilities that might
be necessary should we be unable to continue existence.
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BUSINESS
Corporate History
We are a Nevada corporation, which was initially formed under the laws of
the State of Florida as Datalink Systems, Inc. in 1983. In 1998, we
reincorporated in Nevada, and in November of 2002, we changed our name to our
current name, Applied DNA Sciences, Inc. In November 2005, our corporate
headquarters were relocated from Los Angeles, California to the Long Island High
Technology Incubator at Stony Brook University in Stony Brook, New York. This
relocation was part of our restructuring effort during the fourth quarter of
2005 to transform the company from the developmental stage to an operating
business. During this period and in the first two quarters of 2006, we
established laboratories for the manufacture of DNA markers and product
prototypes, and DNA authentication. To date, the company has a very limited
operating history, and as a result, the company's operations have produced
insignificant revenues. On May 9, 2006, we entered into, and on July 25, 2006 we
announced the performance of our first SigNature Program contract.
OVERVIEW
We provide botanical DNA encryption, embedment and authentication solutions
that can help protect companies, governments and consumers from counterfeiting,
fraud, piracy, product diversion, identity theft, and unauthorized intrusion
into physical locations and databases. Our SigNature Program provides a secure,
accurate and cost-effective means for customers to incorporate our SigNature DNA
Markers in, and then quickly and reliably authenticate and identify, a broad
range of items such as artwork and collectibles, fine wine, consumer products,
digital media, financial instruments, identity cards and other official
documents. Having the ability to reliably authenticate and identify counterfeit
versions of such items enables companies and governments to detect, deter,
interdict and prosecute counterfeiting enterprises and individuals.
Our SigNature Program enables our potential clients to cost-effectively:
o give assurance to manufacturers, suppliers, distributors, retailers
and end-users that their products are authentic and can be
forensically authenticated;
o integrate our SigNature DNA Markers with existing security solutions
such as barcodes, radio frequency identification (RFID) tags,
holograms, microchips and other securities measures; and
o add value to the "bottom-line" by helping to diminish product
diversion and counterfeiting.
Counterfeit and diverted products continue to pose a significant and
growing problem with consumer packaged goods, especially for prestige and
established brands worldwide. Piracy, identity theft and forged documents and
items are also highly prevalent in vertical markets such as digital media, fine
art, luxury goods, and alcoholic beverages. Key aspects of our strategy include:
o continuing to improve and customize our solution to meet our potential
customers' needs;
o continuing to develop and enhance our existing DNA marker
authentication technologies;
o expanding our customer base both domestically and abroad by targeting
high volume markets; and
o augmenting our competitive position through strategic acquisitions and
alliances.
INDUSTRY BACKGROUND
Counterfeiting, product diversion, piracy, forgery, identity theft, and
unauthorized intrusion into physical locations and databases create significant
and growing problems to companies in a wide range of industries as well as
governments and individuals worldwide. The U.S. Chamber of Commerce reported in
2006 that counterfeiting and piracy cost the U.S. economy between $200-$250
billion per year, or an estimated 750,000 American jobs, and pose a real threat
to consumer health and safety. The World Customs Organization and Interpol
estimate that annual global trade in illegitimate goods increased from $5.5
billion in 1982 to roughly $600 billion in 2004.
Product counterfeiting and diversion particularly harms manufacturers of
consumer products, especially for prestige and established brands, and the
consumers who purchase them. For instance, according to the Gieschen
Consultancy's 2005 Document, Product and Intellectual Property Security Report,
or DOPIP, consumer products associated with worldwide counterfeit enforcement
arrests, charges, convictions, sentences and civil litigation in 2005 amounted
to around $1.5 billion. This total includes:
o $695 million of entertainment and software products;
o $283 million of clothing and accessories;
o $193 million of cigarettes and tobacco products ;
o $61 million of drugs and other medical supplies;
o $36 million of toys and sports equipment;
o $35 million of electronic equipment and supplies;
o $12 million in perfume and cosmetics;
o $11 million of food and alcohol products;
o $11 million in jewelry and watches;
o $10 million of computer equipment and supplies;
o $123 million of other goods.
According to this report, the value of seizures and losses associated with
counterfeit documents, products and intellectual property in the United States
alone was $1.29 billion in 2005.
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The artworks and collectibles markets are also particularly vulnerable to
counterfeiting, forgery and fraud. New works are produced and then passed off as
originating from a particular artistic period or source, authentic fragments are
pieced together to simulate an original work, and existing works are modified in
order to increase their purported value. Such phony artwork and collectibles are
then often sold with fake or questionable signatures and "provenance," or
documented ownership histories that confirm authenticity.
Governments are increasingly vulnerable to counterfeiting, terrorism and
other security threats at least in part because currencies, identity and
security cards and other official documents can be counterfeited with relative
ease. For instance, the DOPIP valued 2005 seizures and losses associated with
counterfeit currency at around $609 billion, and counterfeit identification at
$124 million. Governments must also enforce the various anti-counterfeiting and
anti-piracy regimes of their respective jurisdictions which becomes increasingly
difficult with the continued expansion of global trade.
The digital and recording media industry, including the segment that
records computer software on compact discs, has long been a victim of piracy, or
the production of illegal copies of genuine media or software, and the
counterfeiting and distribution of imitation media or software. Compact discs,
DVDs, videotapes, computer software and other digital and recording media that
appears identical to genuine products are sold at substantial discounts by
vendors at street and night markets, via mail order catalogs and on the internet
at direct retail websites or at auction sites. In 2006 the Business Software
Alliance ("BSA") reported that in 2005, the United States lost $6.9 billion as a
result of software piracy. The BSA also estimated that 21 percent of software
programs in the U.S. are unlicensed and that since January 1, 2000, the BSA has
settled with 1,668 companies for a total of $81,821,895. In a white paper
published in December 2005, the BSA and the IDC also reported that they found in
a 2004 study that the world spent more than $59 billion for commercial packaged
software. Yet, software worth over $90 billion was actually installed. In other
words, for every two dollars worth of software purchased legitimately, one
dollar was obtained illegally.
The pharmaceutical industry also faces major problems relative to
counterfeit, diluted, or falsely labeled drugs that make their way through
healthcare systems worldwide, posing a health threat to patients and a financial
threat to drugmakers and distributors. In 2006 the Center for Medicine in the
Public Interest predicted that counterfeit drug sales will reach $75 billion
globally in 2010, an increase of more than 90% from 2005. In February, 2006, the
World Health Organization ("WHO") estimated that counterfeits account for more
than 10% of the global pharmaceuticals market, 25% of pharmaceuticals consumed
in developing countries and as much as 50% in some countries, are counterfeit.
According to the WHO, counterfeiting can apply to both branded and generic
products and counterfeit pharmaceuticals may include products with the correct
ingredients but fake packaging, with the wrong ingredients, without active
ingredients or with insufficient active ingredients. The challenges presented by
traditional counterfeiters have recently been supplemented by the many websites,
from direct retailers to auction sites, that offer counterfeit prescription
drugs online. As a result, the pharmaceutical industry and regulators are
examining emerging anti-counterfeit technologies, including radio-frequency
identification tags and electronic product codes, known as EPCs, to help stem
the wave of counterfeit drugs and better track legitimate drugs from
manufacturing through the supply chain.
As more and more companies in each of these markets begin to address the
problem of counterfeiting, we expect that different systems will compete to be
the leading standards by which products can be tracked across world markets.
Historically, counterfeiting, product diversion and other types of fraud have
been combated by embedding various authentication systems and rare and easily
distinguishable materials into products, such as radio frequency identification
(RFID) devices and banknote threads in packaging, integrated circuit chips and
magnetic strips in automatic teller machine cards, holograms on currency,
elemental taggants in explosives, and radioactivity and rare molecules in crude
oil. These techniques are effective but have generally been reverse-engineered
and replicated by counterfeiters, which limits their usefulness as forensic
methods for authentication of the sources of products and other items.
THE APPLIED DNA SOLUTION
We believe our solution, which we call the SigNature Program, is as broadly
applicable, convenient and inexpensive as existing authentication systems, while
highly resistant to reverse-engineering or replication, so that it can either be
applied independently or supplement existing systems in order to allow for a
forensic level of authentication of the sources of a broad range of items, such
as artwork and collectibles, fine wine, consumer products, digital and recording
media, pharmaceuticals, financial instruments, identity cards and official
documents. The SigNature Program first involves our design and manufacture of a
highly customized and encrypted botanical DNA marker, or SigNature DNA Marker.
The SigNature DNA Marker is then encapsulated and stabilized so that it is
resistant to heat, organic solvents, chemicals and most importantly,
ultraviolet, or UV radiation. Once it has been encapsulated, our SigNature DNA
Embedment system can be used to embed the SigNature DNA Marker directly onto
products or other items or into special inks, threads and other media, which in
turn can be incorporated into packaging or products. Once it is embedded, our
SigNature DNA Encryption Detector pen can instantly show the presence or absence
of any of our SigNature DNA Markers, and our SigNature polymerase chain reaction
(PCR) Kits can provide rapid forensic level authentication of specific SigNature
DNA Markers.
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We believe that the key characteristics and benefits of the SigNature
Program are as follows:
We Believe Our SigNature DNA Markers Are Virtually Impossible to Copy
In creating unique SigNature DNA Markers, we use DNA segments from one or
more botanical sources, rearrange them into unique encrypted sequences, and then
implement one or more layers of anti-counterfeit techniques. Because the portion
of DNA in a SigNature DNA Marker used to identify the marker is so minute, it
cannot be detected unless it is replicated billions of times over, or amplified.
This amplification can only be achieved by applying matching strands of DNA, or
a primer, and PCR techniques to the SigNature DNA Marker. The sequence of the
relevant DNA in a SigNature DNA Marker must be known in order to manufacture the
primer for that DNA. As a result, we believe the effort required to find,
amplify, select and clone the relevant DNA in a SigNature DNA Marker would
involve such enormous effort and expense that SigNature DNA Markers are
virtually impossible to copy without our proprietary systems.
Simple and Rapid Authentication
With our advanced SigNature DNA Marker detection devices and PCR testing
kits, any of our customers can quickly complete an on-site verification. When
our SigNature DNA Encryption Detector pen comes in contact with our proprietary
overt ink on a label or product package, a biochemical reaction triggers a
reversible color change from blue to pink and back to blue. Testing of this
color change can be repeated between 30 to 50 times. For forensic level
authentication, our SigNature PCR testing kits can produce absolute
authentication in less than 30 minutes using portable PCR machines.
Low Cost and High Accuracy
The costs associated with the DNA required to manufacture our SigNature DNA
Markers are not significant since the amount of DNA required for each marker is
so minute (for instance, only 3-5 parts per million when incorporated in an
ink). We manufacture the identifying segment of DNA to be used in a SigNature
DNA Marker by cloning them inside microorganisms such as yeast or bacteria,
which are highly productive and inexpensive to grow. As a result, SigNature DNA
Markers are relatively inexpensive when compared to other anti-counterfeiting
devices such as RFIDs, EPCs, integrated circuit chips, and holograms. Our
SigNature DNA Encryption Detectors, which use color changing dyes and molecular
"triggers" to instantly detect SigNature DNA Markers, are also relatively
inexpensive. At the same time, the probability of mistakenly identifying a
SigNature DNA Marker is less than 1 in 1 trillion, so our authentication systems
are highly accurate, and in fact, our SigNature PCR Kits can authenticate to a
forensic level.
Easily Integrated with Other Anti-Counterfeit Technologies
Our DNA Markers can easily be embedded onto RFID devices, banknote threads,
labels, serial numbers, holograms, and other marking systems using inks, threads
and other media. We believe that combined with other traditional methods, our
SigNature Program provides a significant deterrent against counterfeiting,
product diversion, piracy, fraud and identity theft.
Broad Applicability and Ingestible
Our SigNature DNA Markers can be embedded into almost any consumer product,
and virtually any other item. For instance, the indelible SigNature DNA Ink we
produce is safe to consume and can be used in pharmaceutical drug tablets and
capsules. Use of our SigNature DNA in ingestible products and drugs will require
FDA approval. We have initiated a strategy to approach FDA in the first quarter
of calendar year 2007.
OUR STRATEGY
We expect to generate revenues principally from sales of our SigNature
Program. Key aspects of our strategy include:
Customize and Refine the SigNature Program to Meet Potential Customers' Needs
We are continuously attempting to improve our SigNature Program by testing
the incorporation of our DNA Markers into different media, such as newly
configured labels, inks or packing elements, for use in new applications. Each
prospective customer has specific needs and employs varying levels of existing
security technologies with which our solution must be integrated. Our goal is to
develop a secure and cost-effective system for each potential customer that can
be incorporated into that potential customer's products or items themselves or
their packaging so that they can, for instance, be tracked throughout the entire
supply chain and distribution system.
Continue to Enhance Detection Technologies for Authentication of our SigNature
DNA Markers
We have also identified and are further examining opportunities to
collaborate with companies and universities to develop a new line of detection
technologies that will provide faster and more convenient ways to authenticate
our SigNature DNA Markers.
21
Target Potential High-Volume Markets
We will continue to focus our efforts on target vertical markets that are
characterized by a high level of vulnerability to counterfeiting, product
diversion, piracy, fraud, identity theft, and unauthorized intrusion into
physical locations and databases. Today our target markets include art and
collectibles, fine wine, consumer products, digital and recording media,
pharmaceuticals, and homeland security. If and when we have significantly
penetrated these markets, we intend to expand into additional related high
volume markets.
Pursue Strategic Acquisitions and Alliances
We intend to pursue strategic acquisitions of companies and technologies
that strengthen and complement our core technologies, improve our competitive
positioning, allow us to penetrate new markets, and grow our customer base. We
also intend to work in collaboration with our licensee Biowell and potential
strategic partners in order to continue to market and sell new product lines
derived from, but not limited to, DNA technology.
TARGET MARKETS
A licensee of our products, Biowell, has incorporated DNA markers, based
upon the same technology we use to create our SigNature DNA Markers, in nearly 1
billion consumer products including DVDs, CDs, fine art, cosmetics, luxury teas
and rice wine, seafood and many other items distributed in Asia. We have just
begun offering our products and services in Europe and the United States and are
targeting the following six principal markets:
Art & Collectibles
The fine art and collectibles markets are particularly vulnerable to
counterfeiting, forgeries and fraud. Phony artwork and collectibles are often
sold with fake or questionable signatures or attributions. We believe our
SigNature DNA Markers can safely be embedded directly in, and so can be used to
designate and then authenticate all forms of artwork and collectibles, including
paintings, books, porcelain, marble, stone, bronzes, tapestries, glass and fine
woodwork, including frames. They can also be embedded in any original supporting
documentation related to the artwork or collectible, the signature of the artist
and any other relevant material that would provide provenance, such as:
o A signed certificate or statement of authenticity from a respected
authority or expert on the artist;
o An exhibition or gallery sticker attached to the art or collectible;
o An original sales receipt;
o A film or recording of the artist talking about the art or
collectible;
o An appraisal from a recognized authority or expert on the art or
collectible; or
o Letters or papers from recognized experts or authorities discussing
the art or collectible.
Fine Wine
Vintners and purveyors of fine wine are also vulnerable to counterfeiting
or product diversion. We believe our SigNature Program can provide vintners and
purveyors of fine wines several benefits:
o Verifed authenticity increases potential customers' confidence in the
product and their purchase decision;
o For the vintner, the SigNature Program can strengthen brand support
and recognition, and offers the potential for improved marketability
and sales; and,
o SigNature DNA Markers can be embedded in bottles, labels, or both at
the winery, and easily authenticated at the location of the wine
distributor or auctioneer.
Consumer Products
Counterfeit items are a significant and growing problem with all kinds of
consumer packaged goods, especially in the retail and apparel industries.
According to the 2005 DOPIP, up to $283 million worth of clothing and
accessories worldwide are fake, as well as $12 million worth of fragrances and
cosmetics are counterfeit each year. In the United States, $1.29 billion dollars
worth of seizures and losses were incurred resulting from counterfeit of apparel
and other consumer products. We have developed and are currently marketing a
number of solutions aimed at brand protection and authentication for the retail
and apparel industries, including the clothing, accessories, fragrances and
cosmetics segments. Our SigNature Program can be used by manufacturers in these
industries to combat counterfeiting and piracy of primary, secondary and
tertiary packaging, as well as the product itself, and to track products that
have been lost in transit, whether misplaced or stolen.
22
Digital and Recording Media
The digital and recording media industry, including the segment that
records computer software on compact discs, faces significant threats from
piracy and the counterfeiting and distribution of imitation media or software.
For instance, according to the BSA, in 2005 the United States lost $6.9 billion
as a result of software piracy. Our SigNature DNA Markers can be embedded onto
digital and recording media products, such as CDs, DVDs, videotapes and computer
software, as well as the packaging of these products.
Pharmaceuticals
The pharmaceutical industry also faces major problems relative to
counterfeit, diluted, or falsely labeled drugs that make their way through
healthcare systems worldwide, posing a health threat to patients and a financial
threat to drugmakers and distributors. As a result, the pharmaceutical industry
and regulators are examining emerging anti-counterfeit technologies, including
RFID tags and EPCs to help stem the wave of counterfeit drugs and better track
legitimate drugs from manufacturing through the supply chain. Our SigNature DNA
Markers can easily be embedded directly into pharmaceutical packaging or into
RFID tags or EPCs attached to packaging, and since they are ingestible, may be
applied as part of a unit dose. In its 2004 report "Combating Counterfeit
Drugs," the Food and Drug Administration ("FDA") noted that authentication
technologies for pharmaceuticals (such as color-shifting inks, holograms,
taggants, or chemical markers imbedded in a drug or its label) have been
sufficiently perfected that they can now serve as a critical component of a
layered approach to control counterfeit drugs. FDA's 2004 Report acknowledged
the importance of using one or more authentication technologies for drug
products.
Homeland Security
Governments worldwide are increasingly faced with the problems of
counterfeit currencies, official documents, and identity and security cards, as
well as terrorism and other security threats. Governments must also enforce the
various anti-counterfeiting and anti-piracy regimes of their respective
jurisdictions which becomes increasingly difficult with the continued expansion
of global trade. Our SigNature Program can provide secure, forensic, and
cost-effective anti-counterfeiting, anti-piracy and identification solutions to
local, state, and federal governments as well as the defense contractors and the
other companies that do business with them. Our SigNature Program can be used
for all types of identification and official documents, such as:
o Passports;
o Lawful permanent resident, or "green" cards;
o Visas;
o Drivers' licenses;
o Social Security cards;
o Military identification cards;
o National transportation cards;
o Security cards for access to sensitive physical locations; and,
o Other important identity cards, official documents and
security-related cards.
OUR TECHNOLOGY
Every living organism has a unique DNA code that determines the character
and composition of its cells. The core technologies of our business allow us to
use the DNA of everyday plants to mark objects in a unique manner that we
believe can only be replicated at great expense, and then identify these objects
by detecting the absence or presence of the DNA.
SigNature DNA Encryption
Our patent pending encryption system allows us to isolate strands of
botanical DNA and then fragment and reconstitute them to form unique "DNA
chimers", or encrypted DNA segments, whose sequences are known only to us.
SigNature DNA Encapsulation
Our patented encapsulation system allows us to apply a protective coating
to encrypted DNA chimers, creating a SigNature DNA Marker that is resistant to
heat, organic solvents, chemicals and UV radiation, and so can be identified for
hundreds of years after being embedded directly, or into media applied or
attached to the item to be marked.
SigNature DNA Embedment
Our patented embedment system allows us to incorporate our SigNature DNA
Markers into a broad variety of media, such as petroleum and petroleum
derivatives, inks, dyes, laminates, glues, threads, and textiles.
23
SigNature DNA Authentication
Our patent pending forensic level authentication methods allow us to unlock
the encrypted DNA chimers by using PCR techniques and proprietary primers that
were specifically designed by us to detect the DNA sequences we encrypted and
embedded into the product or other item. Detection of the DNA chimers unique to
a particular item or series of items allows us to authenticate its or their
origin.
PRODUCTS AND SERVICES
Our SigNature Program consists of three steps: creating and encapsulating a
specific encrypted DNA segment, applying it to a product or other item, and
detecting the presence or absence of the specific segment. We plan for the first
two steps to be controlled exclusively by Applied DNA and its certified agents
to ensure the security of SigNature DNA Markers. Once applied, the presence of
any of our SigNature DNA Markers can be detected by us or a customer in a simple
spot test, or a sample taken from the product or other item can be analyzed
forensically to obtain definitive proof of the presence or absence of a specific
type of SigNature DNA Marker (e.g. one designed to mark a particular product).
Creating a Customer or Product-Specific SigNature DNA Marker
Our SigNature DNA Markers are botanical DNA segments custom manufactured by
us to identify a particular class of or individual products or items. During
this manufacturing process, we scramble and encrypt a naturally occurring
botanical DNA code segment or segments, and then encapsulate the resulting DNA
segment utilizing our proprietary SigNature DNA Encapsulation system. We then
record and store the sequence of the DNA segment in a secure database in order
that we can later detect it.
Embedding the SigNature DNA Marker
Our SigNature DNA Markers may be directly embedded in products or other
items, or otherwise attached by embedding them into media that is incorporated
in or attached to the product or item. For example, we can embed SigNature DNA
Markers directly in paper, metal, plastics, stone, ceramic, and other materials.
Media in which we can embed SigNature DNA Markers include:
SigNature DNA Ink: Our SigNature DNA Ink can be applied directly or on a
label that is then affixed to the product or item. SigNature DNA Ink is highly
durable and degradation resistant. SigNature DNA Ink can be visible (colored) or
invisible. This makes it possible to mark products with a visible, or overt,
and/or invisible, or covert, SigNature DNA Marker on any tangible surface such
as a label. The location of covert Signature DNA Markers on a product are
recorded and stored in a secure database. Similar media like varnish and paints
can also be used instead of ink. Examples of products and other items onto which
SigNature DNA Ink can be applied include:
o Artwork and Collectibles: paintings, artifacts, antiques, stamps,
coins, documents, collectibles and memorabilia;
o Corporate documents: confidential, date and time dependent documents
or security clearance documents;
o Financial services: currency, stock certificates, checks, bonds and
debentures;
o Retail: event tickets, VIP tickets, clothing labels, luxury products;
o Pharmaceuticals: tablet, capsule and pill surface printing ; and,
o Miscellaneous: lottery tickets, inspection stamps, custom seals,
passports and visas, etc.
SigNature DNA Thread: Our SigNature DNA Thread, which can consist of any
fabric from cotton to wool, is embedded with SigNature DNA Markers and can be
used to mark and authenticate products and other items incorporating textiles.
For example, SigNature DNA Thread can be incorporated in a finished garment,
bag, purse, shoe or other product or item. SigNature DNA Thread can help textile
vendors, clothing and accessory manufacturers and governments authenticate
thread, yarn and fabric at any stage in the supply chain.
Other Security Devices: Our SigNature DNA Markers can also be embedded onto
printed barcodes, RFID tags, optical memory strips, holograms, tamper proof
labels and other security devices incorporated into products and other items for
various security-related purposes.
SigNature DNA Detection and Product Authentication
Level 1 "Spot Test" Detection: Our SigNature DNA Encryption Detector pens,
which are custom manufactured to identify our SigNature DNA Markers, allow us or
our customers to determine the presence or absence of these markers in around
one second when they have been embedded in a special overt DNA Ink. When the
SigNature DNA Encryption Detector is swiped over matching overt DNA Ink, the
color of the ink temporarily changes from blue to pink, indicating the presence
of the markers, and validating the product or other item. Though this detection
process cannot distinguish between different types of SigNature DNA Markers,
such as markers we have designed for one customer or product versus another, it
allows for instant sampling at any point in the supply chain.
24
Level 2 Forensic DNA Authentication: Our SigNature PCR Kits allow us or our
customers to use a sample taken from the product or other item to be
authenticated, and using our proprietary primers and PCR technology, determine
the sequences of DNA included in the sample, and conclude whether it includes a
specific SigNature DNA Marker. This more elaborate test generally requires about
30 minutes to complete. This authentication process provides absolute certainty
about the presence or absence of specific types of a SigNature DNA Marker.
SALES AND MARKETING
We have since inception only had sales of our products in Europe through
direct sales. As of October 31, 2006, we had 2 employees devoted to and 3
employees engaged in direct sales. We expect to hire additional sales directors
and/or consultants to assist us with sales and marketing efforts with respect to
our 6 target vertical markets.
RESEARCH AND DEVELOPMENT
From June 1, 2005 to September 20, 2005, we retained the Idaho National
Laboratory ("INL"), which is managed and operated by Battelle Energy Alliance
LLC for the Department of Energy, for the purpose of independently validating
our SigNature DNA Encryption, Encapsulation, Embedment and Authentication
technologies. Currently our research and development efforts are primarily
focused on the development of prototypes of new versions of our products using
our existing technologies for review by prospective customers, such as different
types of SigNature DNA Ink and SigNature DNA Thread. Nonetheless, we believe
that our development of new and enhanced technologies relating to our business
may be important to our future success, and we continue to examine whether
investments in the research and development of such technologies is merited.
MANUFACTURING
We have the capability to manufacture SigNature DNA Markers, covert DNK
Ink, and SigNature PCR Kits at our laboratories in Stony Brook. We rely upon
Biowell to manufacture our overt color-changing DNA Ink for use with, and our
SigNature DNA Encryption Detector pens.
COMPETITION
The principal markets for our SigNature Program are intensely competitive.
We compete with many existing 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, or have
strategic alliances with such 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 existing
products. Some of our competitors that operate in the anti-counterfeiting and
fraud prevention markets include: Art Guard International, Applied Optical
Technologies, Authentix, ChemTAG, Collectors Universe Inc., Cypher Science, Data
Dot Technology, Digimarc Corp., DNA Technologies, Inc., Inksure Technologies,
L-1 Identity Solutions, NTT DATA Labs, SureTrace , Theft Protection Systems, and
Tracetag.
Some examples of competing security products include:
o Fingerprint scanner: a system that scans fingerprints before granting
access to secure information or facilities;
o Voice recognition software: software that authenticates users based on
individual vocal patterns;
o Cornea scanner: a scanner that scan the iris of a user's eye to
compare with data in a computer database;
o Face scanner: a scanning system that use complex algorithms to
distinguish one face from another;
o Integrated circuit chip & magnetic strips: integrated circuit chips
that receive and, if authentic, send a correct electric signal back to
the reader, and magnetic strips that contain information, both of
which are common components of debit and credit cards;
o Optically variable microstructures: these include holograms, which
display images in three dimensions and are generally difficult to
reproduce using advanced color photocopiers and printing techniques,
along with other devices with similar features;
o Elemental Taggants and Fluorescence: elemental taggants are various
unique substances that can be used to mark products and other items,
are revealed by techniques such as x-ray fluorescence; and,
o Radioactivity & Rare Molecules: radioactive substances or rare
molecules which are uncommon and readily detected.
We expect competition with our products and services to continue and
intensify in the future. We believe competition in our principal markets is
primarily driven by:
o product performance, features and liability;
25
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 significantly harmed.
PROPRIETARY RIGHTS
We believe that our 7 patents, 14 patents pending, 2 registered trademarks,
and 2 registered trademarks pending, which are described in the table below, and
our trademarks, trade secrets, copyrights and other intellectual property rights
are important assets for us.
PATENTS ISSUED:
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Patent Name Patent No: Assignee of Record Dated Issued Jurisdiction
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Nucleic Acid as Marker for Product 89108443 APDN (B.V.I.) Inc. March 17,2000 Taiwan
Anticounterfeiting and Identification
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Method of using ribonucleic acid as 00107580.2 Rixflex Holdings February 2, 2005 China
product antifake mark and for verification Limited (2)
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
EppenLocker (A Leakage-Prevention 89204158 APDN (B.V.I.) Inc. March 10, 2000 Taiwan
Apparatus of Microcentrifuge)
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Multiple Tube Structure for Multiple PCR 89210575 APDN (B.V.I.) Inc. June 20, 2000 Taiwan
in a Closed Container
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
A Device for Multiple Polymerase Chain 89111477 APDN (B.V.I.) Inc. June 12, 2000 Taiwan
Reactions In a Closed Container and a
Method of Using Thereof
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Method for Mixing Nucleic Acid in Water 921221973 APDN (B.V.I.) Inc. August 11, 2003 Taiwan
Insoluble Media and Application Thereof
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
A Method of Utilizing Nucleic Acids as US 7,115,301 B2 Rixflex Holdings Limited October 3, 2006 United States
Markers for Product Anti-Counterfeit (2)
Labeling and Verification
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Patents Pending:
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Patent Name Application No. Filed in the Name of Dated Filed Jurisdiction
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Method for Mixing Nucleic Acid in Water 2002-294229 Biowell (1) August 31, 2002 Japan
Insoluble Media and Application Thereof
03007023.9 Rixflex Holdings March 27, 2003 EU
Limited (2)
10/645,602 Rixflex Holdings Limited August 22, 2003 United States
(2)
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
26
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Patent Name Application No. Filed in the Name of Dated Filed Jurisdiction
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Method of dissolving nucleic acid in 03155949.2 Rixflex Holdings August 27, 2003 China
water insoluble medium and its application Limited (2)
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Novel nucleic acid based steganography 10/909,431 Rixflex Holdings August 3, 2004 United States
system and application thereof Limited (2)
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Cryptic method of secret information 921221490 APDN (B.V.I.) Inc. August 6, 2003 Taiwan
carried in DNA molecule and it
deencryption method
A novel nucleic acid based steganography 03127517.6 Biowell (1) August 6, 2003 China
system and application thereof
61387/2004 Rixflex Holdings August 4, 2004 Korea
Limited (2)
A novel method for coding based on
nucleic acids and utility thereof 04018374.1 Rixflex Holdings August 3, 2004 EU
Limited (2)
1-2004-00742 Rixflex Holdings August 4, 2004 Vietnam
Limited (2)
A novel nucleic acid based steganography
system and applications thereof 092819 Rixflex Holdings August 4, 2004 Thailand
Limited (2)
PI20043145 Biowell (1) August 4, 2004 Malaysia
2004-225987 Rixflex Holdings August 2, 2004 Japan
Limited (2)
P-00200400374 Rixflex Holdings August 4, 2004 Indonesia
Limited (2)
764/CHE/2004 Rixflex Holdings Limited August 4, 2004 India
(2)
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Method for classifying group ID of 92119302 APDN (B.V.I.) Inc. July 15, 2003 Taiwan
shoppers and transferring the shopping
discount to group development funds
development
Method For transferring feedback 03150071.4 Rixflex Holdings July 31, 2003 China
foundation capable of identifying Limited (2)
multiple objects
Method of Classifying Group ID of PI20042889 Rixflex Holdings August 4, 2004 Malaysia
Shoppers and Transferring the Shopping Limited (2)
Discount to Group Development Funds
092217 Rixflex Holdings July 12, 2004 Thailand
Limited (2)
2004-200730 Biowell (1) July 7, 2004 Japan
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
27
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Patent Name Application No. Filed in the Name of Dated Filed Jurisdiction
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
System and Method for authenticating 11/437,265 APDN (B.V.I.) Inc. May 19, 2005 US
multiple components associated with a
particular product. PCT/US2006/019660 APDN (B.V.I.) Inc. May 19, 2006 PCT
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
System and Method for Marking Textiles 10/825,968 APDN (B.V.I.) Inc. April 15, 2004 US
with Nucleic Acid
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
Method for Transferring 92119302 APDN (B.V.I.) Inc. July 15, 2003 Taiwan
Feedback-Foundation capable of
identifying multiple objects 03150071.4 Rixflex July 31, 2003 China
Holdings Limited(2)
------------------------------------------- ---------------------- -------------------------- --------------------- ----------------
(1) All patents in the name of and patent applications filed in the name of
Biowell have been assigned to our wholly-owned subsidiary APDN (B.V.I.)
Inc., and we are making efforts to ensure APDN (B.V.I.) is the assignee or
filer of record, as the case may be.
(2) All patents in the name of and patent applications filed in the name of
Rixflex Holdings Limited, which merged into APDN (B.V.I.) Inc. on July 12,
2005, have been assigned to APDN (B.V.I.) Inc., and we are making efforts
to ensure APDN (B.V.I.) is the assignee or filer of record, as the case may
be.
Trademarks Issued:
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
Trademark Registration No: Registered Owner Registration Date Jurisdiction
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
APPLIED DNA and model molecule design 846354 Applied DNA Sciences August 13, 2004 Mexico
Inc.
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
APPLIED DNA and model molecule design 846711 Applied DNA Sciences Inc. August 16, 2004 Mexico
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
APPLIED DNA and model molecule design 3392818 Applied DNA Sciences Inc. March 21, 2005 European Community
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
BIOWELL and Design 3,155,578 Rixflex Holdings Limited October 17, 2006 United States
(1)
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
BIOWELL and Design 2,675,941 Rixflex Holdings Limited January 21, 2003 United States
(1)
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
BIOWELL and Design 2,611,291 Rixflex Holdings Limited August 27, 2002 United States
(1)
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
BIOWELL and Design 4101159010000 Biowell (2) May 4, 2005 South Korea
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
BIOWELL and Design 4,819,252 Rixflex Holdings Limited November 19, 2004 Japan
(1)
---------------------------------------- ---------------------- -------------------------- --------------------- -------------------
(1) All registered trademarks in the name of Rixflex Holdings Limited have been
assigned to APDN (B.V.I.) Inc., and we are making efforts to ensure APDN
(B.V.I.) Inc. is the registered owner.
(2) All registered trademarks in the name of Biowell have been assigned to APDN
(B.V.I.) Inc., and we are making efforts to ensure APDN (B.V.I.) Inc. is
the registered owner.
28
Trademarks Pending:
------------------------------------------- ----------------------- ------------------------- --------------------- ----------------
Trademark Application No: Owner Filing Date Jurisdiction
------------------------------------------- ----------------------- ------------------------- --------------------- ----------------
APPLIED DNA 76/549,861 APDN (B.V.I.) Inc. September 22, 2003 United States
------------------------------------------- ----------------------- ------------------------- --------------------- ----------------
SIGNATURE 78/871,967 APDN (B.V.I.) Inc. April 28, 2006 United States
------------------------------------------- ----------------------- ------------------------- --------------------- ----------------
However, there are events that are outside of our control that pose a
threat to our intellectual property rights as well as to our products and
services. For example, effective intellectual property protection may not be
available in every country in which our products and services are distributed.
The efforts we have taken to protect our proprietary rights may not be
sufficient or effective. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete. Protecting our
intellectual property rights is costly and time consuming. Any increase in the
unauthorized use of our intellectual property could make it more expensive to do
business and harm our operating results. Although we seek to obtain patent
protection for our innovations, it is possible we may not be able to protect
some of these innovations. Given the costs of obtaining patent protection, we
may choose not to protect certain innovations that later turn out to be
important. There is always the possibility that the scope of the protection
gained from one of our issued patents will be insufficient or deemed invalid or
unenforceable. We also seek to maintain certain intellectual property as trade
secrets. This secrecy could be compromised by third parties, or intentionally or
accidentally by our employees, which would cause us to lose the competitive
advantage resulting from these trade secrets.
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.
STRATEGIC ALLIANCES
Purchase of Intellectual Property and License Agreement with Biowell
In the first half of 2005, Biowell transferred substantially all of its
intellectual property to Rixflex Holdings Limited, a British Virgin Islands
company, and on July 12, 2005, Rixflex Holdings Limited merged with and into our
wholly-owned subsidiary APDN (B.V.I.) Inc., a British Virgin Islands company.
The shareholders of Rixflex Holdings Limited received 36 million shares of our
common stock in consideration of this merger. In connection with the acquisition
of this Biowell intellectual property, we terminated the license agreement that
we had previously entered into with Biowell in October 2002, under which we had
the exclusive right to sell, market, and sub-license certain Biowell
intellectual property within the United States, the European Union, Canada,
Mexico, Colombia, Saudi Arabia and the United Arab Emirates. Also in connection
with this acquisition, on July 12, 2005, the Company entered into a license
agreement with Biowell, whereby the Company granted Biowell an exclusive license
to sell, market, and sub-license certain of the Company's products in most Asian
countries and certain Middle Eastern countries. The license is for an initial
term ending December 31, 2010, and if Biowell meets its performance goals, the
license agreement will extend for an additional five year term. If Biowell
sub-licenses these products within these countries, Biowell is required to pay
the Company 50% of all fees, payments or consideration or any kind received in
connection with the grant of the sublicense. Biowell is also required to pay a
royalty of 10% on all net sales of these products and is required to meet
certain minimum annual net sales in each of the various countries covered by the
license. We have the right to terminate the exclusivity of the license with
respect to any particular country if Biowell fails to meet its annual net sales
requirements for that country during the first year after the date of the
agreement, and to terminate the license altogether with respect to any
particular country if Biowell fails to meet its annual net sales requirements
for that country for two consecutive years. Although Biowell has not met its
annual net sales requirements for any particular country to date, we have not
yet terminated the exclusivity of the license with respect to any country.
Cumulative royalties earned from this agreement for the period from July 2005
through June 30, 2006 totaled $20,532. Until the license agreement is
terminated, it also provides us ownership of all improvements, modifications or
alterations made by Biowell to the licensed products, the technologies
underlying them, or the mode of using them, that are related to our business,
and provides Biowell an exclusive license to any such improvements,
modifications or alterations made by us.
29
Sub-License Agreement with G.A. Corporate Finance
In July of 2003, we, Biowell and G. A. Corporate Finance Ltd. entered into
a Sub-License Agreement for the United Kingdom in exchange for $3 million. G. A.
Corporate Finance Ltd. paid $25,000 upon its execution of the Agreement, and the
remaining $2.975 million in the form of its interest bearing promissory note,
payable in twenty (20) consecutive quarterly installments of principal and
interest in the amount equal to the lesser of $185,937.50 or 35% of gross
revenues for that quarter it generated from sales of certain of our products in
the United Kingdom, due on the final day of each quarter. Due in part to our
lack of marketable products during the first two years after the date of this
agreement, G.A. Corporate Finance Ltd. has not generated any revenue from sales
of our products in the United Kingdom, and so has never made any payments to us
under its note. We are currently in negotiations with G.A. Corporate Finance
Ltd. to either amend or terminate this agreement.
EMPLOYEES
Presently, we employ a total of 7 full-time employees, including 2 in
management, 3 in operations, and 2 in sales and marketing. None of our employees
are covered by collective bargaining agreements, and we believe our relations
with our employees are favorable.
FACILITIES
We maintain our principal office at 25 Health Sciences Drive, Suite 113,
Stony Brook, New York 11790. We moved our principal office to the Long Island
High Technology Incubator, which is located on the campus of Stony Brook
University, in December 2005. We believe that our current office space and
facilities are sufficient to meet our present needs and do not anticipate any
difficulty securing alternative or additional space, as needed, on terms
acceptable to us.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
described below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
Paul Reep v. Applied DNA Sciences, Inc., Case No.: BC345702
Plaintiff Paul Reep, a former employee, commenced this action against us on
January 10, 2006. Mr. Reep asserts eight causes of action for breach of
contract, breach of an oral agreement, negligent misrepresentation, interference
with prospective business advantages, defamation, fraud, accounting and
constructive trust, unjust enrichment. The relief sought includes declaratory
relief, unspecified compensatory damages, unpaid salary, unspecified penalties
under the California Labor Code, interest, and attorneys' fees. We have
successfully moved the court to indefinitely stay all proceedings in this matter
in light of a forum selection clause designating Nevada state courts as the
proper forum.
Applied DNA Sciences, Inc. v. Paul Reep, Adrian Butash, John Barnett, Chanty
Cheang, Jaime Cardona, and Angela Wiggins, Case No. CV06-2027 RGK
We filed this action against the defendants, Paul Reep, Adrian Butash, John
Barnett, Chanty Cheang, Jaime Cardona, and Angela Wiggins on April 4, 2006, in
the United States District Court for the Central District of California. In this
matter we have asked the court to make a judicial determination that an
agreement amending the employment contracts of all named defendants, which we
did not authorize and which is the basis of the Reep and Butash litigation
against Applied DNA, is invalid and unenforceable. This matter is in the early
stages of discovery. Trial has been set for April 3, 2007.
Barnett, et al. v. Applied DNA Sciences, et al., Case No.: BC 350904
Plaintiffs John D. Barnett, Jr., Adrian Butash, Jaime A. Cardona, and
Chanty Cheang, our former employees, filed suit against us, Applied DNA
Operations Management, Inc., APDN (B.V.I.), Inc., Peter Brocklesby, James A.
Hayward, and Jun-Jei Sheu in Los Angeles County Superior Court on April 17,
2006. The complaint alleges causes of action for breach of written contract,
breach of oral contract, fraud, violations of the California Labor Code, and
wrongful termination. The complaint seeks $159,000 (trebled to $477,000) in
alleged unpaid salary, $546,000 in severance pay, other unspecified compensatory
and consequential damages, unspecified punitive damages, attorneys' fees and
costs, and interest. Our answer to the complaint is due on November 15, 2006.
The trial date has been set for May 21, 2007.
30
In re the Unemployment Insurance Claims of Adrian Butash, John Barnett, and Paul
Reep, California Unemployment Insurance Appeals Board Case Nos. 1809031,
1801356, and 1842399, respectively.
We are in the process of appealing an administrative law judge's
determination John Barnett, Paul Reep, and Adrian Butash are entitled to
unemployment benefits following their separation from employment with us and
that our unemployment insurance account will be charged. We will appeal on the
determination on the grounds that the claimants were terminated for reasons
other than lack of work. We have filed a notice of appeal, and no trial date has
yet been set.
Douglas A. Falkner v. Applied DNA Sciences, Inc./N.C. Industrial Commission File
No. 585698
Plaintiff Douglas Falkner ("Falkner") filed a worker's compensation claim
in North Carolina for an alleged work-related neck injury that he alleges
occurred on January 14, 2004. Falkner worked as Business Development and
Operations Manager our sole East Coast office at the time of the alleged injury.
Plaintiff Falkner was the only employee employed by us in North Carolina at the
time of the alleged injury and we have employed no other employees in North
Carolina at any other time. The claim has been denied and is being defended on
several grounds, including the lack of both personal and subject matter
jurisdiction. Specifically, we contend that we did not employ the requisite
minimum number of employees in North Carolina at the time of the alleged injury
and that the company is therefore not subject to the North Carolina Workers'
Compensation Act. The claim was originally set for hearing in October 2006, but
was continued to allow the parties to engage in further discovery. The claim is
tentatively scheduled to be heard in December 2006, though no definite date has
been set yet.
31
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following is a list of our directors, executive officers and
significant employees.
Name Age Title Board of Directors
---- --- ----- ------------------
Jun-Jei Sheu 40 Chairman of the Board Director
James A. Hayward 53 Chief Executive Officer Director
Sanford R. Simon 63 Director
Yacov Shamash 56 Director
Ming-Hwa Benjamin Liang 43 Secretary and Strategic
Technology Development
Officer
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are four seats on our board of directors.
Currently, the members of our board of directors do not receive any fees
for being a director or attending meetings. Our directors are reimbursed for
out-of-pocket expenses relating to attendance at meetings. Officers are elected
by the Board of Directors and serve until their successors are appointed by the
Board of Directors. Biographical resumes of each officer and director are set
forth below.
CHAIRMAN OF THE BOARD - JUN-JEI SHEU
On July 15, 2005, Dr. Jun-Jei Sheu was appointed as a director and elected
Chairman by the board of directors. Since November 2000, Dr. Sheu has been the
Chairman of Biowell Technology Inc. Between November 2000 and August 2005, Dr.
Sheu was the Chief Executive Officer of Biowell Technology Inc. Dr. Sheu
received his bachelor's degree in Biology from Fu-Jen Catholic University in
1988, his Masters degree in Biology from Fu-Jen Catholic University in 1990, his
Ph.D in Life Sciences from Intermural of Academia Sinica & National Defense
Medical Center in 1996 and his MBA from South Australia University in 2000. Dr.
Sheu is also a director of Biowell Technology (S) Pte Ltd., a Singapore company,
Biotechcard International Pte (S) Ltd. a Singapore company, Yan Zhan Life
Technology & Marketing Inc., a Taiwanese company and Biowell Technology (Suzhou)
Co. Ltd., a Chinese company, all of which are biotechnology companies.
CHIEF EXECUTIVE OFFICER - JAMES A. HAYWARD
Dr. James A. Hayward has been our Chief Executive Officer since March 17,
2006, prior to which he was acting Chief Executive Officer since October 5,
2005. Since June 2004, Dr. Hayward has been the Chairman of Evotope Biosciences,
Inc., a drug development company based in Stony Brook, New York. Since 2001, Dr.
Hayward has been a director of Q-RNA, Inc., a biotech company based in New York,
New York. Since 2000, Dr. Hayward has been a General Partner of Double D Venture
Fund, a venture capital firm based in New York, New York. Between 1990 and July
2004, Dr. Hayward was the Chairman, President and CEO of The Collaborative
Group, Ltd., a provider of products and services to the biotechnology,
pharmaceutical and consumer-product industries based in Stony Brook, New York.
Dr. Hayward received his bachelor's degree in Biology and Chemistry from the
State University of New York at Oneonta in 1976, his Ph.D. in Molecular Biology
from the State University of New York at Stony Brook in 1983, and an honorary
Doctor of Science from Stony Brook in 2000. Dr. Hayward has served on the boards
of the Council on Biotechnology, the Long Island Association, the Stony Brook
Foundation, The Research Foundation of State University of New York Board of
Directors, the New York Biotechnology Association, the Long Island Life Sciences
Initiative and the Ward Melville Heritage Organization.
DIRECTOR - YACOV SHAMASH
Dr. Yacov Shamash has been a member of the board of directors since March
17, 2006. Dr. Shamash is Vice President of Economic Development at the State
University of New York at Stony Brook. Since 1992, he has been the Dean of
Engineering and Applied Sciences and the Harriman School for Management and
Policy at the University, and Founder of the New York State Center for
Excellence in Wireless Technologies at the University. Dr. Shamash developed and
directed the NSF Industry/University Cooperative Research Center for the Design
of Analog/Digital Integrated Circuits from 1989 to 1992 and also served as
Chairman of the Electrical and Computer Engineering Department at Washington
State University from 1985 until 1992. Dr. Shamash also serves on the Board of
Directors of Keytronic Corp., Netsmart Technologies, Inc., American Medical
Alert Corp., and Softheon Corp.
32
DIRECTOR - SANFORD R. SIMON
Dr. Sanford R. Simon has been a member of the board of directors since
March 17, 2006. Dr. Simon has been a Professor of Biochemistry, Cell Biology and
Pathology at Stony Brook since 1997. He joined the faculty at Stony Brook as an
Assistant Professor in 1969 and was promoted to Associate Professor with tenure
in 1975. Dr. Simon was a member of the Board of Directors of The Collaborative
Group from 1995 to 2004. From 1967 to 1969 Dr. Simon was a Guest Investigator at
Rockefeller University. Dr. Simon received a B.A. in Zoology and Chemistry from
Columbia University in 1963, a Ph.D. in Biochemistry from Rockefeller University
in 1967, and studied as a postdoctoral fellow with Nobel Prize winner Max Perutz
in Cambridge, England.
SECRETARY AND STRATEGIC TECHNOLOGY DEVELOPMENT OFFICER - MING-HWA BENJAMIN LIANG
Ming-Hwa Benjamin Liang has been our Secretary and Strategic Technology
Development Officer since October 2005. Between May 1999 and September 2005, Mr.
Liang has been the director of research and development at Biowell Technology
Inc. Mr. Liang received a B.S. in Bio-Agriculture from Colorado State University
in 1989, a M.S. in Horticulture from the University of Missouri at Columbia in
1991, his Ph.D. in Plant Science from the University of Missouri at Columbia in
1997 and his LL.M. in Intellectual Property Law from Shih Hsin University,
Taiwan in 2004.
33
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us during the
fiscal years ended September 30, 2006, 2005 and 2004 to our Chief Executive
Officer and our former Chief Executive Officer. No executive officer of the
Company received total salary and bonus in excess of $100,000 during the fiscal
year ended September 30, 2006.
---------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
------------------------------------ --------------------------- ---------- --------------
Securities
Name and Annual Other Annual Restricted Underlying LTIP All Other
Principal Fiscal Salary Annual Compensation Stock Options/SARs Payments Compensation
Position Year ($) Bonus ($) ($) Awards ($) (#) ($) ($)
----------------- -------- ---------- ---------- -------------- ----------- --------------- ---------- --------------
James A. 2006 0 0 0 0 7,500,000 0 0
Hayward,
CEO
2005 0 0 0 0 0 0 0
2004 0 0 0 0 0 0 0
----------------- -------- ---------- ---------- -------------- ----------- --------------- ---------- --------------
Rob Hutchison, 2006 0 0 0 0 0 0 0
former CEO
2005 0 0 138,453 0 0 0 0
2004 159,400 0 0 0 0 0 0
----------------- -------- ---------- ---------- -------------- ----------- --------------- ---------- --------------
The Board of Directors, in their discretion, may award stock and stock
options to key executives for achieving financing or expenditure guidelines,
meeting our business plan objectives, as part of their compensation for
employment or for retention purposes.
EMPLOYMENT AGREEMENTS
None.
34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 3, 2005, we issued and sold a promissory note in the principal
amount of $550,000 to Allied International Fund, Inc. ("Allied"). Allied in turn
financed a portion of its making of this loan by borrowing $450,000 from certain
persons, including $100,000 from James A. Hayward, a director and our Chief
Executive Officer. The terms of the promissory note provided that we issue upon
the funding of the note warrants to purchase 5,000,000 shares of our common
stock at an exercise price of $0.50 per share to certain persons designated by
Allied. On November 9, 2005, we issued nine warrants to Allied and eight other
persons to purchase an aggregate of 5,500,000 shares of our common stock at an
exercise price of $0.50 per share. These warrants included a warrant to purchase
1,100,000 shares that was issued to James A. Hayward, a director and our Chief
Executive Officer. Additionally, we paid $55,000 in cash to VC Arjent, Ltd. for
its services as the placement agent with respect to this placement. All
principal and accrued but unpaid interest under the promissory note was paid in
full shortly after the closing of and from the proceeds of a private placement
we completed on March 8, 2006.
In February 2005, we entered into an agreement with The Research Foundation
of the State University of New York acting on behalf of Stony Brook University
("The Research Foundation") to support a project entitled "A Chimeric Method and
System for DNA Encryption and Authentication." Pursuant to this agreement, The
Research Foundation made a grant of $79,005.77 to us to support the project,
which amount is payable over six months. Upon approval from The Research
Foundation, we will receive an additional grant of $80,000, payable over one
year. On July 31, 2006, we received an additional grant of $79,005.07 for use by
us during the period from July 1, 2006 to July 1, 2007. The general objective of
this project is to further extend the application of chimeric DNA methodologies
in different product applications such as ink and thread. Dr. Sanford R. Simon,
Professor of Biochemistry, Cell Biology, and Pathology at Stony Brook University
and one of our directors, will lead this project on behalf of Stony Brook
University together with Dr. Benjamin Liang, our Strategic Technology
Development Officer.
On March 29, 2006 and April 13, 2006, we borrowed $200,000 in the
aggregate, at a rate of 7.5% per annum, from BioCogent, Ltd., a New York
corporation ("BioCogent") whose President and Chief Executive Officer and sole
stockholder is James A. Hayward, one of our directors and our Chief Executive
Officer. These loans were due and payable upon the earlier to occur of (1) the
close of business on June 30, 2006, or (2) the closing of the issuance and sale
of our securities for gross proceeds of at least $250,000. The proceeds from the
loans were used for general corporate purposes. The note issued on March 29,
2006 was repaid with interest in May, 2006. The note issued on April 13, 2006
was repaid with interest in June, 2006.
In May, 2006, we signed a Business Development and Trademark License
Agreement with Dr. Suwelack Skin & Health Care AG ("Dr. Suwelack") providing Dr.
Suwelack rights to use our SigNature(TM) logo, which is printed with ink
containing our proprietary encrypted botanical DNA technology, and to
participate in our SigNature(TM) Program. The terms of this one year license
agreement provide Suwelack with a limited, non-exclusive, non-transferable right
to use the SigNature(TM) logo on its packaging and labels. Dr. Suwelack will pay
us a one time license fee in the amount of (euro)15,000 in consideration for the
use of our SigNature(TM) logo. (euro)7,500 of the license fee was due upon
signing of the agreement and the remaining 50% is due upon receipt of the
shipped labels. James A. Hayward, a director and our Chief Executive Officer,
serves on Dr. Suwelack's board of directors. BioCogent, whose President and
Chief Executive Officer and sole stockholder is Dr. Hayward, provides consulting
services to Dr. Suwelack.
On September 1, 2006, we issued warrants to purchase an aggregate of
18,400,000 shares of our common stock exercisable for a period of five years
commencing on September 1, 2006, at a price of $0.09 per share, the closing
price of our common stock on the date of issuance. Each such warrant provides
its holder unlimited piggyback registration rights with respect to any
registration statement we file. These warrants include a warrant to purchase an
aggregate of 6,400,000 shares of our common stock that was issued to James A.
Hayward, a director and our Chief Executive Officer. The Company also issued a
warrant to purchase 250,000 shares of our common stock to each of Sanford R.
Simon and Yacov Shamash, each of whom is one of our directors. Each of these
warrants is exercisable for a period commencing on March 17, 2007, and expiring
on August 31, 2011, at a price of $0.09 per share, the closing price of our
common stock on the date of issuance of the warrants, and provide its holder
unlimited piggyback registration rights with respect to any registration
statement filed by the Company.
We have no policy regarding entering into transactions with affiliated
parties.
35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the shares of
our common stock beneficially owned of September 30, 2006, (i) by each person
who is known to us to beneficially own more than 5% of the outstanding common
stock, (ii) by each of the executive officers named in the table under
"Executive Compensation" and by each of our directors, and (iii) by all officers
and directors as a group.
---------------------------------------- ------------------- ----------------------- -------------------- --------------------
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS NUMBER OF SHARES PERCENTAGE OF PERCENTAGE OF
OWNED (1) CLASS PRIOR TO CLASS AFTER
OFFERING (2) OFFERING (3)
---------------------------------------- ------------------- ----------------------- -------------------- --------------------
Jun-Jei Sheu Common Stock 3,113,695 (4) 2.57% 2.21%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
---------------------------------------- ------------------- ----------------------- -------------------- --------------------
James A. Hayward Common Stock 7,759,400 (5) 6.04% 5.24%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
---------------------------------------- ------------------- ----------------------- -------------------- --------------------
Yacov Shamash Common Stock 250,000 (6) 0.21% 0.18%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
---------------------------------------- ------------------- ----------------------- -------------------- --------------------
Sanford R. Simon Common Stock 250,000 (6) 0.21% 0.18%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
---------------------------------------- ------------------- ----------------------- -------------------- --------------------
Rob Hutchinson Common Stock 2,350,000 (7) 1.91% 1.64%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
---------------------------------------- ------------------- ----------------------- -------------------- --------------------
All directors and officers as a group Common Stock 13,723,095 (8) 10.45% 9.09%
(5 persons)
---------------------------------------- ------------------- ----------------------- -------------------- --------------------
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to the
shares shown. Except as indicated by footnote and subject to community
property laws where applicable, to our knowledge, the stockholders named in
the table have sole voting and investment power with respect to all common
stock shares shown as beneficially owned by them. A person is deemed to be
the beneficial owner of securities that can be acquired by such person
within 60 days upon the exercise of options, warrants or convertible
securities (in any case, the "Currently Exercisable Options"). Each
beneficial owner's percentage ownership is determined by assuming that the
Currently Exercisable Options that are held by such person (but not those
held by any other person) have been exercised and converted.
(2) Based upon 120,982,385 shares issued and outstanding on October 31, 2006.
(3) Percentage based on 140,671,885 shares of common stock outstanding,
assuming all shares being registered in the offering are sold.
(4) Includes 315,859 shares owned by his wife and 254,354 shares owned by his
minor children. Also includes 1,500,000 shares owned by Biowell of which
company Dr. Sheu is deemed a beneficial owner.
(5) Includes 7,500,000 shares underlying currently exercisable warrants.
(6) Includes 250,000 shares underlying a currently exercisable warrant.
(7) Includes 2,350,000 shares underlying currently exercisable warrants.
(8) Includes 10,350,000 shares underlying currently exercisable options and
warrants.
36
DESCRIPTION OF SECURITIES
Our current authorized capital stock consists of 250,000,000 shares of
common stock, par value $0.0001 per share, of which 120,982,385 shares were
issued and outstanding as of October 31, 2006, and 10,000,000 shares of
preferred stock, par value $0.0001 per share, none of which were issued and
outstanding as of October 31, 2006.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. The holders of common
stock are entitled to receive dividends ratably when, as and if declared by the
board of directors out of funds legally available therefore. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share equally and ratably in all assets remaining available for distribution
after payment of liabilities and after provision is made for each class of
stock, if any, having preference over the common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged American Stock Transfer & Trust Company, located in
Brooklyn, New York, as independent transfer agent or registrar.
PREFERRED STOCK
Under our Restated Certificate of Incorporation, as amended, the Board of
Directors is authorized, subject to any limitations prescribed by the laws of
the State of Nevada, but without any further action by our stockholders, to
provide for the issuance of up to 10,000,000 shares of preferred stock in one or
more series, to establish from time to time the number of shares to be included
in such series, to fix the designations, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. The board of directors may authorize
and issue preferred stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of common stock.
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 Rule 144 period
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
our common stock every 90 days. This series has been authorized by the Board of
Directors. On or about February 1, 2005, the Founders' Series of Preferred Stock
was converted into 1,500,000 shares of our common stock. As of March 31, 2006,
there were no shares of preferred stock issued and outstanding.
OPTIONS
There are currently options outstanding that have been issued to our
officers, directors and employees to purchase 296,000 shares of our common stock
pursuant to our 2002 Professional/Employee/Consultant Compensation Plan and
5,660,000 shares of our common stock pursuant to our 2005 Incentive Stock Plan.
WARRANTS
In connection with the a private placement of promissory notes in December
2004, we issued warrants to purchase a total up to 2,930,000 shares of common
stock. The warrants are exercisable until three years from the date of issuance
at a purchase price of $0.75 per share. The registration statement of which this
prospectus forms a part registers the resale of the common stock issuable upon
exercise of these warrants.
In connection with a private placement of convertible promissory notes in
January and February of 2005, we issued warrants to purchase a total up to
14,742,000 shares of our common stock. The warrants are exercisable until five
years from the date of issuance at a purchase price of $0.75 per share. The
registration statement of which this prospectus forms a part registers the
resale of the common stock issuable upon exercise of these warrants.
In connection with a private placement of a promissory note in November,
2005, we have issued warrants to purchase a total of up to 5,500,000 shares of
our common stock exercisable at an exercise price of $0.50 per share at any time
until five years from their date of issuance to certain persons designated by
the noteholder. Each of these warrants provide for customary adjustments to the
exercise price of and shares subject to the warrant, including upon a
subdivision or combination of our common stock, but no such
37
adjustment will be made to either the exercise price or the number of shares
subject to these warrants in the event that we effect a reverse-split, or
combination, of our common stock within three years from their date of issuance.
In connection with a private placement of secured convertible notes that
was completed on March 8, 2006, we have issued warrants to purchase a total of
up to 3,000,000 shares of our common stock. The warrants are exercisable until
five years from the date of issuance at a purchase price of $0.50 per share.
In connection with the closing of first and second tranches of the Offshore
Offering described under "Convertible Securities" below, on May 2, 2006, and
June 15, 2006, respectively, we issued warrants to purchase a total of 7,900,000
shares of our common stock, exercisable five years from the date of issuance at
a purchase price of $0.50 per share.
On September 1, 2006, we issued warrants to purchase an aggregate of
18,400,000 shares of our common stock exercisable for a period of five years
commencing on September 1, 2006, at a price of $0.09 per share, the closing
price of our common stock on the date of issuance. Each such warrant provides
its holder unlimited piggyback registration rights with respect to any
registration statement we file. These warrants include a warrant to purchase an
aggregate of 6,400,000 shares of our common stock that was issued to James A.
Hayward, a director and our Chief Executive Officer, and a warrant to purchase
6,000,000 shares of our common stock that was issued to Timpix International
Limited, a British Virgin Islands corporation. The Company also issued a warrant
to purchase 250,000 shares of our common stock to each of Sanford R. Simon and
Yacov Shamash, each of whom is one of our directors. Each of these warrants is
exercisable for a period commencing on March 17, 2007, and expiring on August
31, 2011, at a price of $0.09 per share, the closing price of our common stock
on the date of issuance of the warrants, and provide its holder unlimited
piggyback registration rights with respect to any registration statement filed
by the Company.
In addition, we also have outstanding (i) warrants to purchase 105,464
shares of common stock at $0.10 per share, (ii) warrants to purchase 5,000
shares of common stock at $0.20 per share, (iii) warrants to purchase 50,000
shares of common stock at $0.50 per share, (iv) warrants to purchase 9,000,000
shares of common stock at $0.55 per share, (v) warrants to purchase 9,132,000
shares of common stock at $0.60 per share, (vi) warrants to purchase 950,000
shares of common stock at $0.70 per share, and (vii) warrants to purchase 55,000
shares of common stock at $0.75 per share.
CONVERTIBLE SECURITIES
We sold $1.465 million in convertible promissory notes to 13 investors in
December 2004. Each promissory note was automatically convertible into shares of
our common stock, at a price of $0.50 per share, upon the closing of a private
placement for $1 million or more. On January 28, 2005, we closed upon a private
placement transaction in excess of $1 million and the promissory notes converted
into an aggregate of 2,930,000 shares of common stock. The registration
statement of which this prospectus forms a part registers the resale of the
common stock issued upon conversion of these promissory notes.
We conducted a private placement in January and February 2005 in which we
sold $7.371 million of secured convertible promissory notes bearing interest at
10% per annum to 61 investors. These promissory notes automatically converted
into shares of our common stock, at a price of $0.50 per share, upon the filing
of this registration statement. The registration statement of which this
prospectus forms a part registers the resale of the common stock issued upon
conversion of these promissory notes.
We completed a private placement on March 8, 2006, in which we sold an
aggregate of 30 units of our securities, (i) a $50,000 principal amount secured
convertible promissory note bearing interest at 10% per annum, and (ii) a
warrant to purchase 100,000 shares of our common stock, for aggregate gross
proceeds of $1.5 million. The notes and interest accrued thereon are convertible
into shares of our common stock at a price of $0.50 per share by the holder
anytime from issuance through the first anniversary of issuance of the notes and
automatically convert on the maturity date at a 20% discount to the average bid
price for our common stock for the ten trading days prior to conversion.
In March, 2006 we commenced the Offshore Offering of up to 140 units, at a
price of $50,000 per unit, for a maximum offering of $7 million for sale to
"accredited investors" who are not "U.S. persons." These units consist of (i) a
$50,000 principal amount secured convertible promissory note, and (ii) a warrant
to purchase 100,000 shares of our common stock at a price of $0.50 per share.
The notes and accrued but unpaid interest thereon are convertible into shares of
our common stock at a price of $0.50 per share by the holder of the notes at any
time from their date of issuance through the first anniversary of such date and
shall automatically convert on such anniversary at a 20% discount to the average
of the closing bid prices of our common stock on trading days during the 12
months prior to such conversion. On May 2, 2006, we closed on the first tranche
of the Offshore Offering in which we sold 20 units for aggregate gross proceeds
of $1,000,000. We paid Arjent Limited $375,000 in commissions, fees and expenses
from these gross proceeds. On June 15, 2006, we completed the second tranche of
the Offshore Offering in which we sold 59 units for aggregate gross proceeds of
$2,950,000. We paid Arjent Limited $442,500 in commissions, fees and expenses
from these gross proceeds.
38
REGISTRATION RIGHTS
Pursuant to the terms of a registration rights agreement with respect to
common stock underlying convertible notes and warrants we issued in private
placements in November and December, 2003, December, 2004, and January and
February, 2005, if we did not have a registration statement registering the
shares underlying these convertible notes and warrants declared effective on or
before June 15, 2005, we are obligated to pay liquidated damages in the amount
of 3.5% per month of the face amount of the notes, which equals $367,885, until
the registration statement is declared effective. At our option, these
liquidated damages can be paid in cash or restricted shares of our common stock.
To date we have decided to pay certain of these liquidated damages in common
stock, although any future payments of liquidated damages may, at our option, be
made in cash. If we decide to pay such liquidated damages in cash, we would be
required to use our limited working capital and potentially raise additional
funds. If we decide to pay the liquidated damages in shares of common stock, the
number of shares issued would depend on our stock price at the time that payment
is due. Based on the closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32
and $0.20 for our common stock on July 15, 2005, August 15, 2005, September 15,
2005, October 17, 2005, November 15, 2005 and December 15, 2005, respectively,
we issued a total of 3,807,375 shares of common stock in liquidated damages from
August, 2005 to January, 2006 to persons who invested in the January and
February, 2005 private placements. The issuance of shares upon any payment by us
of further liquidated damages will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
We paid liquidated damages in the form of common stock only for the period
from June 15, 2005 to December 15, 2005, and only to persons who invested in the
January and February, 2005 private placements. We believe that we have no
enforceable obligation to pay liquidated damages to holders of any shares we
agreed to register under the registration rights agreement for periods after the
first anniversary of the date of issuance of such shares, since they were
eligible for resale under Rule 144 of the Securities Act during such periods,
and such liquidated damages are grossly inconsistent with actual damages to such
persons. Nonetheless, as of June 30, 2006 we have accrued $2,921,660 in
penalties representing further liquidated damages associated with our failure to
have the registration statement declared effective by the deadline, and have
included this amount in accounts payable and accrued expenses.
In June 2005, we issued to Trilogy Capital Partners, Inc. a warrant to
purchase 7,500,000 shares of our common stock at a price of $0.55 per share and
Joff Pollon ("Pollon") a warrant to purchase 1,500,000 shares of our common
stock at a price of $0.55 per share. In connection with the issuance of those
warrants we also agreed to file a registration statement with the SEC with
respect to the shares underlying such warrants no later than the earlier to
occur of: (i) 15 days following the effectiveness of this Registration
Statement, or (ii) September 15, 2005. As of the date hereof we have not filed a
registration statement with respect to the shares of our common stock underlying
the warrants we issued to Trilogy and Pollon.
On November 3, 2005, we issued and sold a promissory note in the principal
amount of $550,000 to Allied International Fund, Inc. ("Allied"). Allied in turn
financed a portion of its making of this loan by borrowing $450,000 from certain
persons, including $100,000 from James A. Hayward, a director and our Chief
Executive Officer. The terms of the promissory note provided that we issue upon
the funding of the note warrants to purchase 5,000,000 shares of our common
stock at an exercise price of $0.50 per share to certain persons designated by
Allied. On November 9, 2005, we issued nine warrants to Allied and eight other
persons to purchase an aggregate of 5,500,000 shares of our common stock at an
exercise price of $0.50 per share. These warrants included a warrant to purchase
1,100,000 shares that was issued to James A. Hayward, a director and our Chief
Executive Officer. Each such warrant provides its holder the broadest possible
unlimited piggyback registration rights with respect to any registration
statement filed by the Company.
In connection with the private placement that we completed on March 8,
2006, we have agreed to file a registration statement to effect the registration
of 100% of our shares of common stock issuable upon conversion of the notes and
exercise of the warrants within 30 days of the registration statement of which
this prospectus is a part being declared effective by the SEC. We have agreed to
use our reasonable best efforts to cause the registration statement to be
declared effective no later than 180 days after the filing date. If we fail to
file a registration statement with the SEC on or before the time frame
described, the holders will be entitled to liquidated damages from Applied DNA
Operations Management, Inc. in an amount equal to 2% per month for each month
that we are delinquent in filing the registration statement.
As part of the Offshore Offering we have offered to enter into, and with
respect to the closing of the first and second tranches of the Offshore Offering
on May 2, 2006 and June 15, 2006 have entered into, a registration rights
agreement with purchasers of notes and warrants in that offering that provides
that we will prepare and file a registration statement with the SEC covering the
common stock underlying the notes and the warrants sold in the Offshore Offering
within 30 days of the registration statement of which this prospectus is a part
being declared effective by the SEC, and use our reasonable best efforts to have
the registration statement declared effective by the SEC by no later than 180
days after filing. These obligations to file and have the registration statement
declared effective would terminate as to any holder of the units upon the
earlier of the date: (a) when all of such holder's common stock underlying the
notes and the warrants may be sold during a single three month period under Rule
144 of the Securities Act of 1933, as amended; and (b) when all of such holder's
common stock underlying the notes and the warrants may be transferred under Rule
144(k) of the Securities Act of 1933, as amended, unless such holder later
becomes our affiliate (as defined in Rule 144 of the Securities Act of 1933, as
amended) in which case our obligation shall be revived until such holder's
rights otherwise terminate under clause (a) above.
On September 1, 2006, we issued warrants to purchase an aggregate of
18,400,000 shares of the our common stock to James A. Hayward, a director and
our Chief Executive Officer, Timpix International Limited, a British Virgin
Islands corporation, and Sanford R. Simon and Yacov Shamash, each of whom is one
of our directors. Each of these warrants provides its holders unlimited
piggyback registration rights with respect to any registration statement filed
by the Company in the future.
39
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers. In addition, we have entered into indemnification agreements with our
officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act" or "Securities Act"), may be permitted to
directors, officers or persons controlling us pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the
Securities and Exchange SEC, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
40
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of any
state or the United States;
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. VC Arjent, a
registered broker-dealer; Michael Morris, Susan Diamond; Ronald Heineman and
Michael Gochman; all of whom are employees of VC Arjent and Jesse Shelmire IV
and Scott Griffith, affiliates of Stonegate Securities, a registered
broker-dealer, are an "underwriter" as that term is defined under the Securities
Exchange Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, and the rules and regulations of such acts. Further, the other selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters." In
such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the
41
commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
42
PENNY STOCK
The Securities and Exchange SEC has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must
o obtain financial information and investment experience objectives of the
person; and
o make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the SEC relating to the penny stock
market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability
determination; and
o that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
43
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholder. We will not receive any proceeds
from the resale of the common stock by the selling stockholder. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
For the table set forth below, the following persons have investment and
voting control over the shares owned by the respective entities:
------------------------------------------- ------------------------------------
Entity Control Person
------------------------------------------- ------------------------------------
Allied International Fund Rosemarie DePalo
------------------------------------------- ------------------------------------
AS Capital Partners Michael Coughlan
------------------------------------------- ------------------------------------
Avonwoods Ltd. C. Rand
------------------------------------------- ------------------------------------
Basso Private Opportunity Holding Fund Ltd. Howard I. Fischer
------------------------------------------- ------------------------------------
Basso Multi-Strategy Holding Fund Ltd. Howard I. Fischer
------------------------------------------- ------------------------------------
F Berdon Comp. Frederick Berdon
------------------------------------------- ------------------------------------
Beston Worldwide Ltd Michael Ben-Jacob
------------------------------------------- ------------------------------------
Blumfield Investments M. Kraus
------------------------------------------- ------------------------------------
Clear Mountain Holdings Raul Garrido Garibaldo
------------------------------------------- ------------------------------------
Consultants and Advisors NJB, Inc. Gary Schonwald
------------------------------------------- ------------------------------------
Cordilliera Funds Stephen J. Carter
------------------------------------------- ------------------------------------
Double U Master Fund David Sims
------------------------------------------- ------------------------------------
Equilibrium Solutions Johnny Vage
------------------------------------------- ------------------------------------
First London Finance, Ltd. Moshe Grauman
------------------------------------------- ------------------------------------
Galileo Asset Management, SA Marie-Christine Wright,
John Sauickie and John Wright
------------------------------------------- ------------------------------------
Gemini Master Funds Steve Winters
------------------------------------------- ------------------------------------
Global Asset Management Robert Fallah
------------------------------------------- ------------------------------------
Goldenberg & Hirsch Properties Leo Hirsch
------------------------------------------- ------------------------------------
GSSF Master Fund E.B. Lyon IV
------------------------------------------- ------------------------------------
Guerilla IRA L.P. Leigh Curry
------------------------------------------- ------------------------------------
Hirsch Family Foundation Leo Hirsch
------------------------------------------- ------------------------------------
ID Federman Holdings LTD Iris Federman
------------------------------------------- ------------------------------------
Ivelocity Fund Scott Parent
------------------------------------------- ------------------------------------
KA Steel Chemical Kenneth Steel Jr.
------------------------------------------- ------------------------------------
Lone Star Equity Mark A. Bogina
------------------------------------------- ------------------------------------
Marina Ventures Michael Hartstein
------------------------------------------- ------------------------------------
Melton Management Yehuda Breitkops
------------------------------------------- ------------------------------------
Odin Partners LP John A. Gibbons
------------------------------------------- ------------------------------------
Omega Capital Small Cap Abraham Sylverin
------------------------------------------- ------------------------------------
P.R. Diamonds Pinkus Reisz
------------------------------------------- ------------------------------------
Provident Master Fund Steven Winters
------------------------------------------- ------------------------------------
Rock Capital Partners, LLC Howard Chalfin
------------------------------------------- ------------------------------------
Salzwedel Financial Communications, Inc. Jeff Salzwedel
------------------------------------------- ------------------------------------
San Rafael Consulting Group, LLC Isabelle H. Wright and John Wright
------------------------------------------- ------------------------------------
Rabbi Scheinerman KBY LLC Rabbi Schenerman
------------------------------------------- ------------------------------------
Sichenzia Ross Friedman Ference LLP Greg Sichenzia, Marc Ross, Richard
Friedman and Michael Ference
------------------------------------------- ------------------------------------
Starboard Capital Markets, LLC James Dotzman
------------------------------------------- ------------------------------------
Steel Harbor Holdings Mark Step
------------------------------------------- ------------------------------------
Stonestreet, LP Michael Finkelstein
------------------------------------------- ------------------------------------
VC Arjent, Ltd. Robert DePalo
------------------------------------------- ------------------------------------
Vestal Venture Capital Allan Lyons
------------------------------------------- ------------------------------------
Whalehaven Evan Schemenauer
------------------------------------------- ------------------------------------
Wolfson Trust Franchesca Wolfson
------------------------------------------- ------------------------------------
44
Beneficial Ownership Beneficial Ownership
Prior to Offering (1) After Offering (1)
Name of Selling Security Holder Shares Percentage(2) Shares Offered Shares Percentage (2)
--------------------------------------- ---------------------------- -------------------------------------------------
Allied International Fund 1,128,125 * 1,128,125 0 *
AS Capital Partners 62,909 * 62,909 (5) 0 *
Avonwoods Ltd. 1,303,275 * 903,275 (20) 400,000 *
Evan B. Azriliant 112,909 * 112,909 (5) 0 *
Mordechai Bank 225,819 * 225,819 (21) 0 *
Judith Barclay 251,639 * 251,639 (11) 0 *
Jack Basch 600,000 * 600,000 (22) 0 *
Basso Private Opportunity Holding 470,331 * 470,331 (23) 0 *
Fund Ltd.
Basso Multi-Strategy Holding 1,869,305 1.3% 1,869,305 (24) 0 *
Fund Ltd.
Lon E Bell 15,000 * 7,500 (4) 7,500 *
F Berdon Comp. 225,819 * 225,819 (21) 0 *
Beston Worldwide Ltd 57,500 * 57,500 (5) 0 *
Robert R. Blakely 201,166 * 201,166 0 *
Blumfield Investments 235,301 * 235,301 (11) 0 *
Doug Bowen 155,417 * 141,659 (6) 13,758 *
Salvatore Cantatore 22,500 * 22,500 0 *
Notzer Chesed 252,776 * 252,776 (11) 0 *
Clear Mountain Holdings 338,728 * 338,728 (12) 0 *
David Cohen 225,819 * 225,819 (21) 0 *
Consultant and Advisors NJB, Inc. 220,000 * 145,000 75,000 *
Cordilliera Funds 1,129,095 * 1,129,095 (25) 0 *
Adrian Davidescu 451,639 * 451,639 (11) 0 *
Jacob and Linda Davidowitz JTWROS 800,000 * 800,000 (20) 0 *
David and Jeanette Defoto 225,819 * 225,819 (21) 0 *
Susan Diamond 5,000 * 5,000 0 *
Joseph Digiacamo 56,455 * 56,455 (10) 0 *
Double U Master Fund 480,600 * 480,600 (20) 0 *
Asher Avishay Ephrathi 335,000 * 335,000 0 *
Equilibrium Solutions 112,909 * 112,909 (5) 0 *
Jeanine Fehn 270,984 * 270,984 (19) 0 *
First London Finance, Ltd. 850,000 * 850,000 0 *
Frederick Frank 261,515 * 110,000 (7) 151,515 *
Galileo Asset Management, SA 357,000 * 157,000 200,000 *
Charles Gargano 57,500 * 57,500 (5) 0 *
Gemini Master Funds 325,819 * 225,819 (21) 100,000 *
Nicholas Giustino 151,659 * 146,659 (8) 5,000 *
Michael Glazer 16,875 * 14,375 (9) 2,500 *
Global Asset Management 1,621,822 1.2% 1,257,500 364,322 *
Rochelle Gold 377,456 * 377,456 (22) 0 *
Harold Goldenberg 200,015 * 200,015 (11) 0 *
Goldenberg & Hirsch Properties 200,000 * 200,000 (11) 0 *
Mary Anne Gray 209,015 * 57,500 (5) 151,515 *
45
Beneficial Ownership Beneficial Ownership
Prior to Offering (1) After Offering (1)
Name of Selling Security Holder Shares Percentage(2) Shares Offered Shares Percentage (2)
--------------------------------------- ---------------------------- -------------------------------------------------
Eugene Gross 251,639 * 251,639 (11) 0 *
Wayne Grubb 57,500 * 57,500 (5) 0 *
GSSF Master Fund 1,129,095 * 1,129,095 (25) 0 *
Guerilla IRA L.P. 383,551 * 110,000 (7) 273,551 *
Paul Reyes-Guerra 33,750 * 28,750 (10) 5,000 *
Michael Hamblett 85,060 * 84,060 1,000 *
Ronald Heineman 100,000 * 22,000 78,000 *
Joseph Henn 14,375 * 12,500 (9) 1,875 *
Hirsch Family Foundation 80,000 * 80,000 (8) 0 *
Leo Hirsch 120,000 * 120,000 (19) 0 *
ID Federman Holdings LTD 677,456 * 677,456 (22) 0 *
Joseph Iorio 112,909 * 112,909 (5) 0 *
Thomas Iovino 225,819 * 225,819 (21) 0 *
Ivelocity Fund 15,000 * 15,000 0 *
William L. Jiler 54,129 * 14,375 (9) 39,754 *
KA Steel Chemical 28,750 * 28,750 (10) 0 *
Ahmed Kareem 10,500 * 10,500 0 *
Jeffery Kessler 104,508 * 28,750 (10) 75,758 *
Tibor Klein 720,000 * 720,000 (26) 0 *
Yisreal Klein 200,000 * 200,000 (21) 0 *
Yossi Kraus 100,000 * 100,000 (5) 0 *
Alexander J. Lapatka 57,500 * 57,500 (5) 0 *
Lone Star Equity 451,639 * 451,639 (11) 0 *
Jason Lyons 57,000 * 57,000 0 *
Michael Mangan 112,909 * 112,909 (5) 0 *
Tony Manual 225,819 * 225,819 (21) 0 *
Marina Ventures 125,000 * 95,000 30,000 *
Paul Masters IRA 225,819 * 225,819 (21) 0 *
Melton Management 251,639 * 251,639 (11) 0 *
Linda Michaels 250,000 * 250,000 0 *
Raymond Mikulich 643,849 * 340,819 (11) 303,030 *
Kyle Morgan 225,819 * 225,819 (21) 0 *
Michael Morris 40,000 * 40,000 0 *
Houston Muthart 387,834 * 283,319 (12) 104,515 *
Richard Neslund 1,129,095 * 1,129,095 (25) 0 *
Michael Nizza 56,455 * 56,455 (10) 0 *
Marvin Numeroff 434,834 * 283,319 (12) 151,515 *
Odin Partners LP 57,500 * 57,500 (5) 0 *
Eric Okamoto 441,901 * 441,901 (13) 0 *
Omega Capital Small Cap 754,914 * 754,914 (17) 0 *
Eileen Patterson 28,750 * 28,750 (10) 0 *
Platinum Partners 401,639 * 401,639 (11) 0 *
P.R. Diamonds 240,000 * 240,000 (19) 0 *
Joseph Prezioso 451,638 * 451,638 (11) 0 *
Arthur Priver 289,948 * 252,069 (14) 37,879 *
Provident Master Fund 845,814 * 845,814 (17) 0 *
Robert & Claudia Quinn 26,250 * 26,250 (9) 0 *
Avindam Rapaport 112,909 * 112,909 (5) 0 *
Kenneth Reichelle 165,163 * 127,284 (15) 37,879 *
Rock Capital Partners, LLC 377,456 * 377,456 (22) 0 *
Joseph Rozehzadeh 451,639 * 451,639 (11) 0 *
Edward M Rotter 3,748,102 2.6% 3,713,102 (16) 35,000 *
Angela Chen Sabella 150,000 * 120,000 (19) 30,000 *
Salzwedel Financial
Communications, Inc. 950,000 * 365,000 585,000 *
46
Beneficial Ownership Beneficial Ownership
Prior to Offering (1) After Offering (1)
Name of Selling Security Holder Shares Percentage(2) Shares Offered Shares Percentage (2)
--------------------------------------- ---------------------------- -------------------------------------------------
San Rafael Consulting Group, LLC 67,236 * 67,236 0 *
Frederick Sandvick 225,819 * 225,819 (21) 0 *
Rabbi Scheinerman KBY LLC 62,909 * 62,909 (5) 0 *
Joel Schindler 112,909 * 112,909 (5) 0 *
Shatashvili Sharona 225,819 * 225,819 (21) 0 *
Sichenzia Ross Friedman Ference 43,000 * 43,000 0 *
LLP
Jerry Silva 1,000,000 * 1,000,000 (25) 0 *
Jerry and Esther Soloman JTWROS 800,000 * 800,000 (20) 0 *
Anthony Spatacco 42,030 * 42,030 0 *
Starboard Capital Markets, 42,030 * 42,030 0 *
LLC
Steel Harbor Holdings 5,000 * 5,000 0 *
Kenneth Steel Jr. 25,000 * 25,000 (10) 0 *
Chaim Stern 3,045,601 2.1% 3,045,601 (27) 0 *
Alexander Stolin 270,984 * 270,984 (19) 0 *
Stonestreet, LP 600,000 * 600,000 (17) 0 *
Richard Swier Jr. 67,746 * 67,746 (28) 0 *
Stewart Taylor 55,008 * 28,750 (10) 26,258 *
Marcovich Tibo 112,909 * 112,909 (5) 0 *
Ester Tuman 201,515 * 57,500 (5) 144,015 *
Alex Verjovski 225,819 * 225,819 (21) 0 *
VC Arjent, Ltd. 2,500,000 1.8% 165,750 2,334,250 1.66%
Vestal Venture Capital 57,500 * 57,500 (5) 0 *
Sem Victori 270,984 * 270,984 (19) 0 *
Whalehaven 1,279,095 * 1,279,095 (18) 0 *
Phil Westridge 25,000 * 25,000 (10) 0 *
Peter Wieser 175,819 * 175,819 (5) 0 *
Wolfson Trust 14,375 * 14,375 (9) 0 *
Franchesca Wolfson 14,375 * 14,375 (9) 0 *
Eric Yaoz 270,984 * 270,984 (19) 0 *
Harry/Temy/Ark Zelcer 200,000 * 200,000 (21) 0 *
* Less than 1%
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange SEC and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options
or warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of October 31, 2006 are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other
person.
(2) Percentage prior to offering is based on 120,982,385 shares of common stock
outstanding; percentage after offering is based on 140,671,885 shares of
common stock outstanding, which assumes that all shares registered in the
offering will be sold.
(3) Of which 50% of such number of shares are issuable upon exercise of
currently exercisable warrants.
(4) Includes 7,500 shares of common stock underlying warrants.
(5) Includes 50,000 shares of common stock underlying warrants.
(6) Includes 75,000 shares of common stock underlying warrants.
(7) Includes 55,000 shares of common stock underlying warrants.
(8) Includes 80,000 shares of common stock underlying warrants.
(9) Includes 12,500 shares of common stock underlying warrants.
(10) Includes 25,000 shares of common stock underlying warrants.
47
(11) Includes 200,000 shares of common stock underlying warrants.
(12) Includes 150,000 shares of common stock underlying warrants.
(13) Includes 232,000 shares of common stock underlying warrants.
(14) Includes 112,500 shares of common stock underlying warrants.
(15) Includes 62,500 shares of common stock underlying warrants.
(16) Includes 1,700,000 shares of common stock underlying warrants.
(17) Includes 600,000 shares of common stock underlying warrants.
(18) Includes 650,000 shares of common stock underlying warrants.
(19) Includes 120,000 shares of common stock underlying warrants.
(20) Includes 400,000 shares of common stock underlying warrants.
(21) Includes 100,000 shares of common stock underlying warrants.
(22) Includes 300,000 shares of common stock underlying warrants.
(23) Includes 315,000 shares of common stock underlying warrants.
(24) Includes 1,185,000 shares of common stock underlying warrants.
(25) Includes 500,000 shares of common stock underlying warrants.
(26) Includes 360,000 shares of common stock underlying warrants.
(27) Includes 1,500,000 shares of common stock underlying warrants.
(28) Includes 30,000 shares of common stock underlying warrants.
48
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be
passed upon for us by Snell & Wilmer LLP, Las Vegas, Nevada.
EXPERTS
Russell Bedford Stefanou Mirchandani LLP, independent registered public
accounting firm, have audited, as set forth in their report thereon appearing
elsewhere herein, our financial statements at September 30, 2005 and 2004 and
for the years then ended that appear in the prospectus. The financial statements
referred to above are included in this prospectus with reliance upon the
independent registered public accounting firm's opinion based on their expertise
in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Applied DNA Sciences, Inc., filed as
part of the registration statement, and it does not contain all information in
the registration statement, as certain portions have been omitted in accordance
with the rules and regulations of the Securities and Exchange SEC.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, which requires us to file reports, proxy statements and
other information with the SEC. Such reports, proxy statements and other
information may be inspected at public reference facilities of the SEC at 100 F
Street, N.E., Washington, D.C. 20549. Copies of such material can be obtained
from the Public Reference Section of the SEC at 100 F Street, N.E., Washington,
D.C. 20549 at prescribed rates. Because we file documents electronically with
the SEC, you may also obtain this information by visiting the SEC's website at
http://www.sec.gov.
49
APPLIED DNA SCIENCES, INC
FINANCIAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
Quarterly Period Ending June 30, 2006:
Condensed Consolidated Balance Sheet: June 30, 2006 (unaudited) F-2
Condensed Consolidated Statements of Losses:
Three and Nine Months Ended June 30, 2006 and 2005 (Unaudited)
and the Period from September 16, 2002 (Date of Inception)
Through June 30, 2006 (Unaudited) F-3
Condensed Consolidated Statement of Stockholders' Equity (Deficiency):
For the Period from September 16, 2002 (Date of Inception)
Through June 30, 2006 (Unaudited) F-4--F-17
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended June 30, 2006 and 2005 (Unaudited) and
the Period from September 16, 2002 (Date of Inception) Through
June 30, 2006 (Unaudited) F-18--F-19
Notes to Unaudited Condensed Consolidated Financial Information:
June 30, 2006 F-20--F-50
Annual Period Ending September 30, 2005:
Report of Independent Registered Public Accounting Firm F-51
Consolidated Balance Sheet as of September 30, 2005 F-52
Consolidated Statements of Losses for the years ended September 30,
2005 and 2004 and for the period September 16, 2002 (Date of
Inception) to September 30, 2005 F-53
Consolidated Statement of Stockholders' Equity (Deficiency)
for the Period September 16, 2002 (Date of Inception)
to September 30, 2005 F-54--F-66
Consolidated Statements of Cash Flows for the years ended
September 30, 2005 and 2004 and the Period September
16, 2002 (Date of Inception) to September 30, 2005 F-67--F-68
Notes to Consolidated Financial Statements F-69--F-93
F-1
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2006
RESTATED
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,931,173
Accounts receivable 18,900
Advances and other receivables 11,611
Prepaid expenses 146,667
--------------
Total current assets 2,108,351
Property, plant and equipment-net of accumulated depreciation of $10,315 38,286
Deposits 8,322
Capitalized finance costs 1,437,862
Intangible assets:
Patients, net of accumulated amortization of $16,881 17,376
Intellectual property, net of accumulated amortization of $1,347,271 8,083,629
--------------
Total Assets $ 11,693,826
==============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 4,680,849
Note payable- Related Party (Note G) 410,429
--------------
Total current liabilities 5,091,278
Convertible notes payable, net of unamortized discount (Note C) 3,306,371
Debt derivative and warrant liability (Note F) 5,698,286
Commitments and contingencies (Note H)
Deficiency in Stockholders' Equity
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; 60,000 issued and
outstanding 6
Common stock, par value $0.001 per share; 250,000,000 shares authorized; 118,582,385 issued
and outstanding 118,582
Common stock subscription (200,000)
Additional paid in capital 81,997,006
Accumulated deficit (84,317,703)
--------------
Total deficiency in stockholders' equity (2,402,109)
Total liabilities and Deficiency in Stockholders' Equity $ 11,693,826
==============
See the accompanying notes to the unaudited condensed consolidated financial
statements
F-2
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSSES)
(Unaudited)
From
September
16,
2002
(Date of
For the Three For the Nine Inception)
Months Months Through
Ended June 30, Ended June 30, June 30,
2006 2005 2006 2005 2006
---- ---- ---- ---- -------------
RESTATED RESTATED RESTATED RESTATED RESTATED
-------- -------- -------- -------- --------
Sales $ 18,900 $ - $ 18,900 $ - $ 18,900
Cost of sales 15,639 - 15,639 - 15,639
-------------- -------------- -------------- -------------- --------------
Gross Profit 3,261 - 3,261 - 3,261
Operating expenses:
Selling, general and administrative 1,580,967 1,865,631 4,391,305 24,188,882 75,910,882
Research and development - 88,870 75,276 345,958 968,711
Depreciation and amortization 336,824 3,160 1,021,199 15,187 1,380,626
-------------- -------------- -------------- -------------- --------------
Total operating expenses 1,917,791 1,957,661 5,487,780 24,550,027 78,260,219
-------------- -------------- -------------- -------------- --------------
NET LOSS FROM OPERATIONS (1,914,530) (1,957,661) (5,484,519) (24,550,027) (78,256,958)
Net gain (loss) in fair value of debt derivative
and warrant liabilities 3,493,961 5,679,175 14,250,621 16,454,928 30,951,611
Other income (expenses) 8,483 241 17,976 3,415 49,319
Interest income (expense) (826,827) (21,557) (3,177,229) (32,373,143) (37,061,675)
-------------- -------------- -------------- -------------- --------------
Net income (loss) before provision for income taxes 761,087 3,700,198 5,606,849 (40,464,827) (84,317,703)
Income taxes (benefit) - - - - -
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS) $ 761,087 $ 3,700,198 $ 5,606,849 $ (40,464,827) $ (84,317,703)
============== ============== ============== ============== ==============
Net income (loss) per share-basic $ 0.01 $ 0.06 $ 0.05 $ (0.83)
============== ============== ============== ==============
Net income (loss) per share-fully diluted $ 0.01 $ 0.04 $ 0.03
============== ============== ==============
Weighted average shares outstanding-
Basic 118,582,385 66,308,115 115,852,521 48,810,559
-------------- -------------- -------------- --------------
Fully diluted 177,501,849 109,223,832 181,716,985
-------------- -------------- --------------
See the accompanying notes to the unaudited condensed consolidated financial
statements
F-3
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share - - 100,000 $ 10 $ 990 $ - $ - $ - $ 1,000
Net Loss - - - - - - - (11,612) (11,612)
--------- --------- ---------- ---------- ---------- --------- ------------ ---------- ---------
Balance at September 30, 2002 - $ - 100,000 $ 10 $ 990 $ - $ - $ (11,612) $ (10,612)
========= ========= ========== ========== ========== ========= ============ ========== =========
Issuance of common stock in
connection with merger with
Prohealth Medical Technologies,
Inc on October 1, 2002 - - 10,178,352 1,015 - - - - 1,015
Cancellation of Common stock
in connection with merger with
Prohealth Medical
Technologies, Inc on October
21, 2002 - - (100,000) (10) (1,000) - - - (1,010)
Issuance of common stock in
exchange for services in
October 2002 at $ 0.65 per
share - - 602,000 60 39,070 - - - 39,130
Issuance of common stock in
exchange for subscription in
November and December 2002
at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - -
Cancellation of common stock
in January 2003 previously
issued in exchange for
consulting services - - (836,000) (84) (54,264) - 54,340 - (8)
Issuance of common stock in
exchange for licensing services
valued at $ 0.065 per share in
January 2003 - - 1,500,000 150 97,350 - - - 97,500
Issuance of common stock in
exchange for consulting
services valued at $ 0.13 per
share in January 2003 - - 586,250 58 76,155 - - - 76,213
Issuance of common stock in
exchange for consulting
services at $ 0.065 per share
in February 2003 - - 9,000 1 584 - - - 585
Issuance of common stock to
Founders in exchange for
services valued at $0.0001 per
share in March 2003 - - 10,140,000 1,014 - - - - 1,014
Issuance of common stock in
exchange for consulting
services valued at $2.50 per
share in March 2003 - - 91,060 10 230,624 - - - 230,634
See accompanying notes to the financial statements
F-4
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Issuance of common stock in
exchange for consulting services
valued at $ 0.065 per share in
March 2003 - - 6,000 1 389 - - - 390
Common stock subscribed in
exchange for cash at $1 per
share in March 2003 - - - - 18,000 - - - 18,000
Common stock issued in
exchange for consulting
services at $ 0.065 per
share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900
Common stock issued in
exchange for cash at $ 1.00 per
share on April 9, 2003 - - 18,000 2 - - - - 2
Common stock issued in
exchange for consulting services
at $ 0.065 per share on April 9,
2003 - - 9,000 1 584 - - - 585
Common stock issued in
Exchange for consulting services
at $ 2.50 per share on April 23,
2003 - - 5,000 1 12,499 - - - 12,500
Common stock issued in
exchange for consulting services
at $ 2.50 per share, on June 12,
2003 - - 10,000 1 24,999 - - - 25,000
Common stock issued in
exchange for cash at $ 1.00 per
share on June 17, 2003 - - 50,000 5 49,995 - - - 50,000
Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 27, 2003 - - - - - 24,000 - - 24,000
Common stock retired in
exchange for note payable
at $0.0118 per share,
in June 30, 2003 - - (7,500,000) (750) 750 - - - -
Common stock issued in
exchange for consulting services
at $0.065 per share, on June 30,
2003 - - 270,000 27 17,523 - - - 17,550
Common stock subscribed in
exchange for cash at $ 1.00 per
share pursuant to private
placement on June 30, 2003 - - - - - 10,000 - - 10,000
Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 30, 2003 - - - - - 24,000 - - 24,000
Common stock issued in
exchange for consulting services
at approximately $2.01 per
share, July 2003 - - 213,060 21 428,798 - - - 428,819
See accompanying notes to the financial statements
F-5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock canceled in July
2003, previously issued for
services rendered at $2.50 per
share - - (24,000) (2) (59,998) - - - (60,000)
Common stock issued in
exchange for options exercised
at $1.00 per share in July 2003 - - 20,000 2 19,998 - - - 20,000
Common stock issued in
exchange for exercised of
options previously subscribed at
$1.00 per share in July 2003 - - 10,000 1 9,999 (10,000) - - -
Common stock issued in
exchange for consulting services
at approximately $2.38 per
share, August 2003 - - 172,500 17 410,915 - - - 410,932
Common stock issued in exchange
for options exercised at $1.00
per share 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 per share in
September 2003 - - 95,000 10 94,991 - - - 95,001
Common stock subscription
receivable reclassification
adjustment - - - - - - 2,600 - 2,600
Common Stock subscribed to
at $2.50 per share in September
2003 - - - - - 300,000 - - 300,000
Net Loss for the year
ended September 30, 2003 - - - - - - - (3,445,164) (3,445,164)
--------- --------- ---------- ---------- ---------- --------- ----------- ----------- ----------
Balance at September 30, 2003 - $ - 17,811,082 $ 1,781 $2,577,568 $ 300,000 $ - $(3,456,776) $ (577,427)
========= ========= ========== ========== ========== ========= ========== =========== ==========
See accompanying notes to the financial statements
F-6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Preferred shares issues in
exchange for services at $25.00
per share, October 2003 15,000 15 - - - - - - 15
Common stock issued in
exchange for consulting services
at approximately $2.85 per
share, October 2003 - - 287,439 29 820,389 - - - 820,418
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable-October 2003 - - 120,000 12 299,988 (300,000) - - -
Common stock canceled in
October 2003, previously issued
for services rendered at $2.50
per share - - (100,000) (10) (249,990) - - - (250,000)
Common stock issued in
exchange for consulting services
at approximately $3 per share,
November 2003 - - 100,000 10 299,990 - - - 300,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, November, 2003 - - 100,000 10 249,990 - - - 250,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, December, 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for consulting services
at approximately $2.59 per
share, December 2003 - - 2,125,500 213 5,504,737 - - - 5,504,950
Common Stock subscribed to
at $2.50 per share in
December 2003 - - - - - 104,000 - - 104,000
Beneficial conversion feature
relating to notes payable - - - - 1,168,474 - - - 1,168,474
Beneficial conversion feature
relating to warrants - - - - 206,526 - - - 206,526
Adjust common stock par value
from $0.0001 to $0.50 per share,
per amendment of articles dated
in December 2004 - - - 10,223,166 (10,223,166) - - - -
Common Stock issued pursuant
to subscription at $2.50 share
in January 2004 - - 41,600 20,800 83,200 (104,000) - - -
Common stock issued in
exchange for consulting services
at $2.95 per share, January 2004 - - 13,040 6,520 31,948 - - - 38,468
Common stock issued in
exchange for consulting services
at $2.60 per share, January 2004 - - 123,000 61,500 258,300 - - - 319,800
See accompanying notes to the financial statements
F-7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting services
at $3.05 per share, January 2004 - - 1,000 500 2,550 - - - 3,050
Common stock issued in
exchange for employee services
at $3.07 per share, February 2004 - - 6,283 3,142 16,147 - - - 19,289
Common stock issued in
exchange for consulting services
at $3.04 per share, March 2004 - - 44,740 22,370 113,640 - - - 136,010
Common Stock issued for
options exercised at $1.00 per
share in March 2004 - - 55,000 27,500 27,500 - - - 55,000
Common stock issued in
exchange for employee services
at $3.00 per share, March 2004 - - 5,443 2,722 13,623 - - - 16,345
Common stock issued in
exchange for employee services
at $3.15 per share, March 2004 - - 5,769 2,885 15,292 - - - 18,177
Preferred shared converted to
common shares for consulting
services at $3.00 per share,
March 2004 (5,000) (5) 125,000 62,500 312,500 - - - 374,995
Common stock issued in
exchange for employee services
at $3.03 per share, March 2004 - - 8,806 4,400 22,238 - - - 26,638
Common Stock issued pursuant
to subscription at $2.50 per
share in March 2004 - - 22,500 11,250 (9,000) - - - 2,250
Beneficial Conversion Feature
relating to Notes Payable - - 122,362 - - - 122,362
Beneficial Conversion Feature - -
relating to Warrants - - 177,638 - - - 177,638
Common stock issued in
exchange for consulting services
at $2.58 per share, April 2004 - - 9,860 4,930 20,511 - - - 25,441
Common stock issued in
exchange for consulting services
at $2.35 per share, April 2004 - - 11,712 5,856 21,667 - - - 27,523
Common stock issued in
exchange for consulting services
at $1.50 per share, April 2004 - - 367,500 183,750 367,500 - - - 551,250
Common stock returned to
treasury at $0.065 per share,
April 2004 - - (50,000) (25,000) 21,750 - - - (3,250)
Preferred stock converted to
common stock for consulting
services at $1.01 per share in
May 2004 (4,000) (4) 100,000 50,000 51,250 - - - 101,246
Common stock issued per
subscription May 2004 - - 10,000 5,000 (4,000) - (1,000) - -
See accompanying notes to the financial statements
F-8
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2005
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting
services at $0.86 per
share in May 2004 - - 137,000 68,500 50,730 - - - 119,230
Common stock issued in
exchange for consulting
services at $1.15 per
share in May 2004 - - 26,380 13,190 17,147 - - - 30,337
Common stock returned to
treasury at $0.065 per
share, June 2004 - - (5,000) (2,500) 2,175 - - - (325)
Common stock issued in
exchange for consulting
services at $0.67 per
share in June 2004 - - 270,500 135,250 45,310 - - - 180,560
Common stock issued in
exchange for consulting services
at $0.89 per share in June 2004 - - 8,000 4,000 3,120 - - - 7,120
Common stock issued in
exchange for consulting services
at $0.65 per share in June 2004 - - 50,000 25,000 7,250 - - - 32,250
Common stock issued pursuant
to private placement at $1.00
per share in June 2004 - - 250,000 125,000 125,000 - - - 250,000
Common stock issued in
exchange for consulting services
at $0.54 per share in July 2004 - - 100,000 50,000 4,000 - - - 54,000
Common stock issued in
exchange for consulting services
at $0.72 per share in July 2004 - - 5,000 2,500 1,100 - - - 3,600
Common stock issued in
exchange for consulting services
at $0.47 per share in July 2004 - - 100,000 50,000 (2,749) - - - 47,251
Common stock issued in
exchange for consulting
services at $0.39 per
share in August 2004 - - 100,000 50,000 (11,000) - - - 39,000
Preferred stock converted
to common stock for
consulting services at
$0.39 per share in August 2004 (2,000) (2) 50,000 25,000 (5,500) - - - 19,498
Common stock issued in
exchange for consulting
services at $0.50 per
share in August 2004 - - 100,000 50,000 250 - - - 50,250
Common stock issued in
exchange for consulting
services at $0.56 per
share in August 2004 - - 200,000 100,000 12,500 - - - 112,500
Common stock issued in
exchange for consulting
services at $0.41 per
share in August 2004 - - 92,500 46,250 (8,605) - - - 37,645
Common stock issued in
exchange for consulting
services at $0.52 per
share in September 2004 - - 1,000,000 500,000 17,500 - - - 517,500
See accompanying notes to the financial statements
F-9
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting
services at $0.46 per
share in September 2004 - - 5,000 2,500 (212) - - - 2,288
Common stock issued pursuant
to subscription at $0.50 per
share in September 2004 - - 40,000 20,000 - - - - 20,000
Preferred shares converted to
common stock for consulting
services at $0.41 per share in
September 2004 (4,000) (4) 100,000 50,000 4,000 - - - 53,996
Preferred shares issued in
exchange for service at $25 per
share in September 2004 60,000 6 - - 1,499,994 - - - 1,500,000
Fair value of 2,841,000 warrants
issued to non-employees and
consultants for services
rendered at approximately $0.71
per warrant in September 2004 - - - - 2,019,862 - - - 2,019,862
Net Loss - - - - - - - (19,358,258) (19,358,258)
--------- ------- ---------- ----------- ----------- -------- --------- ------------ -----------
Balance at September 30, 2004 60,000 $ 6 23,981,054 $11,990,527 $ 6,118,993 $ - $ (1,000) $(22,815,034) $(4,706,508)
========= ======= ========== =========== =========== ======== ========= ============ ===========
See accompanying notes to the financial statements
F-10
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting services
at $0.68 per share in October
2004 - - 200,000 100,000 36,000 - - - 136,000
Common stock returned
to treasury at $0.60 per share
in October 2004 - - (1,069,600) (534,800) (107,297) - - - (642,097)
Common stock issued in exchange
for consulting services at $0.60
per share in October 2004 - - 82,500 41,250 8,250 - - - 49,500
Common Stock issued pursuant to
subscription at $0.60 per share
in October 2004 - - 500,000 250,000 50,000 (300,000) - - -
Common stock issued in exchange
for consulting servicesat $0.50
per share in October 2004 - - 532,500 266,250 - - - - 266,250
Common Stock issued in exchange
for debt at $0.50 per share
in October 2004 - - 500,000 250,000 - - - - 250,000
Common Stock issued pursuant to
subscription at $0.45 per share
in October 2004 - - 1,000,000 500,000 (50,000) (450,000) - - -
Common stock issued in exchange
for consulting services at $0.45
per share in October 2004 - - 315,000 157,500 (15,750) - - - 141,750
Common Stock issued in
exchange for consulting
services at $0.47 per share
in November 2004 - - 100,000 50,000 (3,000) - - - 47,000
Common Stock issued in
exchange for consulting
services at $0.80 per share
in November 2004 - - 300,000 150,000 90,000 - - - 240,000
Common Stock issued in
exchange for consulting
services at $1.44 per share
in November 2004 - - 115,000 57,500 108,100 - - - 165,600
Common Stock issued in
exchange for employee
services at $1.44 per share
in November 2004 - - 5,000 2,500 4,700 - - - 7,200
See accompanying notes to the financial statements
F-11
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Warrants exercised
at $0.60 per share
in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000
Beneficial Conversion discount
relating to Notes Payable - - - - 1,465,000 - - - 1,465,000
Common stock issued at $0.016
per share in exchange for note
payable in December 2004 - - 5,500,000 2,750,000 (2,661,500) - - - 88,500
Common stock issued in
settlement of debt at $0.50 per
share in December 2004 - - 2,930,000 1,465,000 - (125,000) - - 1,340,000
Fair value of 6,063,500
warrants issued to non
employees and consultants for
services rendered at $0.52
per warrant in October
and December 2004 - - - - 3,169,052 - - - 3,169,052
Warrants exercised at $0.10 per
share in January 2005 - - 25,000 12,500 (10,000) - - - 2,500
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 1,628,789 814,395 (276,895) - - - 537,500
Warrants exercised at $0.10 per
share in January 2005 - - 17,500 8,750 (7,000) - - - 1,750
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 2,399,012 1,199,504 (407,830) - - - 791,674
Common Stock issued in
exchange for consulting
services at $1.30 per share - - 315,636 157,818 252,508 - - - 410,326
in January 2005
Fair value of warant liability
reclassed due to registration
rights granted in
February 2005 - - - - (3,108,851) - - - (3,108,851)
Common Stock issued in
exchange for consulting
services at $1.44 per share
in February 2005 - - 5,796,785 2,898,393 5,418,814 - - - 8,317,207
Fair value of 55,000 warrants
issued to consultants for
services at $1.31 per warrant
in February 2005 - - - - 72,017 - - - 72,017
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 75,757 37,879 (12,879) - - - 25,000
See accompanying notes to the financial statements
F-12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Warrants exercised at $0.10 per
share in February 2005 - - 20,000 10,000 (8,000) - - - 2,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 606,060 303,030 (103,030) - - - 200,000
Warrants exercised at $0.10 per
share in February 2005 - - 45,000 22,500 (18,000) - - - 4,500
Common Stock issued in
exchange for related party debt
at $1.31 per share in February
2005 - - 1,500,000 750,000 1,215,000 - - - 1,965,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 278,433 139,217 (47,334) - - - 91,883
Common Stock issued in
exchange for consulting services
at $1.17 per share in February
2005 - - 17,236 8,618 11,548 - - - 20,166
Common stock issued in
exchange for debt at $0.50 per
share in February 2005 - - 300,000 150,000 - - - - 150,000
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 716,500 358,250 322,425 - - - 680,675
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 10,500 5,250 4,725 - - - 9,975
Common stock issued in
exchange for debt at $0.50 per
share in March 2005 - - 13,202,000 6,601,000 - - - - 6,601,000
Common Stock issued in
exchange for consulting
services at $1.19 per share
in March 2005 - - 185,000 92,500 127,650 - - - 220,150
Options exercised at $0.60 per
share in March 2005 - - 100,000 50,000 10,000 - - - 60,000
Common Stock issued in
exchange for consulting
services at $0.98 per share
in March 2005 - - 1,675,272 837,636 804,131 - - - 1,641,767
See accompanying notes to the financial statements
F-13
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting
services at $0.92 per share
in March 2005 - - 24,333 12,167 10,219 - - - 22,386
Common Stock issued in
exchange for consulting
services at $0.99 per share
in March 2005 - - 15,000 7,500 7,350 - - - 14,850
Common stock issued in exchange
for debt at $0.50 per
share in March 2005 - - 1,240,000 620,000 - - - - 620,000
Common stock canceled for
shares issued in exchange of
debt in March 2005 - - (500,000) (250,000) - - - - (250,000)
Common stock subscribed
Canceled in March 2005 - - - - - 750,000 - - 750,000
Common Stock issued in
exchange for consulting
services at $0.89 per share
in March 2005 - - 10,000 5,000 3,900 - - - 8,900
Adjust common stock par value
from $0.50 to $0.001 per share,
per amendment of articles dated
Mar-05 - - - (32,312,879) 32,312,879 - - - -
Beneficial Conversion discount
relating to Notes Payable in
March 2005 - - - - 7,371,000 - - - 7,371,000
Stock options granted to
employees in exchange for
services rendered, at
exercise price below fair value
of common stock in
March 2005 - - - - 180,000 - - - 180,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 160,000 160 127,840 - - - 128,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 40,000 40 31,960 - - - 32,000
See accompanying notes to the financial statements
F-14
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting services
at $0.75 per share in April 2005 - - 850,000 850 636,650 - - - 637,500
Common Stock issued in
exchange for consulting services
at $0.33 per share in April 2005 - - 500,000 500 164,500 - - - 165,000
Common Stock canceled during
April 2005, previously issued for
services rendered at $3.42 per
share - - (10,000) (10) (34,190) - - - (34,200)
Common Stock issued in
settlement of debt at $0.33 per
share in April 2005 - - 75,758 77 24,923 (25,000) - - -
Common Stock issued in
exchange for consulting services
at $0.68 per share in April 2005 - - 50,000 50 33,950 - - - 34,000
Proceeds received against
subscription Payable in June
2005 - - - - - 118,000 - - 118,000
Common Stock canceled in
June 2005, previously issued for
services rendered at $0.50 per
share - - (10,000) (10) (4,990) - - - (5,000)
Cancellation of previously
granted stock options granted
to employees for services
rendered, at exercise price
below fair value of common stock - - - - (180,000) - - - (180,000)
Common Stock issued in
exchange for consulting services
at $0.60 per share in July 2005 - - 157,000 157 94,043 - - - 94,200
Common Stock issued in exchange
for intellectual property
at $0.67 per share in July 2005 - - 36,000,000 36,000 24,084,000 - - - 24,120,000
Common Stock issued in
exchange for consulting
services at $0.60 per share
in July 2005 - - 640,000 640 383,360 - - - 384,000
Common Stock issued in
exchange for employee services
at $0.48 per share in July 2005 - - 8,000,000 8,000 3,832,000 - - - 3,840,000
See accompanying notes to the financial statements
F-15
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting
services at $0.94 per share
in July 2005 - - 121,985 121 168,217 - - - 168,338
Common Stock issued in
exchange for consulting
services at $0.48 per share
in August 2005 - - 250,000 250 119,750 - - - 120,000
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.62 per share
in September 2005 - - 814,158 814 501,858 - - - 502,672
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.70 per share
in September 2005 - - 391,224 391 273,466 - - - 273,857
Common Stock issued in
exchange for consulting
services at $0.94 per share
in September 2005 - - 185,000 185 173,715 - - - 173,900
Common Stock returned in
September 2005, previously
issued for services rendered at
$0.40 per share - - (740,000) (740) (453,232) 56,000 1,000 - (396,972)
Net Loss - - - - - - - (67,109,519) (67,109,519)
--------- -------- ----------- --------- ----------- --------- -------- ------------ ------------
Balance as of September
30, 2005 60,000 $ 6 112,230,392 $ 112,230 $82,320,715 $ 20,000 $ - $(89,924,553) $(7,471,602)
========= ======== =========== ========= =========== ========= ======== ============ ===========
See accompanying notes to the financial statements
F-16
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH JUNE 30, 2006
(Unaudited)
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued pursuant
to subscription at $0.50 per
share in October 2005 - - 400,000 400 199,600 (200,000) - - -
Common Stock issued in
exchange for consulting
services at $0.75 per share
in October 2005 - - 100,000 100 74,900 - - - 75,000
Common Stock returned in
October 2005, previously
issued for services
rendered at $0.60 per share - - (350,000) (350) (209,650) - - - (210,000)
Common stock issued pursuant
to subscription at $0.50 per
share in December 2005 - - 40,000 40 19,960 (20,000) - - -
Common Stock to investors
pursuant to registration rights
agreement at $0.51 per share in
December 2005 - - 505,854 506 257,480 - - - 257,986
Common Stock returned in
January 2006, previously issued
for services rendered at $0.60
per share - - (250,000) (250) (149,750) - - - (150,000)
Common Stock issued to investors
pursuant to registration rights
agreement at $0.32 per share
in January 2006 - - 806,212 806 257,182 - - - 257,988
Common Stock issued to investors
pursuant to registration rights
agreement at $0.20 per share
in January 2006 - - 1,289,927 1,290 256,695 - - - 257,985
Fair value of 200,000 warrants
issued to consultants for
services at $0.22 per warrant
in January 2006 - - - - 43,098 - - - 43,098
Common Stock issued in exchange
for consulting services at $0.17
per share in February 2006 - - 160,000 160 27,040 - - - 27,200
Common Stock issued in exchange
for consulting services at $0.16
per share in February 2006 - - 3,800,000 3,800 604,200 - - - 608,000
Common Stock returned in
March 2006, previously issued
for services rendered at $0.80
per share - - (150,000) (150) (119,850) - - - (120,000)
Previously issued warrants
reclassed to warrant liability - - - - (1,584,614) - - - (1,584,614)
Net Income - - - - - - - 5,606,849 5,606,849
--------- ------ ----------- ---------- ---------- --------- ---------- ----------- ----------
Balance as of June 30, 2006 60,000 6 118,582,385 118,582 81,997,006 (200,000) - (84,317,703) (2,402,109)
========= ====== =========== ========== ========== ========= ========== =========== ==========
See accompanying notes to unaudited condensed consolidated financial statements
F-17
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Period
September 16, 2002
(Date of Inception)
For the nine months ended June 30, through
2006 2005 June 30, 2006
-------------- -------------- --------------
RESTATED RESTATED RESTATED
Cash flows from operating activities:
Net income (loss) $ 5,606,849 $ (40,464,827) $ (84,317,703)
Adjustments to reconcile net loss to net used in operating activities:
Depreciation and amortization 1,021,199 15,187 1,368,711
Organization expenses 88,500
Preferred shares issued in exchange for services - - 1,500,000
Warrants issued to consultants 43,100 3,241,068 9,421,530
Income attributable to repricing of warrants and debt
derivatives (14,250,621) (16,454,929) (30,951,611)
Financing costs attributable to issuance of warrants 2,271,000 23,148,214 25,418,674
Amortization of beneficial conversion feature-convertible
notes 8,836,000 10,461,000
Amortization of capitalized financing costs 247,238 - 247,238
Amortization of debt discount attributable to convertible
debenture 276,090 - 276,090
Fair value of common stock issued to related party in excess
of previously incurred debt - 1,365,000 1,365,000
Common stock issued in exchange for services 710,200 13,396,202 31,284,573
Common stock exchanged for intellectual property in
connection with costs of acquiring intangible assets - - 14,689,100
Common stock issued as penalty in connection financing 773,958 1,550,487
Common stock canceled-previously issued for services rendered (480,000) (181,298) (1,343,845)
Change in assets and liabilities:
Increase in accounts receivable (18,900) (18,900)
Increase in prepaid expenses and deposits (145,849) (33,291) (163,472)
Decrease in other assets 5,940 - (3,128)
Decrease in due related parties (52,662) (20,631) -
Increase (decrease) in accounts payable and accrued
liabilities 1,685,792 (833,465) 4,085,745
-------------- -------------- --------------
Net cash used in operating activities (2,306,666) (7,986,770) (15,042,011)
Cash flows from investing activities:
Payments for patent filing - (4,347) (25,698)
Capital expenditures (35,851) - (48,602)
-------------- -------------- --------------
Net cash used in investing activities (35,851) (4,347) (74,300)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost - 432,000
Proceeds from issuance of convertible notes 4,242,500 9,079,000 13,446,500
Proceeds form exercise of options and warrants - 102,750 343,750
Payment of debt - - (24,854)
Proceeds from loans - - 2,750,000
Advances from shareholders - - 100,088
-------------- -------------- --------------
Net cash provided by financing activities 4,242,500 9,181,750 17,047,484
Net increase in cash and cash equivalents 1,899,983 1,190,633 1,931,173
Cash and cash equivalents at beginning of period 31,190 1,832 -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 1,931,173 $ 1,192,465 $ 1,931,173
============== ============== ==============
See the accompanying notes to the unaudited condensed consolidated financial
statements
F-18
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Period
September 16, 2002
(Date of Inception)
For the nine months ended June 30, through
2006 2005 June 30, 2006
-------------- -------------- --------------
RESTATED RESTATED RESTATED
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest - - -
Cash paid during period for taxes - - -
Non-cash transactions:
Common stock issued for services 710,200 13,396,202 31,284,573
Common stock issued in exchange for previously incurred debt - 2,313,500 2,313,500
Common stock canceled-previously issued for services rendered (480,000) (181,298) (1,343,845)
Beneficial conversion feature attributable to convertible notes 8,836,000 10,461,000
Preferred shares in exchange for services - - 1,500,000
Warrants issued to consultants 43,100 3,241,068 9,421,530
Warrants issued in exchange for financing costs 2,271,000 23,148,214 25,418,674
Acquisition:
Common stock retained - 1,015 1,015
Assets acquired - (135) (135)
-------------- -------------- --------------
Total consideration paid - 880 880
-------------- -------------- --------------
Organizational expenses-note issued in exchange for shares retired 88,500
Common stock issued in exchange for note payable 88,500
See the accompanying notes to the unaudited condensed consolidated financial
statements
F-19
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB/A, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended June 30, 2006 are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2006. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated September 30,
2005 financial statements and footnotes thereto included in the Company's SEC
Form 10-KSB, as amended.
Business and Basis of Presentation
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of placeStateNevada. 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 placecountry-regionUnited
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 June 30, 2006, the Company has accumulated
losses of $84,317,703.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiary ProHealth Medical Technologies, Inc. Significant
inter-company transactions have been eliminated in consolidation.
Reclassification
Certain prior period amounts have been reclassified for comparative purposes.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives of 3 to 5 years using the straight line method. At June 30, 2006
property and equipment consist of:
Computer equipment $ 15,328
Furniture 33,273
Accumulated depreciation (10,315)
-----------
Net $ 38,286
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
F-20
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):
F-21
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
For the Period
September, 16
2002 (Date of
For The Three For The Three For The Nine For The Nine Inception
Months ended Months ended Months ended Months ended through
June 30, June 30, June 30, June 30, June 30,
2006 2005 2006 2005 2006
Net income (loss) - as
reported $ 761,087 $ 3,700,198 $ 5,606,849 $ (40,464,827) $ (84,317,703)
Add: Total stock based
employee compensation
expense as reported
under intrinsic value
method (APB No. 25) -- -- -- -- --
Deduct: Total stock
based employee
compensation expense
as reported under fair
value method (APB No.
123) (1,406,350) (1,406,350) (1,406,350)
------------ ------------ ------------ -------------- --------------
Net income (loss) -
Pro Forma $ 761,087 $ 2,293,848 $ 5,606,849 $ (41,871,177) $ (85,724,053)
============ ============ ============ ============== ==============
Net income (loss)
attributable to common
stockholders - Pro
Forma $ 761,087 $ 2,293,848 $ 5,606,849 $ (41,871,177) $ (85,724,053)
============ ============ ============ ============== ==============
Basic income (loss)
per share - as reported $ 0.01 $ 0.06 $ 0.05 $ (0.83)
============ ============ ============ ==============
Basic income (loss)
per share - Pro Forma $ 0.01 $ 0,04 $ 0.04 $ (0.86)
============ ============ ============ ==============
Fully diluted income per
share - as reported $ 0.01 $ 0.04 $ 0.03 N/A N/A
============ ============ ============ ============== ==============
Fully diluted income per
share - Pro Forma $ 0.01 $ 0.03 $ 0.03 N/A N/A
============ ============ ============ ============== ==============
F-22
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact that this statement will have on Company's consolidated
financial statements.
Revenue Recognition
Revenues are recognized in the period that services are provided. For revenue
from product sales, the Company recognizes revenue in accordance with Staff
Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which superseded
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB101"). SAB 101 requires that four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred; (3) the selling price is fixed and determinable; and (4)
collectibility is reasonably assured. Determination of criteria (3) and (4) are
based on management's judgments regarding the fixed nature of the selling prices
of the products delivered and the collectibility of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances, and
other adjustments are provided for in the same period the related sales are
recorded. The Company defers any revenue for which the product has not been
delivered or is subject to refund until such time that the Company and the
customer jointly determine that the product has been delivered or no refund will
be required. At June 30, 2006 the Company did not have any deferred revenue.
SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"), MULTIPLE
DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The effect of implementing EITF 00-21 on
the Company's financial position and results of operations was not significant.
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 credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit. The Company periodically reviews its trade receivables
in determining its allowance for doubtful accounts. At June 30, 2006, allowance
for doubtful receivable was $0.
Derivative Financial Instruments
The Company's derivative financial instruments consist of embedded derivatives
related to the 10% Secured Convertible Promissory Notes (the "Serial Notes")
entered into in 2006 (see Note D). These embedded derivatives include certain
conversion features, variable interest features, call options and default
provisions. The accounting treatment of derivative financial instruments
requires that the Company recorded the derivatives and related warrants at their
fair values as of the inception date of the Note Agreement (estimated at
$2,419,719) and at fair value as of each subsequent balance sheet date. In
addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the Notes, the Company is
required to classify all other non-employee stock options and warrants as
derivative liabilities and mark them to market at each reporting date. The fair
value of such options and warrants that were reclassified as liabilities from
additional paid-in capital in the nine months ended June 30, 2006 totaled
F-23
$1,584,614. Any change in fair value will be recorded as non-operating, non-cash
income or expense at each reporting date. If the fair value of the derivatives
is higher at the subsequent balance sheet date, the Company will record a
non-operating, non-cash charge. If the fair value of the derivatives is lower at
the subsequent balance sheet date, the Company will record non-operating,
non-cash income. Conversion-related derivatives were valued using the Binomial
Option Pricing Model with the following assumptions: dividend yield of 0%;
annual volatility of 111 to 112%; and risk free interest rate of 4.96 to 5.15%
as well as probability analysis related to trading volume restrictions. The
remaining derivatives were valued using discounted cash flows and probability
analysis. The derivatives are classified as long-term liabilities (see Note F).
F-24
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
New Accounting Pronouncements
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
adopted this interpretation from January 1, 2006. The adoption of this
Interpretation did not have a material impact on its consolidated financial
position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate affected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company adopted of this SFAS with its restatements
included within.
On February 16, 2006 the Financial Accounting Standards Board (FASB) issued SFAS
155, "Accounting for Certain Hybrid Instruments," which amends SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS 155 allows financial instruments that have embedded
derivatives to be accounted for as a whole (eliminating the need to bifurcate
the derivative from its host) if the holder elects to account for the whole
instrument on a fair value basis. SFAS 155 also clarifies and amends certain
other provisions of SFAS 133 and SFAS 140. This statement is effective for all
financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. The Company does not expect its adoption of this new
standard to have a material impact on its financial position, results of
operations or cash flows.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing
of Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The Company does not expect its
adoption of this new standard to have a material impact on its financial
position, results of operations or cash flows.
NOTE B - INTANGIBLE ASSETS AND AMORTIZATION
The Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets,
whereby the Company periodically test its intangible assets for impairment. On
an annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.
Biowell Technology, Inc.
On July 12, 2005, the Company acquired certain intellectual properties from
Biowell Technology, Inc. ("Biowell") through an Asset Purchase Agreement
("Agreement") in exchange for 36 million shares of the Company's restricted
common stock having an aggregate fair value at the date of issuance of
F-25
$24,120,000. The intangible assets acquired consist of proprietary DNA
anti-counterfeit trade secrets created by Biowell that are intended to protect
intellectual property from counterfeiting, fraud, piracy, product diversion and
unauthorized intrusion.
F-26
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE B - INTANGIBLE ASSETS AND AMORTIZATION (continued)
The purchase price has been allocated as follows:
Amortizable intangible assets acquired are comprised of:
Developed core technologies $ 2,260,900
Developed product technologies 7,170,000
-----------
Total amortizable intangible assets $ 9,430,900
Transaction costs 14,869,100
-----------
Total purchase price $24,120,000
===========
In Process Research & Development
The Company concluded as of the date of acquisition, the acquired intangible
assets, consisting of developed core and product technologies had reached full
development and that it was not the intention of the Company's management to
utilize the asset in specific research and development activities as defined in
SFAS No. 2 Accounting for Research & Development Costs, As a result, the Company
determined there was no in-process research and development ("IPR& D") projects
in place related to the technology acquired , nor any future research and
development activities planned. Accordingly, there is no charge to operations
during the year ended September 30, 2005 for IPR&D in connection with the
acquisition of the assets.
Transaction costs
The amount of the purchase price that could not be allocated to acquired
identifiable intangible assets or IPR & D was $14,689,100 and was charged to
operations as a cost of the transaction during the year ended September 30,
2005.
The identifiable intangible assets acquired and their carrying value at June 30,
2006 are:
Weighted
Gross Carrying Average
Amount Accumulated Residual Amortization
Amortization Net Value Period
(Years)
Amortizable
Intangible
Assets:
Trade secrets and
developed technologies $ 9,430,900 $ 1,347,271 $ 8,083,629 - 7
Patents 34,237 16,881 17,376 - 5
----------- ----------- ----------- ----------- ------------
Total
Amortized
Identifiable
Intangible Assets $ 9,465,137 $ 1,364,152 $ 8,101,005 - 6.99
Total amortization expense charged to operations for the nine months ended June
30, 2006 and 2005 was $1,015,571and $7,748, respectively.
F-27
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES
Convertible notes payable as of June 30, 2006 are as follows:
10% Secured Convertible Notes Payable dated March 8, 2006, net of
unamortized debt discount of $680,110 (see
below) $ 819,890
10% Secured Convertible Notes Payable dated May 2, 2006,
net of unamortized debt discount of $395,158 (see below)
604,842
10% Secured Convertible Notes Payable dated June 15, 2006, net of
unamortized debt discount of $1,068,361 (see below)
1,881,639
$ 3,306,371
============
10% Secured Convertible Promissory Notes dated March 8, 2006
On March 8, 2006, in connection with a private placement, the Company issued 10%
Secured Convertible Promissory Notes in the aggregate principal amount of
$1,500,000 (the "Serial Notes") and warrants to purchase 3,000,000 shares of the
Company's common stock to accredited investors. The Serial Notes bear interest
at 10%, mature on September 7, 2007 and are convertible into the Company's
common stock, at the holder's option, at fifty cents ($.50) per share during the
period from the date of issuance (March 8, 2006) through March 7, 2007. Should
the holder of the Serial Note elect not to convert to the Company's common stock
on or before March 7, 2007, the outstanding principal, along with accrued and
unpaid interest automatically converts to the Company's common stock at an
amount equal to 80% of the average bid price of the Company's common stock on
the Over-The-Counter Bulletin Board for a period equal to ten (10) days prior to
conversion on the maturity date of September 7, 2007. The full principal amount
of the Serial Notes is due upon a default under the terms of the Note Agreement.
In addition, the Company granted the Investors a security interest in all of its
assets (see Note B). The Company agreed to file a registration statement with
the SEC to effect the registration of the shares of its common stock underlying
the Serial Notes and the warrants within 30 days of the effective date of the
Company's pending Registration Statement (SEC File 333 - 122848) being declared
effective. The Company also agreed to use its reasonable best efforts to cause
the registration statement to be declared effective no later than 180 days after
its filing. If the Registration Statement is not filed and declared effective as
described above, the Company will be required to pay liquidated damages in the
form of cash to the holders of the Serial Notes, in an amount equal to 2% of the
unpaid principal balance per month if the above deadlines are not met. In the
event of a default on the Serial Notes, the Serial Notes will bear interest at
twelve percent (12%) per annum until paid.
The warrants are exercisable until five years from March 8, 2006 until March 7,
2011 at a price of $0.50 per share. The Company has the right, but not the
obligation, to call these warrants for $1.25 per share at the earlier of (i) one
year from issuance or (ii) the date that shares of common stock issuable upon
conversion of the Serial Notes and exercise of the warrants are registered for
resale and the Company's common stock trades at or above $1.25 per share for
twenty (20) consecutive trading days. The Notes include certain features that
are considered embedded derivative financial instruments, such as a variety of
conversion options, a variable interest rate feature, events of default and a
variable liquidated damages clause.
The initial relative fair value assigned to the embedded derivatives was
$346,500.
In conjunction with the Notes, the Company issued warrants to purchase 3,000,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values as of the
inception date of the debt issuance, which totaled $512,100.
The Company recorded the fair value of the derivatives ($346,500) and warrants
($ 512,100) to debt discount, aggregating $858,600, which will be amortized to
interest expense over the term of the Notes. Amortization of $178,490 was
recorded for the nine months ended June 30, 2006.
F-28
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the Serial
Notes into shares of the Company's common stock. The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the principal and interest payments
then due on the Notes.
10% Secured Convertible Promissory Notes dated May 2, 2006
On May 2, 2006, in connection with a private placement, the Company issued 10%
Secured Convertible Promissory Notes in the aggregate principal amount of
$1,000,000 (the "Serial Notes") and warrants to purchase 2,000,000 shares of the
Company's common stock to accredited investors. The Serial Notes bear interest
at 10%, mature on August 2, 2007 and are convertible into the Company's common
stock, at the holder's option, at fifty cents ($.50) per share during the period
from the date of issuance (May 2, 2006) through May 2, 2007. Should the holder
of the Serial Note elect not to convert to the Company's common stock on or
before May 2, 2007, the outstanding principal, along with accrued and unpaid
interest automatically converts to the Company's common stock at an amount equal
to 80% of the average bid price of the Company's common stock on the
Over-The-Counter Bulletin Board for a period equal to ten (10) days prior to
conversion on the maturity date of May 2, 2007. The full principal amount of the
Serial Notes is due upon a default under the terms of the Note Agreement. In
addition, the Company granted the Investors a security interest in all of its
assets (see Note B). The Company agreed to file a registration statement with
the SEC to effect the registration of the shares of its common stock underlying
the Serial Notes and the warrants within 30 days of the effective date of the
Company's pending Registration Statement (SEC File 333 - 122848) being declared
effective. The Company also agreed to use its reasonable best efforts to cause
the registration statement to be declared effective no later than 180 days after
its filing. In the event of a default on the Serial Notes, the Serial Notes will
bear interest at twelve percent (12%) per annum until paid.
The warrants are exercisable until four years from May 2, 2007 until May 2, 2011
at a price of $0.50 per share. The Company has the right, but not the
obligation, to call these warrants for $0.001 per share at the earlier of (i)
one year from issuance and (ii) the date that shares of common stock issuable
upon conversion of the Serial Notes and exercise of the warrants are registered
for resale and the Company's common stock trades at and above $1.00 per share
for twenty (20) consecutive trading days. The Notes include certain features
that are considered embedded derivative financial instruments, such as a variety
of conversion options, a variable interest rate feature, events of default and a
variable liquidated damages clause.
The initial relative fair value assigned to the embedded derivatives was
$82,358.
In conjunction with the Notes, the Company issued warrants to purchase 2,000,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values as of the
inception date of the debt issuance, which totaled $373,600.
The Company recorded the fair value of the derivatives ($82,358) and warrants
($373,600) to debt discount, aggregating $455,958, which will be amortized to
interest expense over the term of the Notes. Amortization of $60,800 was
recorded for the nine months ended June 30, 2006.
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the Serial
Notes into shares of the Company's common stock. The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the principal and interest payments
then due on the Notes.
F-29
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
10% Secured Convertible Promissory Notes dated June 15, 2006
On June 15, 2006, in connection with a private placement, the Company issued 10%
Secured Convertible Promissory Notes in the aggregate principal amount of
$2,950,000 (the "Serial Notes") and warrants to purchase 5,900,000 shares of the
Company's common stock to accredited investors. The Serial Notes bear interest
at 10%, mature on August 2, 2007 and are convertible into the Company's common
stock, at the holder's option, at fifty cents ($.50) per share during the period
from the one years from the date of issuance (June 15, 2006) through June 15,
2007. Should the holder of the Serial Note elect not to convert to the Company's
common stock on or before June 15, 2007, the outstanding principal, along with
accrued and unpaid interest automatically converts to the Company's common stock
at an amount equal to 80% of the average bid price of the Company's common stock
on the Over-The-Counter Bulletin Board for a period equal to ten (10) days prior
to conversion on the maturity date of June 15, 2007. The full principal amount
of the Serial Notes is due upon a default under the terms of the Note Agreement.
In addition, the Company granted the Investors a security interest in all of its
assets (see Note B). The Company agreed to file a registration statement with
the SEC to effect the registration of the shares of its common stock underlying
the Serial Notes and the warrants within 30 days of the effective date of the
Company's pending Registration Statement (SEC File 333 - 122848) being declared
effective. The Company also agreed to use its reasonable best efforts to cause
the registration statement to be declared effective no later than 180 days after
its filing. In the event of a default on the Serial Notes, the Serial Notes will
bear interest at twelve percent (12%) per annum until paid.
The warrants are exercisable until four years from June 15, 2007 until June 15,
2011 at a price of $0.50 per share. The Company has the right, but not the
obligation, to call these warrants for $0.001 per share at the earlier of (i)
one year from issuance and (ii) the date that shares of common stock issuable
upon conversion of the Serial Notes and exercise of the warrants are registered
for resale and the Company's common stock trades at and above $1.00 per share
for twenty (20) consecutive trading days. The Notes include certain features
that are considered embedded derivative financial instruments, such as a variety
of conversion options, a variable interest rate feature, events of default and a
variable liquidated damages clause.
The initial relative fair value assigned to the embedded derivatives was
$175,321.
In conjunction with the Notes, the Company issued warrants to purchase 5,900,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values as of the
inception date of the debt issuance, which totaled $929,840.
The Company recorded the fair value of the derivatives ($175,321) and warrants
($929,840) to debt discount, aggregating $1,105,161, which will be amortized to
interest expense over the term of the Notes. Amortization of $36,800 was
recorded for the nine months ended June 30, 2006.
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the Serial
Notes into shares of the Company's common stock. The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the principal and interest payments
then due on the Notes.
$ 1,675,000 Convertible Notes
Convertible notes payable ("Bridge Unit Offering") in quarterly installments of
interest only at 10% per annum, secured by all assets of the Company and due on
the earlier of the 9 month anniversary date of the initial closing of the
offering or the completion of any equity financing of $3,000,000 or more; the
Company, at its sole discretion may prepay principal at any time without
penalty. The Bridge Unit Offering Notes unpaid principal and accrued and unpaid
interest were converted to an aggregate of 4,988,051 shares of the Company's
common shares at a price equal to approximately $. 33 per share during the
quarter ended March 31, 2005.
F-30
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
$ 1,465,000 Convertible Notes
Beginning in December, 2004, the Company sold a 10% convertible debenture in the
aggregate amount of $ 1,465,000 in a private placement and exempt offerings to
sophisticated investors, net of costs and fees.
The Convertible Note's terms called for the debt to automatically convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 2,930,000 shares of the
Company's common stock.
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 2,930,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants were issued in February, 2005 and lapse if unexercised by
February, 2010. A registration rights agreement was executed in December 2004
and consummated in February, 2005 requiring the Company to register the shares
of its common stock underlying the Convertible Notes and warrants so as to
permit the public resale thereof. The registration rights agreement provided for
the payment of liquidated damages of 3.5% of the aggregate Convertible Note
financing per month if the stipulated registration deadlines were not met. The
liquidated damages, which approximate $ 51,275 per month, may be paid, at the
Company's option, in cash or unregistered shares of the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $1,465,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in December 2004, the debt discount
attributed to the beneficial conversion feature of $ 1,465,000 was charged to
interest expense in its entirety during the six months ended March 31, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued a warrant in February, 2005 that has registration rights
for the underlying shares. As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet $23,148,214 and charged to operations as interest
expense. Upon the registration statement being declared effective, the fair
value of the warrant on that date will be reclassified to equity. The Company
initially valued the warrants using the Black-Scholes pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of
152.59%, (3) risk-free interest rate of 3.67%, and (4) expected life of 5 years.
In connection with the placement of the $1,465,000 of convertible notes as
described above, the Company agreed to registered shares of the Company's common
stock underlying certain previously issued and outstanding warrants that were
not subject to a registration rights agreement at the time the warrants were
issued. These warrants consist of following:
o 105,464 warrants entitling the holder to purchase 105,464 shares of
the Company's common stock at the price of $ .10 per share. These
warrants were issued in July, 2004 and lapse if unexercised by July,
2009.
o 1,602,500 warrants entitling the holder to purchase 1,602,500 shares
of the Company's common stock at the price of $ .60 per share. These
F-31
warrants were issued in October, 2003 and lapse if unexercised by
October, 2008.
As a result, the Company is required to classify the warrants as derivative
liabilities and mark then to market at each reporting date. The fair value of
the warrants that were subject to registration reclassified as liabilities from
additional paid in capital at March 31, 2005 totaled $3,108,851. Upon the
registration statement being declared effective, the fair value of the warrants
on that date will be reclassified to equity. The Company initially valued the
warrants using the Black-Scholes pricing model with the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 148.66%, (3) risk-free
interest rate of 3.21%, and (4) expected life of 3 years.
F-32
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE C - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
$ 7,371,000 Convertible Notes
In January and February, 2005, the Company sold an 10% convertible debenture in
the aggregate amount of $7,371,000 in a private placement and exempt offerings
to sophisticated investors, net of costs and fees.
The Convertible Note's terms called for the debt to automatically convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 14,742,000 shares of the
Company's common stock.
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 14,742,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants lapse if unexercised by February, 2010. A registration rights
agreement was executed and consummated in January, 2005 requiring the Company to
register the shares of its common stock underlying the Convertible Notes and
warrants so as to permit the public resale thereof. The registration rights
agreement provided for the payment of liquidated damages of 3.5% of the
aggregate Convertible Note financing per month if the stipulated registration
deadlines were not met. The liquidated damages, which approximate $ 257,985 per
month, may be paid, at the Company's option, in cash or unregistered shares of
the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $ 7,731,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in February, 2005, 2005, the debt
discount attributed to the beneficial conversion feature of $ 7,371,000 was
charged to interest expense in its entirety during the six months ended March
31, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued warrants that have registration rights for the underlying
shares. As the contract must be settled by the delivery of registered shares and
the delivery of the registered shares is not controlled by the Company, pursuant
to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the net value of the warrants at
the date of issuance was recorded as a warrant liability on the balance sheet
$23,148,214 and charged to operations as interest expense. Upon the registration
statement being declared effective, the fair value of the warrant on that date
will be reclassified to equity. The Company initially valued the warrants using
the Black-Scholes pricing model with the following assumptions: (1) dividend
yield of 0%; (2) expected volatility of 152.59%, (3) risk-free interest rate of
3.67%, and (4) expected life of 5 years.
NOTE D - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 250,000,000 shares
of common stock, with a $0.001 par value per share as the result of a
shareholder meeting conducted on February 14, 2005. Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares with a par value of $0.50. In February 2005, the Company passed a
resolution authorizing change in the par value per common shares from $0.50 per
share to $0.001 per share.
During the period September 16, 2002 through September 30, 2003, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
F-33
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.
F-34
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE D - CAPITAL STOCK (continued)
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc.
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
During the fiscal year ended September 30, 2003, the Company issued 2,369,130
shares of common stock, net of cancellation of 860,000 shares in exchange for
consulting services. The Company valued the shares issued at $2,191,227, net of
cancellation of $60,008, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In November 2003, the Company issued 876,000 shares of common stock in exchange
for subscription at approximately $ 0.065 per share.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement (see Note I). The Company valued the shares issued at
approximately $ .065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth granted the Company an option to acquire up to 8,500,000 shares of
the Company's common stock in exchange for $100,000 (see Note C). The option
expired on December 10, 2004. On June 30, 2003, the Company exercised its option
and acquired 7,500,000 common shares under this agreement in exchange for an
$88,500 convertible promissory note payable to the former controlling owner. The
Company had an option through December 10, 2004 to acquire the remaining
1,000,000 shares from the former controlling owner in exchange for $11,500. On
June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant
to the option agreement.
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
During the fiscal year ended September 30, 2003, the Company issued 154,000
shares of common stock in exchange for previously issued options to purchase the
Company's common stock at $1.00 per share.
During the fiscal year ended September 30, 2003, the Company issued 74,400
shares of common stock in exchange for cash at approximately $0.89 per share.
In October 2003, the Company issued 15,000 shares of convertible preferred stock
in exchange for services. The Company valued the shares issued at the $15 par
value and recorded the value for services when the shares were converted into
common shares as identified below.
During the fiscal year ended September 30, 2004, the Company issued 5,149,472
shares of common stock, net of cancellation of 155,000 shares, in exchange for
consulting services. The Company valued the shares issued at $8,787,315, net of
cancellation of $408,575, which represents the fair value of the services
received which did not differ materially from the value of the stock issued
During the fiscal year ended September 30, 2004, the Company issued 340,500
shares of common stock for shares previously subscribed at approximately $2.04
per share.
F-35
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE D - CAPITAL STOCK (continued)
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
During the fiscal year ended September 30 2004, the Company converted 15,000
preferred shares into 375,000 shares of common stock at $1.47 per share in
exchange for employee services valued at $549,750.
In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share
for total proceeds of $250,000 pursuant to private placement.
In September 2004, the Company issued 60,000 convertible preferred shares at
$25.00, in exchange for consulting services valued at $1,500,000.
During the fiscal year ended September 30, 2005, the Company issued 11,040,647
shares of common stock, net of cancellation of 2,329,600 shares, in exchange for
consulting and employee services. The Company valued the shares issued at
$13,008,371, net of cancellation of $1,328,269, which represents the fair value
of the services received which did not differ materially from the value of the
stock issued
During the fiscal year ended September 30, 2005, the Company issued 1,500,000
shares of common stock for shares previously subscribed at approximately $.54
per share.
During the fiscal year ended September 30, 2005, the Company issued 267,500
shares of common stock for warrants and options exercised at approximately $0.39
per share
During the fiscal year ended September 30, 2005, the Company retired $1,796,057
of convertible notes payable for 5,363,809 shares of common stock. The Notes are
convertible into shares of common stock at a price of $0.34 per share.
During the fiscal year ended September 30, 2005, the Company issued 14,442,000
shares of common stock at $0.50 per share pursuant to the exercise terms of
notes payable. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
In October 2004, the Company issued 500,000 shares of common stock in exchange
for debt at $0.50 per share.
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
In February 2005, the Company in exchange for a related party note in the
outstanding principal amount of $600,000 and as settlement for certain claims
related thereto issued 1,500,000 shares of common stock using a price of $1.31
per share. (See note G)
In March, 2005, the Company granted an aggregate of 300,000 stock options to
employees that vested immediately. The exercise prices of the stock options
granted were below the fair value of the Company's common stock at the grant
date. Compensation expense of $180,000 and $0 was charged to operations during
the period ended March 31, 2005 and 2004, respectively.
In June 2005, the Company cancelled 300,000 stock options previously granted
valued at $180,000. In accordance with EITF 96-18 the measurement date to
determine fair value was the date at which a commitment for performance by the
counter party to earn the equity instrument was reached. The Company valued the
shares issued for consulting services at the rate which represents the fair
value of the services received which did not differ materially from the value of
the stock issued.
F-36
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE D - CAPITAL STOCK (continued)
In July 2005, the Company issued 36 million shares in exchange for intellectual
property at approximately $0.67 per share for a total of $24,120,000. The value
of the acquired intangible assets was established at $9,430,900, with the
balance of the purchase price, or $14,689,100, charged to operations as a cost
of the transaction. (See Note B)
In 2005, the Company issued 8,550,000 shares of its common stock without
restriction to employees in exchange for services rendered. The Company valued
the shares issued at market value and charged operations in the period the
shares were issued. The Company is investigating the circumstances surrounding
the issuance of the shares and the possible subsequent resale of certain of the
shares on the open market and the possibility of violations of securities laws
(see Note H).
In September 2005, the Company issued 814,158 penalty shares pursuant to a
registration rights agreement. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
statement was not effective by July 2005, the Company paid the required $257,985
of liquidated damages in shares of Company stock accruing at the rate of 3.5%
per month on the face value of the Notes for the month of July and August 2005.
The Company valued the shares issued at approximately $0.62 per share for a
total of $502,672.
In September 2005, the Company issued 391,224 penalty shares pursuant to a
registration rights agreement. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
statement was not effective by July 2005, the Company paid the required $257,985
of liquidated damages in shares of Company stock accruing at the rate of 3.5%
per month on the face value of the Notes for the month of September 2005. The
Company valued the shares issued at approximately $0.70 per share for a total of
$273,857.
In October, 2005, the Company issued 400,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $200,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
In October 2005, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.75 per share for a total of $75,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2005, the Company cancelled 350,000 shares previously issued for
services valued at $210,000.
In December, 2005, the Company issued 40,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $20,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
For the fiscal year ended September 30, 2005, the Company issued a total of
2,096,139 penalty shares pursuant to a registration rights agreement. In
connection with the 7,371,000 million convertible debt financing in the quarter
ended March 31, 2005, the Company was obligated to complete a stock registration
by July 2005. Since the registration statement was not effective by July 2005,
the Company paid the required $773,959 of liquidated damages in shares of
Company stock accruing at the rate of 3.5% per month on the face value of the
Notes for the month of September 2005. The Company valued the shares issued at
approximately $0.30 per share for a total of $773,959. The Company continues to
accrue the penalties relating to the pending registration statement.
In December 2005, in connection with debt financing, the Company issued
5,500,000 warrants to purchase the Company's common stock at an exercise price
of $0.50 for five years. The fair value attributable to the warrants of $563,750
was recorded as to current period operations with an offsetting adjustment to
additional paid in capital.
F-37
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE D - CAPITAL STOCK (continued)
In January, 2006, the Company cancelled 250,000 shares previously issued for
services valued at $150,000.
In January 2006, the Company issued 2,096,139 penalty shares pursuant to a
registration rights agreement. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 31, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
statement was not effective by July 2005, the Company paid the required $257,985
of liquidated damages in shares of Company stock accruing at the rate of 3.5%
per month on the face value of the Notes for the month of November and December
2005. The Company valued the shares issued at approximately $0.25 per share for
a total of $515,973. The Company continues to accrue the penalties relating to
the pending registration statement.
In February 2006, the Company issued 160,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.17 per share for a total of $27,200, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued
In February 2006, the Company issued 3,800,000 shares of common stock in
exchange for consulting services. The Company valued the shares issued at
approximately $0.16 per share for a total of $608,000, which represents the fair
value of the services received which did not differ materially from the value of
the stock issued
In March, 2006, the Company cancelled 150,000 shares previously issued for
services valued at $120,000.
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 Exercisable
Remaining Weighted Weighted Weighted
Number Contractual Average Average Average
Exercise Exercise
Prices Outstanding Life (Years) Price Exercisable Exercise Price
================ ============== ======================== =============== ============== =================
$0.10 105,464 3.01 $0.10 105,464 $0.10
$0.20 5,000 2.39 $0.20 5,000 $0.20
$0.50 16,450,000 4.63 $0.50 8,550,000 $0.50
$0.55 9,000,000 1.97 $0.55 9,000,000 $0.55
$0.60 9,132,000 2.88 $0.60 9,132,000 $0.60
$0.70 950,000 1.39 $0.70 950,000 $0.70
$0.75 17,727,000 3.25 $0.75 17,727,000 $0.75
$1.00 100,000 .30 $1.00 100,000 $1.00
-------------- --------------
53,469,464 45,569,464
============== ==============
F-38
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE E - STOCK OPTIONS AND WARRANTS (continued)
Transactions involving warrants are summarized as follows:
Number of Weighted
Shares Average
Price Per
Share
Balance, September 30, 2003 383,500 $1.38
Granted 4,574,753 0.58
Exercised (88,000) 1.00
Canceled or expired - -
---------------- --------------
Balance, September 30, 2004 4,870,253 $0.63
Granted 32,873,000 0.71
Exercised (142,500) 0.34
Canceled or expired (731,289) 0.65
---------------- --------------
Balance, September 30, 2005 36,869,464 0.67
Granted 16,600,000 0.51
Exercised - -
Canceled or expired - -
---------------- --------------
Outstanding at June 30, 2005 53,469,464 $0.61
================ ==============
In the nine months ended June 30, 2006, the Company granted 5,500,000 warrants
to holders of the Company's $550,000 notes payable with a $0.50 exercise price.
As the contract must be settled by the delivery of registered shares and the
delivery of the registered shares is not controlled by the Company, pursuant to
EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the fair value of the warrants
at the date of issuance was recorded as a warrant liability of $1,758,900 and
charged to operations as interest expense. Upon the registration statement being
declared effective, the fair value of the warrants on that date will be
reclassified to equity. The Company initially valued the warrants using the
Black-Scholes pricing model with the following assumptions: (1) dividends yield
of 0%; (2) expected volatility of 156.19%, (3) risk-free interest rate of 4.35%,
and (4) expected life of 5 years.
In the nine months ended June 30, 2006, the Company granted 200,000 warrants as
settlement to bridge financing with a $0.70 exercise price and a three year
life. The fair value of the warrants of $43,098 was charged to operations.
In the nine months ended June 30, 2006, the Company granted 10,900,000 warrants
to holders of the Company's convertible notes (See Note C). The warrants have an
exercise price of $0.50 per with a five year life. Under certain conditions, as
described in Note C, the Company as the option to redeem these warrants.
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company revalued the warrants as of June 30, 2006 using the
Black-Scholes option pricing model. The difference between the fair value of the
warrants as of June 30, 2006 and the previous valuation as of July, 2005 has
been recorded as a gain on revaluation of warrant liability, and included in the
accompanying consolidated financial statements (see Note F)
F-39
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE F - DEBT DERIVATIVE AND WARRANT LIABILITY
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities and EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock", the Company
accounted for identified embedded derivatives and warrants to purchase its
common stock that provide for the payment of liquidated damages if the
stipulated registration deadlines were not met as liabilities.
As of the date of this filing, the registration statement has not yet been
declared effective by the SEC. The Company determined the fair value of the
embedded derivatives and valued the warrants using the Black-Scholes option
pricing model. Assumptions regarding the life were one to five years, expected
dividend yield of 0%, a risk free rate of 5.1 to 5.21%, and a volatility of
154.43%. The determined value of both the warrants and the underlying embedded
derivatives as of June 30, 2006 was $5,698,286. The net change in the fair value
of the derivative and warrant liability values from March 31, 2006 has been
recorded as a gain from change in debt derivative and warrant liabilities in the
consolidated condensed statement of operations.
NOTE G- RELATED PARTY TRANSACTIONS
At June 30, 2006, notes payable are as follows:
4% Convertible Note Payable, unsecured, to related party and due August 1,
2005; currently in default. Note holder has the option to covert unpaid
principal together with any accrued and unpaid interest to 180,000 shares of
the Company's common stock. $ 410,429
In February, 2005 the Company issued 1,500,000 shares of its restricted common
stock to a Company officer and Director in exchange for $600,000 of previously
incurred debt. The debt was in the form of a promissory note.
The Company valued the shares at $1.31 per share for a total of $1,965,000,
which represents the fair value of the common stock on the date of the exchange.
The difference between the fair value of the common stock of $1,965,000 and the
face value of the debt of $600,000 or $1,365,000 has been charged to current
period interest expense.
The Company's officers have advanced funds to the Company for travel related and
working capital purposes. No formal repayment terms or arrangements exist. There
were no advances due at June 30, 2006.
On July 15, 2005, the Company entered into a consulting agreement with Timpix
International Limited ("Timpix") for the consulting services of three former
Biowell employees, Drs. Jun-Jei Sheu, Ben Liang and Johnson Chen. The consulting
agreement is for the shorter of two years, or until all of the consultants have
obtained a visa to work in the placecountry-regionUnited States and execute
employment agreements with the Company. The consulting agreement shall
automatically renew for one year periods until terminated. Pursuant to the
consulting agreement, the Company is obligated to pay $47,000 per month, which
is apportioned at $20,000 per month for Mr. Sheu, $15,000 per month for Mr.
Liang and $12,000 per month for Mr. Chen. In the event that either of Messrs.
Sheu, Liang or Chen becomes employed by us, the monthly consulting fee shall be
reduced accordingly. We have negotiated an agreement in principle to restructure
the Consulting Agreement, whereby, fees owed to Timpix from July 2005 through
December 2005 will be waived, and salaries for each of the three consultants
will be reduced starting January 1, 2006.
In July 2005, the Company entered into a license agreement with Biowell, whereby
the Company granted Biowell an exclusive license to sell, market, and
sub-license the Company's products in selected Asian countries. The exclusive
license for such selected territories is for an initial period of until December
31, 2010, and if Biowell meets its performance goals, the license agreement will
extend for an additional five year term. The license agreement gives Biowell the
initial rights to future anti-fraud biotechnologies developed by the Company and
also new applications for the existing technology that may be developed for the
marketplace as long as the license agreement remains in effect. In the event
F-40
that Biowell shall sub-license the products within its territories, Biowell
shall pay the Company 50% of all fees, payments or consideration or any kind
received in connection with the grant of the sublicense. Biowell is required to
pay a royalty of 10% on all net sales made and is required to meet certain
minimum annual net sales in its various territories. Cumulative royalties earned
from the period July 2005 through June 30, 2006 totaled $20,532.
F-41
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE G- RELATED PARTY TRANSACTIONS (continued)
On March 29, 2006, and April 13, 2006, the Company borrowed $200,000 in the
aggregate, at a rate of 7.5% per annum, from BioCogent, Ltd., ("BioCogent"), an
entity controlled by the Company's President and Chief Executive Officer. These
loans were due and payable upon the earlier to occur of (1) the close of
business on June 30, 2006, or (2) the closing of the issuance and sale by the
Company of its securities for gross proceeds of at least $250,000. These loans
were paid in full as of June 30, 2006.
NOTE H - COMMITMENTS AND CONTINGENCIES
Employment and Consulting Agreements
The Company has consulting agreements with outside contractors, certain of whom
are also Company stockholders. The Agreements are generally month to month.
On July 15, 2005, we entered into a consulting agreement with Timpix for the
consulting services of three former Biowell employees, Drs. Jun-Jei Sheu, Ben
Liang and Johnson Chen. The consulting agreement is for the shorter of two
years, or until all of the consultants have obtained a visa to work in the
United States and execute employment agreements with us. Such consulting
agreement shall automatically renew for one year periods until terminated.
Pursuant to the consulting agreement, we shall pay $47,000 per month, which is
apportioned at $20,000 per month for Mr. Sheu, $15,000 per month for Mr. Liang
and $12,000 per month for Mr. Chen. In the event that either of Messrs. Sheu,
Liang or Chen becomes employed by us, the monthly consulting fee shall be
reduced accordingly. We have negotiated an agreement in principle to restructure
the Consulting Agreement, whereby, fees owed to Timpix from July 2005 through
December 2005 will be waived, and salaries for each of the three consultants
will be reduced starting January 1, 2006.
Litigation
On or about November 24, 2004, Oceanic Consulting, placecountry-regionS.A. filed
a complaint against the Company in the Superior Court of the State of New York.
The Complaint alleges a breach of contract. The Company and the Plaintiff
settled the dispute and the Company recorded the settlement amount as of June
30, 2006.
On or about January 10, 2005, Stern & Co. filed a complaint against the Company
in the placecountry-regionUnited States District Court for the Southern District
of New York. The Complaint alleges a breach of contract. Subsequent to the date
of the financial statements, the Company and the Plaintiff settled the dispute
and the Company have recorded the settlement amount as of June 30, 2006.
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us for $13,000 in the Superior Court of New Jersey,
placePlaceNameMiddlesex PlaceTypeCounty. The Company settled this matter in May
2006.
On or about January 12, 2006, James Paul Brown, a former consultant to the
Company filed a complaint against the Company in the Superior Court of the State
of placeStateCalifornia. The Complaint alleges a breach of contract. Subsequent
to the date of the financial statements, the Company and the Plaintiff settled
the dispute and the Company have recorded the settlement amount as of June 30,
2006.
In January 2006, a former employee of the Company filed a complaint alleging
wrongful termination against the Company. The former employee is seeking
$230,000 in damages. The Company believes that it has meritorious defenses to
the plaintiff's claims and intends to vigorously defend itself against the
Plaintiff's claims. Management believes the ultimate outcome of this matter will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
F-42
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE H - COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
On or about April 4, 2006, the Company filed a complaint against Paul Reep,
Adrian Butash, John Barnett, Chanty Cheang, Jaime Cardona (former Company
employees and officers), and Angela Wiggins ( a former consultant to the
Company) in the placecountry-regionUnited States District Court for the Central
District of placeStateCalifornia . The Company has asked the court to make a
judicial determination that an agreement, which the Company did not authorize
and which is the basis of previously disclosed litigation against the Company by
Paul Reep, a former employee of the Company, and a new action filed by former
employees of the Company as set forth in the subsequent paragraph, is invalid
and unenforceable. This matter is in its early stages.
On or about April 17, 2006, former employees of the Company filed a complaint
against the Company and certain of its current officers and Directors in Los
placePlaceNameAngeles PlaceTypeCounty Superior Court. The Complaint alleges a
breach of contract, violations of California Labor Code and wrongful termination
and is seeking $950,000 in specified damages, plus fees and costs. The complaint
alleges a breach of contract. The Company believes that it has meritorious
defenses to the plaintiff's claims and intends to vigorously defend itself
against the Plaintiff's claims. Management believes the ultimate outcome of this
matter will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
The Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity.
Registration of Company's Shares of Common Stock
Until the Company successfully completes its pending registration statement on
SEC Form SB-2, the Company is subject to liquidated damages (see Notes C and F).
In connection with the $ 1,465,000 and $ 7,371,000 million convertible debt
financing during the quarters ended December 31, 2004 and March 31, 2005,
respectively, , the Company was obligated to deliver registered shares
underlying the convertible notes and warrants by July 2005 (see Note C). Since
the registration was not effective by July 2005, the Company has been accruing
and charging to operations the stipulated liquidated damages in shares of
Company stock accruing at the rate of 3.5% per month on the face value of the
previously issued convertible notes. During the nine months ended June 30, 2006,
the Company has paid and charged to operations penalties of $773,958 in the form
of unregistered shares of its common stock to the former note holders, and has
accrued and charged to operations an additional $1,547,910 representing unpaid
penalties as of June 30, 2006
F-43
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE H - COMMITMENTS AND CONTINGENCIES (continued)
Matters Voluntarily Reported to the SEC and Securities Act Violations
We previously disclosed that we were investigating the circumstances surrounding
certain issuances of 8,550,000 shares to employees and consultants in July 2005
(see Note G), and have engaged our new outside counsel to conduct this
investigation. We have voluntarily reported our current findings from the
investigation to the SEC, and we have agreed to provide the SEC with further
information arising from the investigation. We believe that the issuance of
8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of the Board of Directors. These former officers received a total of
3,000,000 of these shares. In addition, it appears that the 8,000,000 shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance with the Securities Act of 1933, as amended. Our investigation is
continuing. The members of our management who effectuated the stock issuances
that are being examined in the investigation no longer work for us. We believe
that we may incur significant costs and expenses in continuing this
investigation. In the event that any of the exemptions from registration with
respect to the issuance of the Company's common stock under federal and
applicable state securities laws were not available, the Company may be subject
to claims by federal and state regulators for any such violations. In addition,
if any purchaser of the Company's common stock were to prevail in a suit
resulting from a violation of federal or applicable state securities laws, the
Company could be liable to return the amount paid for such securities with
interest thereon, less the amount of any income received thereon, upon tender of
such securities, or for damages if the purchaser no longer owns the securities.
As of the date of these financial statements, the Company is not aware of any
alleged specific violation or the likelihood of any claim. There can be no
assurance that litigation asserting such claims will not be initiated, or that
the Company would prevail in any such litigation.
The Company is unable to predict the extent of its ultimate liability with
respect to any and all future securities matters. The costs and other effects of
any future litigation, government investigations, legal and administrative cases
and proceedings, settlements, judgments and investigations, claims and changes
in this matter could have a material adverse effect on the Company's financial
condition and operating results
F-44
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
The accompanying financial statements for the three and nine months ended June
30, 2006 have been restated for the purpose of correcting errors in accounting
for and the disclosing the issuance by the Company of warrants to acquire the
Company's common stock.
Accordingly, the Company restated the financial statements as of and for the
three and nine months ended June 30, 2006 by disclosing the effect of these
errors in this Form 10-QSB/A.
For both the three and nine months ended June 30, 2006 Condensed Consolidated
Income Statement restatement is to:
- Reclass fair value of previously issued warrants from interest
expense to additional paid in capital of $1,584,614
- Adjust for fair value of warrants issued to Additional Paid in
Capital
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Balance sheet as of
June 30, 2006:
(As restated) (As reported)
ASSETS $ 11,693,826 $ 11,693,826
============== ==============
LIABILITIES AND DEFICIENCY IN
STOCKHOLDERS' EQUITY
Total current liabilities 5,091,278 5,091,278
Debt derivative and warrant liabilities 5,698,286 5,698,286
Convertible notes payable 3,306,371 3,306,371
Deficiency in Stockholders' Equity:
Preferred stock 6 6
Common stock 118,582 118,582
Common stock subscription (200,000) (200,000)
Additional paid in capital 81,997,006 81,860,606
Deficit accumulated during development (84,317,703) (84,181,303)
stage -------------- --------------
Total Liabilities and Deficiency in $ 11,693,826 $ 11,693,826
Stockholders' Equity ============== ==============
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Income Statement as
of June 30, 2006:
- Adjust for effect of warrant valuation change of $4,355,942 reported
in previous restated 10-QSB
- Adjustment for reclassification of initial valuation of previously
issued warrants from interest expense to additional paid in capital
- Increase in selling and administration costs of $386,739
F-45
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
For the Three Months Ended June For the Nine Months Ended June 30,
30, 2006 2006
(As Restated) (As Reported) (As Restated) (As Reported)
NET LOSS FROM OPERATIONS $ (1,914,530) $ (1,527,791) $ (5,484,519) $ (6,051,530)
Net gain/(loss) on revaluation of
warrant liability 3,493,961 2,337,263 14,250,621 18,606,563
Other income (expense) 8,483 8,483 17,976 17,976
Interest income (expense) (826,827) (826,827) (3,177,229) (9,117,785)
----------------- ----------------- ----------------- -----------------
Net Income (Loss) $ 761,087 $ (5,611) $ 5,606,849 $ 3,458,485
================= ================= ================= =================
Net income (loss) per common share-basic $ 0.01 $ (0.00) $ 0.05 $ 0.03
================= ================= ================= =================
Net Income (Loss) per common share-diluted $ 0.01 $ N/A $ 0.03 $ 0.02
================= ================= ================= =================
Weighted average shares outstanding-basic 118,582,385 116,483,044 115,852,521 115,852,521
Weighted average shares
outstanding-Diluted 177,501,849 116,533,352 181,716,985 181,716,985
The resulting effect to the Cash Flow restatement is to:
- Increase profit for the nine months ended June 30, 2006 by $1,584,614
as described above
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Statement of Cash
Flows for the nine month period ended June 30, 2006.
Consistent with the original summary presentation, the following is a
reconciliation of the Company's restatement of the Condensed Consolidated
Statement of Cash Flows for the periods ended March 31, 2006. See the full
Condensed Consolidated Statement of Cash Flows for the periods ended March 31,
2006 for additional details.
F-46
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE I - RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS (continued)
For the Nine Months Ended June 30,
2006
(As Restated) (As Reported)
Cash Flows from operating
activities:
Net income $ 5,606,849 $ 3,458,485
Summary of adjustments to reconcile
net loss to net cash (used in)
operating activities:
Change in fair value of warrant
liabilities (14,250,521) (10,118,917)
Other operating activities - see
Cash Flow statement for full details 7,516,049 4,353,766
-------------- --------------
Net cash (used in) operating
activities (2,306,666) (2,306,666)
Cash flows from investing
activities:
- see Cash Flow statement for full
details
Net cash (used in) investing
activities (35,851) (35,851)
Cash flows from financing
activities:
- see Cash Flow statement for full
details
Proceeds from loans 4,242,500 4,242,500
-------------- --------------
Net cash provided by financing
activities
Increase (decrease) in cash and cash
equivalents 1,899,983 1,899,983
Cash and cash equivalents, 31,190
beginning of period
31,1901 31,1901
-------------- --------------
Cash and cash equivalents, end of $ 1,931,173 $ 1,931,173
period
$ 77,715 $ 77,715
============== ==============
F-47
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE J - RESTATEMENT OF JUNE 30 2005 QUARTERLY FINANCIAL STATEMENTS
The accompanying financial statements for the three and nine months ended June
30, 2005 has been restated to present the effects of revaluing the Company's
warrants.
Accordingly, the Company restated the financial statements as of and for the
three and nine months ended June 30, 2005 by disclosing the effect of these
errors in this Form 10-QSB.
For both the three and nine months ended June 30, 2005 Condensed Consolidated
Income Statement restatement is to: - Increase Selling, General and
Administrative for compensation expense
by $54,951.
- Reflect a net loss on the revaluation of warrants of $6,648,237 as a
result of reclassifying warrants from equity to a liability for the
nine months ended June 30, 2005 as well as the period September 16,
2002 through June 30, 2005. A net gain on the adjustment to fair
value of the warrants of $5,679,175 for the three months ended June
30, 2005.
- Net loss increased by $6,648,237 for the nine months ended June 30,
2005 as a result of the combination of factors described above. Net
loss for the three months ended June 30, 2005 was reduced by
$5,624,224 to a Net Income of $2,851,151.
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Income Statement as
of June 30, 2005.
For the Three Months Ended June 30, For the Nine Months Ended June 30,
2005 2005
(As Restated) (As Reported) (As Restated) (As Reported)
Operating Expenses:
Selling general and
administrative $ 1,865,631 $ 2,659,727 $ 24,188,882 $ 22,236,607
Research and development 88,870 88,870 345,958 345,958
Depreciation and
amortization 3,160 3,160 15,187 15,187
--------------- ---------------- ------------------ ---------------
Total Operating Expenses 1,957,661 2,751,757 24,550,027 22,597,752
--------------- ---------------- ------------------ ---------------
Operating Loss (1,957,661) (2,751,757) (24,550,027) (22,597,752)
Net gain/(loss) on
revaluation of warrant
liability 5,679,175 - 16,454,929 -
Other income (expense) 241 241 3,415 3,415
Interest income
(expense) (21,557) (21,557) (32,373,143) (9,224,929)
--------------- ---------------- ------------------ ---------------
Net Income (Loss) $ 3,700,198 $ (2,773,073) $ (40,464,827) $ (31,819,266)
=============== ================ ================== ===============
Net income (loss) per
common share-basic $ 0.06 $ (0.04) $ (0.83) $ (0.65)
=============== ================ ================== ===============
Weighted average shares 66,308,115 66,298,115 48,810,559 48,806,398
outstanding-basic
Net income per common
share-fully diluted $ 0.04
===============
Weighted average shares
outstanding-fully diluted 109,223,832
F-48
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE I - RESTATEMENT OF JUNE 30, 2005 QUARTERLY FINANCIAL STATEMENTS (continued)
The result of the Cash Flow restatement is to:
- Increase loss for the nine months June 30, 2005 by $8,645,561 as
described above
- Reflect the $12,086,901 warrant valuation and the $100,000
compensation expense revision within operating activities
- Reflect $849,460 in common stock, subscription and Additional Paid in
Capital revisions - see the summarized Other Operating Activities
items within operating activities below
- Net cash flow from operating activities decreased by $749,640
primarily as a result of equity revisions involving stock
subscriptions as described in the above balance sheet restatement
- Net cash flow from financing activities increased by $749,640 as a
result of the combination of factors described above. See preceding
comment.
The changes in reported amounts are summarized in the following reconciliations
of the Company's restatement of the Condensed Consolidated Statement of Cash
Flows for the nine month period ended June 30, 2005.
Consistent with the original summary presentation, following is a reconciliation
of the Company's restatement of the Condensed Consolidated Statement of Cash
Flows for the periods ended June 30, 2005. See the full Condensed Consolidated
Statement of Cash Flows for the periods ended June 30, 2005 for additional
details.
For the Nine Months Ended June 30, 2005
(As Restated) (As Reported)
Cash Flows from operating
activities:
Net loss from operating
activities $ (40,464,827) $ (31,819,266)
Summary of adjustments to
reconcile net loss to net cash
(used in) operating activities:
Change in fair value of
warrant liabilities 6,693,285 -
Other operating activities -
see Cash Flow statement for
full details 25,784,772 20,920,732
-------------------- ------------------
Net cash (used in) operating
activities (7,986,770) (10,898,534)
-------------------- ------------------
Cash flows from investing
activities:
- see Cash Flow statement for
full details
Net cash (used in) investing
activities (4,347) (37,638)
-------------------- ------------------
F-49
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2006
(Unaudited)
NOTE I - RESTATEMENT OF JUNE 30, 2005 QUARTERLY FINANCIAL STATEMENTS (continued)
For the Nine Months Ended June 30, 2005
(As Restated) (As Reported)
-----------------------------------------
Cash flows from financing
activities:
- see Cash Flow statement for
full details
Proceeds from loans 9,181,750 12,126,805
----------------- ----------------
Net cash provided by financing
activities
Increase (decrease) in cash and
cash
equivalents 1,190,633 1,190,633
Cash and cash equivalents,
beginning of year 1,832 1,832
----------------- ----------------
Cash and cash equivalents, end
of year $ 1,192,465 $ 1,192,465
================= ================
F-50
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Applied DNA Sciences, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Applied
DNA Sciences, Inc. (a development stage company) as of September 30, 2005 and
the related consolidated statements of losses, deficiency in stockholders'
equity, and cash flows for each of the two years in the period ended September
30, 2005 and the period September 16, 2002 (date of inception) through September
30, 2005. 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 of
the Public Company Accounting Oversight Board (PCAOB) (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, 2005 and the
results of its operations and its cash flows for each of the two years in the
period ended September 30, 2005 and the period September 16, 2002 (date of
inception) through September 30, 2005 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 K 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.
As discussed in Note L, the Company has restated the consolidated
balance sheet as of September 30, 2005 and the related consolidated statements
of losses, deficiency in stockholders' equity, and cash flows for the year ended
September 30, 2005 and the period September 16, 2002 (date of inception) through
September 30, 2005.
/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
Russell Bedford Stefanou Mirchandani LLP
McLean, Virginia
October 21, 2005, except for Note K, as to which the date is November 30, 2005
and Note M, as to which date is September 15, 2006
F-51
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2005
RESTATED
ASSETS
Current Assets:
Cash $ 31,190
Accounts receivable and advances 12,429
---------------
Total Current Assets 43,619
Property, Plant and Equipment (Note A) 12,750
Less: accumulated depreciation (4,686)
---------------
Total Property, Plant and Equipment 8,064
Other Assets:
Deposits 14,262
Intangible assets:
Patents (net of accumulated amortization of $11,764) (Note B) 22,493
Intellectual Property (net of accumulated amortization of $336,818) (Note B) 9,094,082
---------------
Total Other Assets 9,130,837
---------------
$ 9,182,520
===============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities (Note C) $ 2,570,119
Note payable- Related Party (Note E) 410,429
---------------
Total Current Liabilities 2,980,548
Warrant Liability (Note D) 13,673,574
Commitments and contingencies (Note J)
Deficiency In Stockholders' Equity : (Note F)
Convertible Preferred Stock, par value $0.001 per share; 10,000,000 shares
authorized; 60,000 shares issued and outstanding at September 30, 2005 6
Common Stock, par value $0.001 per share; 250,000,000 authorized;
112,230,392 shares issued and outstanding at September 30, 2005 112,230
Additional paid in capital 82,320,715
Common stock subscribed 20,000
Deficit accumulated during development stage (89,924,553)
---------------
Total deficiency in stockholders' equity (7,471,602)
Total liabilities and deficiency in stockholders' equity $ 9,182,520
===============
See the accompanying notes to the financial statements
F-52
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENTS OF LOSSES
For the Period
September 16, 2002
For the Year Ended For the Year Ended (Date Of Inception)
September 30, September 30, through September 30,
2005 2005
RESTATED 2004 RESTATED
--------------------- ----------------------- -------------------------
Operating expenses:
General and administrative $ 50,714,017 $ $17,341,563 $ 71,535,604
Research and Development 638,873 238,535 877,408
Depreciation and Amortization 356,266 3,161 359,427
---------------------- ---------------------- ---------------------
Total expenses 51,709,156 17,583,259 72,772,439
---------------------- ---------------------- ---------------------
Loss from operations (51,709,156) (17,583,259) (72,772,439)
---------------------- ---------------------- ---------------------
Net gain/(loss) on revaluation of warrant liability 16,700,990 - 16,700,990
Other income(expense) 4,957 1,385 31,342
Interest (expense) (32,106,310) (1,776,385) (33,884,446)
Income (taxes) benefit - - -
--------------------- ---------------------- ---------------------
Net loss $ (67,109,519) $ (19,358,259) $ (89,924,553)
===================== ====================== =====================
Basic and diluted loss per common share (Note I) $ (1.05) $ (0.93) (2.53)
===================== ====================== =====================
Weighted average common shares outstanding 63,917,009 20,819,700 35,590,871
===================== ====================== =====================
See the accompanying notes to the financial statements
F-53
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Issuance of common stock
to Founders in exchange
for services on September
16, 2002 at $.01 per share - - 100,000 $ 10 $ 990 $ - $ - $ - $ 1,000
Net Loss - - - - - - - (11,612) (11,612)
--------- --------- ---------- ---------- ---------- --------- ----------- ---------- ---------
Balance at September 30, 2002 - $ - 100,000 $ 10 $ 990 $ - $ - $ (11,612) $(10,612)
========= ========= ========== ========== ========== ========= =========== ========== =========
Issuance of common stock in
connection with merger with
Prohealth Medical Technologies,
Inc on October 1, 2002 - - 10,178,352 1,015 - - - - 1,015
Cancellation of Common stock
in connection with merger with
Prohealth Medical
Technologies, Inc on October
21, 2002 - - (100,000) (10) (1,000) - - - (1,010)
Issuance of common stock in
exchange for services in
October 2002 at $ 0.65 per
share - - 602,000 60 39,070 - - - 39,130
Issuance of common stock in
exchange for subscription in
November and December 2002
at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - -
Cancellation of common stock
in January 2003 previously
issued in exchange for
consulting services - - (836,000) (84) (54,264) - 54,340 - (8)
Issuance of common stock in
exchange for licensing services
valued at $ 0.065 per share in
January 2003 - - 1,500,000 150 97,350 - - - 97,500
Issuance of common stock in
exchange for consulting
services valued at $ 0.13 per
share in January 2003 - - 586,250 58 76,155 - - - 76,213
Issuance of common stock in
exchange for consulting
services at $ 0.065 per share
in February 2003 - - 9,000 1 584 - - - 585
Issuance of common stock to
Founders in exchange for
services valued at $0.0001 per
share in March 2003 - - 10,140,000 1,014 - - - - 1,014
Issuance of common stock in
exchange for consulting
services valued at $2.50 per
share in March 2003 - - 91,060 10 230,624 - - - 230,634
See accompanying notes to the financial statements
F-54
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Issuance of common stock in
exchange for consulting services
valued at $ 0.065 per share in
March 2003 - - 6,000 1 389 - - - 390
Common stock subscribed in
exchange for cash at $1 per
share in March 2003 - - - - 18,000 - - - 18,000
Common stock issued in
exchange for consulting
services at $ 0.065 per
share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900
Common stock issued in
exchange for cash at $ 1.00 per
share on April 9, 2003 - - 18,000 2 - - - - 2
Common stock issued in
exchange for consulting services
at $ 0.065 per share on April 9,
2003 - - 9,000 1 584 - - - 585
Common stock issued in
exchange for consulting services
at $ 2.50 per share on April 23,
2003 - - 5,000 1 12,499 - - - 12,500
Common stock issued in
exchange for consulting services
at $ 2.50 per share, on June 12,
2003 - - 10,000 1 24,999 - - - 25,000
Common stock issued in
exchange for cash at $ 1.00 per
share on June 17, 2003 - - 50,000 5 49,995 - - - 50,000
Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 27, 2003 - - - - - 24,000 - - 24,000
Common stock retired in
exchange for note payable
at $0.0118 per share,
on June 30, 2003 - - (7,500,000) (750) 750 - - - -
Common stock issued in
exchange for consulting services
at $0.065 per share, on June 30,
2003 - - 270,000 27 17,523 - - - 17,550
Common stock subscribed in
exchange for cash at $ 1.00 per
share pursuant to private
placement on June 30, 2003 - - - - - 10,000 - - 10,000
Common stock subscribed in
exchange for cash at $ 2.50 per
share pursuant to private
placement on June 30, 2003 - - - - - 24,000 - - 24,000
Common stock issued in
exchange for consulting services
at approximately $2.01 per
share, July 2003 - - 213,060 21 428,798 - - - 428,819
See accompanying notes to the financial statements
F-55
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock canceled in July
2003, previously issued for
services rendered at $2.50 per
share - - (24,000) (2) (59,998) - - - (60,000)
Common stock issued in
exchange for options exercised
at $1.00 in July 2003 - - 20,000 2 19,998 - - - 20,000
Common stock issued in
exchange for exercised of
options previously subscribed at
$1.00 in July 2003 - - 10,000 1 9,999 (10,000) - - -
Common stock issued in
exchange for consulting services
at approximately $2.38 per
share, August 2003 - - 172,500 17 410,915 - - - 410,932
Common stock issued in
exchange for options exercised
at $1.00 in August 2003 - - 29,000 3 28,997 - - - 29,000
Common stock issued in
exchange for consulting services
at approximately $2.42 per
share, September 2003 - - 395,260 40 952,957 - - - 952,997
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable-September 2003 - - 19,200 2 47,998 (48,000) - - -
Common stock issued in
exchange for cash at $2.50 per
share pursuant to private
placement September 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for options exercised
at $1.00 in September 2003 - - 95,000 10 94,991 - - - 95,001
Common stock subscription
receivable reclassification
adjustment - - - - - - 2,600 - 2,600
Common Stock subscribed to
at $2.50 per share in September
2003 - - - - - 300,000 - - 300,000
Net Loss for the year
ended September 30, 2003 - - - - - - - (3,445,164) (3,445,164)
--------- --------- ---------- ---------- ---------- --------- --------- ----------- ----------
Balance at September 30, 2003 - $ - 17,811,082 $ 1,781 $2,577,568 $ 300,000 $ - $(3,456,776) $ (577,427)
========= ========= ========== ========== ========== ========= ========= =========== ==========
See accompanying notes to the financial statements
F-56
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Preferred shares issues in
exchange for services at $25.00
per share, October 2003 15,000 15 - - - - - - 15
Common stock issued in
exchange for consulting services
at approximately $2.85 per
share, October 2003 - - 287,439 29 820,389 - - - 820,418
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable-October 2003 - - 120,000 12 299,988 (300,000) - - -
Common stock canceled in
October 2003, previously issued
for services rendered at $2.50
per share - - (100,000) (10) (249,990) - - - (250,000)
Common stock issued in
exchange for consulting services
at approximately $3 per share,
November 2003 - - 100,000 10 299,990 - - - 300,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, November, 2003 - - 100,000 10 249,990 - - - 250,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to private
placement, December, 2003 - - 6,400 1 15,999 - - - 16,000
Common stock issued in
exchange for consulting services
at approximately $2.59 per
share, December 2003 - - 2,125,500 213 5,504,737 - - - 5,504,950
Common Stock subscribed to
at $2.50 per share in Dec 2003
- - - - - 104,000 - - 104,000
Beneficial conversion feature
relating to notes payable - - - - 1,168,474 - - - 1,168,474
Beneficial conversion feature
relating to warrants - - - - 206,526 - - - 206,526
Adjust common stock par value
from $0.0001 to $0.50 per share,
per amendment of articles dated
Dec 2003 - - - 10,223,166 (10,223,166) - - - -
Common Stock issued pursuant
to subscription at $2.50 share in
Jan 2004 - - 41,600 20,800 83,200 (104,000) - - -
Common stock issued in
exchange for consulting services
at $2.95 per share, Jan 2004 - - 13,040 6,520 31,948 - - - 38,468
Common stock issued in
exchange for consulting services
at $2.60 per share, Jan 2004 - - 123,000 61,500 258,300 - - - 319,800
See accompanying notes to the financial statements
F-57
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting services
at $3.05 per share, Jan 2004 - - 1,000 500 2,550 - - - 3,050
Common stock issued in
exchange for employee services
at $3.07 per share, Feb 2004 - - 6,283 3,142 16,147 - - - 19,289
Common stock issued in
exchange for consulting services
at $3.04 per share, Mar 2004 - - 44,740 22,370 113,640 - - - 136,010
Common Stock issued for
options exercised at $1.00 per
share in Mar 2004 - - 55,000 27,500 27,500 - - - 55,000
Common stock issued in
exchange for employee services
at $3.00 per share, Mar 2004 - - 5,443 2,722 13,623 - - - 16,345
Common stock issued in
exchange for employee services
at $3.15 per share, Mar 2004 - - 5,769 2,885 15,292 - - - 18,177
Preferred shared converted to
common shares for consulting
services at $3.00 per share,
Mar 2004 (5,000) (5) 125,000 62,500 312,500 - - - 374,995
Common stock issued in
exchange for employee services
at $3.03 per share, Mar 2004 - - 8,806 4,400 22,238 - - - 26,638
Common Stock issued pursuant
to subscription at $2.50 per
share in Mar. 2004 - - 22,500 11,250 (9,000) - - - 2,250
Beneficial Conversion Feature
relating to Notes Payable - - 122,362 - - - 122,362
Beneficial Conversion Feature - -
relating to Warrants - - 177,638 - - - 177,638
Common stock issued in
exchange for consulting services
at $2.58 per share, Apr 2004 - - 9,860 4,930 20,511 - - - 25,441
Common stock issued in
exchange for consulting services
at $2.35 per share, Apr 2004 - - 11,712 5,856 21,667 - - - 27,523
Common stock issued in
exchange for consulting services
at $1.50 per share, Apr 2004 - - 367,500 183,750 367,500 - - - 551,250
Common stock returned to
treasury at $0.065 per share,
April 2004 - - (50,000) (25,000) 21,750 - - - (3,250)
Preferred stock converted to
common stock for consulting
services at $1.01 per share in
May 2004 (4,000) (4) 100,000 50,000 51,250 - - - 101,246
Common stock issued per
subscription May 2004 - - 10,000 5,000 (4,000) - (1,000) - -
See accompanying notes to the financial statements
F-58
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting
services at $0.86 per
share in May 2004 - - 137,000 68,500 50,730 - - - 119,230
Common stock issued in
exchange for consulting
services at $1.15 per
share in May 2004 - - 26,380 13,190 17,147 - - - 30,337
Common stock returned to
treasury at $0.065 per
share, Jun 2004 - - (5,000) (2,500) 2,175 - - - (325)
Common stock issued in
exchange for consulting
services at $0.67 per
share in June 2004 - - 270,500 135,250 45,310 - - - 180,560
Common stock issued in
exchange for consulting services
at $0.89 per share in June 2004 - - 8,000 4,000 3,120 - - - 7,120
Common stock issued in
exchange for consulting services
at $0.65 per share in June 2004 - - 50,000 25,000 7,250 - - - 32,250
Common stock issued pursuant
to private placement at $1.00
per share in June 2004 - - 250,000 125,000 125,000 - - - 250,000
Common stock issued in
exchange for consulting services
at $0.54 per share in July 2004 - - 100,000 50,000 4,000 - - - 54,000
Common stock issued in
exchange for consulting services
at $0.72 per share in July 2004 - - 5,000 2,500 1,100 - - - 3,600
Common stock issued in
exchange for consulting services
at $0.47 per share in July 2004 - - 100,000 50,000 (2,749) - - - 47,251
Common stock issued in
exchange for consulting
services at $0.39 per
share in August 2004 - - 100,000 50,000 (11,000) - - - 39,000
Preferred stock converted
to common stock for
consulting services at
$0.39 per share in August 2004 (2,000) (2) 50,000 25,000 (5,500) - - - 19,498
Common stock issued in
exchange for consulting
services at $0.50 per
share in August 2004 - - 100,000 50,000 250 - - - 50,250
Common stock issued in
exchange for consulting
services at $0.56 per
share in August 2004 - - 200,000 100,000 12,500 - - - 112,500
Common stock issued in
exchange for consulting
services at $0.41 per
share in August 2004 - - 92,500 46,250 (8,605) - - - 37,645
Common stock issued in
exchange for consulting
services at $0.52 per
share in September 2004 - - 1,000,000 500,000 17,500 - - - 517,500
See accompanying notes to the financial statements
F-59
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting
services at $0.46 per
share in September 2004 - - 5,000 2,500 (212) - - - 2,288
Common stock issued pursuant
to subscription at $0.50 per
share in September 2004 - - 40,000 20,000 - - - - 20,000
Preferred shares converted to
common stock for consulting
services at $0.41 per share in
September 2004 (4,000) (4) 100,000 50,000 4,000 - - - 53,996
Preferred shares issued in
exchange for service at $25 per
share in September 2004 60,000 6 - - 1,499,994 - - - 1,500,000
Fair value of 2,841,000 warrants
issued to non-employees and
consultants for services rendered
at approximately $.71 per warrant
in September 2004 - - - - 2,019,862 - - - 2,019,862
Net Loss - - - - - - - (19,358,258) (19,358,258)
--------- ------ ---------- ----------- ----------- -------- -------- ------------ ------------
Balance at September 30, 2004 60,000 $ 6 23,981,054 $11,990,527 $ 6,118,993 $ - $(1,000) $(22,815,034) $(4,706,508)
========= ====== ========== =========== =========== ======== ======== ============ ============
See accompanying notes to the financial statements
F-60
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common stock issued in
exchange for consulting services
at $0.68 per share in October
2004 - - 200,000 100,000 36,000 - - - 136,000
Common stock returned
to treasury at $0.60
per share, Oct 2004 - - (1,069,600) (534,800) (107,297) - - - (642,097)
Common stock issued in
exchange for consulting services
at $0.60 per share in Oct 2004 - - 82,500 41,250 8,250 - - - 49,500
Common Stock issued pursuant
to subscription at $0.60 share in
October 2004 - - 500,000 250,000 50,000 (300,000) - - -
Common stock issued in
exchange for consulting services
at $0.50 per share in October 2004 - - 532,500 266,250 - - - - 266,250
Common Stock issued in
exchange for debt at $0.50 share
in October 2004 - - 500,000 250,000 - - - - 250,000
Common Stock issued pursuant
to subscription at $0.45 share in
October 2004 - - 1,000,000 500,000 (50,000) (450,000) - - -
Common stock issued in
exchange for consulting services
at $0.45 per share in October 2004 - - 315,000 157,500 (15,750) - - - 141,750
Common Stock issued in
exchange for consulting
services at $0.47 share
in November 2004 - - 100,000 50,000 (3,000) - - - 47,000
Common Stock issued in
exchange for consulting
services at $0.80 share
in November 2004 - - 300,000 150,000 90,000 - - - 240,000
Common Stock issued in
exchange for consulting
services at $1.44 share
in November 2004 - - 115,000 57,500 108,100 - - - 165,600
Common Stock issued in
exchange for employee
services at $1.44 share
in November 2004 - - 5,000 2,500 4,700 - - - 7,200
See accompanying notes to the financial statements
F-61
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Warrants exercised
at $0.60 per share
in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000
Beneficial Conversion discount
relating to Notes Payable - - - - 1,465,000 - - - 1,465,000
Common stock issued at $0.016 per
share in exchange for note payable
in December 2004 - - 5,500,000 2,750,000 (2,661,500) - - - 88,500
Fair value of 6,063,500 warrants
issued to non employees and
consultants for services rendered
at $.52 per warrant in
October and December 2004 - - - - 3,169,052 - - - 3,169,052
Warrants exercised at $0.10 per
share in January 2005 - - 25,000 12,500 (10,000) - - - 2,500
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 1,628,789 814,395 (276,895) - - - 537,500
Warrants exercised at $0.10 per
share in January 2005 - - 17,500 8,750 (7,000) - - - 1,750
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005 - - 2,399,012 1,199,504 (407,830) - - - 791,674
Common Stock issued in
exchange for consulting
services at $1.30 per share - - 315,636 157,818 252,508 - - - 410,326
in January 2005
Fair value of warrant liability
reclassed due to registration
rights granted in February 2005 - - - - (3,108,851) - - - (3,108,851)
Common Stock issued in
exchange for consulting
services at $1.44 per share
in February 2005 - - 5,796,785 2,898,393 5,418,814 - - - 8,317,207
Fair value of warrants issued to
consultants for services rendered
at $1.31 per warrant in
February 2005 - - - - 72,017 - - - 72,017
Common stock issued in
settlement of debt at $0.50 per
share in February 2005 - - 2,930,000 1,465,000 - (125,000) - - 1,340,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 75,757 37,879 (12,879) - - - 25,000
See accompanying notes to the financial statements
F-62
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Warrants exercised at $0.10 per
share in February 2005 - - 20,000 10,000 (8,000) - - - 2,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 606,060 303,030 (103,030) - - - 200,000
Warrants exercised at $0.10 per
share in February 2005 - - 45,000 22,500 (18,000) - - - 4,500
Common Stock issued in
exchange for related party debt
at $1.31 per share in February
2005 - - 1,500,000 750,000 1,215,000 - - - 1,965,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005 - - 278,433 139,217 (47,334) - - - 91,883
Common Stock issued in
exchange for consulting services
at $1.17 per share in February
2005 - - 17,236 8,618 11,548 - - - 20,166
Common stock issued in
exchange for debt at $0.50 per
share in February 2005 - - 300,000 150,000 - - - - 150,000
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 716,500 358,250 322,425 - - - 680,675
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005 - - 10,500 5,250 4,725 - - - 9,975
Common stock issued in
exchange for debt at $0.50 per
share in March 2005 - - 13,202,000 6,601,000 - - - - 6,601,000
Common Stock issued in
exchange for consulting
services at $1.19 per share
in March 2005 - - 185,000 92,500 127,650 - - - 220,150
Options exercised at $0.60 per
share in March 2005 - - 100,000 50,000 10,000 - - - 60,000
Common Stock issued in
exchange for consulting
services at $0.98 per share
in March 2005 - - 1,675,272 837,636 804,131 - - - 1,641,767
See accompanying notes to the financial statements
F-63
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting
services at $0.92 per share
in March 2005 - - 24,333 12,167 10,219 - - - 22,386
Common Stock issued in
exchange for consulting
services at $0.99 per share
in March 2005 - - 15,000 7,500 7,350 - - - 14,850
Common stock issued in exchange
for debt at $0.50 per share
in March 2005 - - 1,240,000 620,000 - - - - 620,000
Common stock cancelled for
shares issued in exchange of
debt in March 2005 - - (500,000) (250,000) - - - - (250,000)
Common stock subscribed
Canceled in March 2005 - - - - - 750,000 - - 750,000
Common Stock issued in
exchange for consulting
services at $0.89 per share
in March 2005 - - 10,000 5,000 3,900 - - - 8,900
Adjust common stock par value
from $0.50 to $0.001 per share,
per amendment of articles dated
March 2005 - - - (32,312,879) 32,312,879 - - - -
Beneficial Conversion discount
relating to Notes Payable in
March 2005 - - - - 7,371,000 - - - 7,371,000
Stock options granted to
employees in exchange for
services rendered, at exercise
price below fair value of common
stock in March 2005 - - - - 180,000 - - - 180,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 160,000 160 127,840 - - - 128,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005 - - 40,000 40 31,960 - - - 32,000
See accompanying notes to the financial statements
F-64
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting services
at $0.75 per share in April 2005 - - 850,000 850 636,650 - - - 637,500
Common Stock issued in
exchange for consulting services
at $0.33 per share in April 2005 - - 500,000 500 164,500 - - - 165,000
Common Stock canceled during
April 2005, previously issued for
services rendered at $3.42 per
share - - (10,000) (10) (34,190) - - - (34,200)
Common Stock issued in
settlement of debt at $0.33 per
share in April 2005 - - 75,758 77 24,923 (25,000) - - -
Common Stock issued in
exchange for consulting services
at $0.68 per share in April 2005 - - 50,000 50 33,950 - - - 34,000
Proceeds received against
subscription Payable in June
2005 - - - - - 118,000 - - 118,000
Common Stock canceled in
June 2005, previously issued for
services rendered at $0.50 per
share - - (10,000) (10) (4,990) - - - (5,000)
Cancellation of previously
granted stock options granted
to employees for services
rendered, at exercise price
below fair value of common stock - - - - (180,000) - - - (180,000)
Common Stock issued in
exchange for consulting services
at $0.60 per share in July 2005 - - 157,000 157 94,043 - - - 94,200
Common Stock issued in
exchange for intellectual property
at $0.67 per share in July 2005 - - 36,000,000 36,000 24,084,000 - - - 24,120,000
Common Stock issued in
exchange for consulting
services at $0.60 per share
in July 2005 - - 640,000 640 383,360 - - - 384,000
Common Stock issued in
exchange for employee services
at $0.48 per share in July 2005 - - 8,000,000 8,000 3,832,000 - - - 3,840,000
See accompanying notes to the financial statements
F-65
APPLIED DNA SCIENCES, INC
(A development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2005
RESTATED
(Continued)
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ---------- ----------- ----------- ---------- ------------ ----------- ----------
Common Stock issued in
exchange for consulting
services at $0.94 per share
in July 2005 - - 121,985 121 168,217 - - - 168,338
Common Stock issued in
exchange for consulting
services at $0.48 per share
in August 2005 - - 250,000 250 119,750 - - - 120,000
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.62 per share
in September 2005 - - 814,158 814 501,858 - - - 502,672
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.70 per share
in September 2005 - - 391,224 391 273,466 - - - 273,857
Common Stock issued in
exchange for consulting
services at $0.94 per share
in September 2005 - - 185,000 185 173,715 - - - 173,900
Common Stock returned in
September 2005, previously
issued for services rendered at
$0.40 per share - - (740,000) (740) (453,232) 56,000 1,000 - (396,972)
Net Loss - - - - - - - (67,109,519) (67,109,519)
------ ----- ----------- -------- ----------- -------- --------- ------------- ------------
Balance as of September
30, 2005 60,000 $ 6 112,230,392 $112,230 $82,320,715 $ 20,000 $ - $(89,924,553) $(7,471,602)
====== ===== =========== ======== =========== ======== ========= ============= ============
See accompanying notes to the financial statements
F-66
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
September 16, 2002
(Date of
For the Year Ended For the Year Ended Inception)
September 30, September 30, through September
2005 2004 30, 2005
RESTATED RESTATED
---------------------------------------------------------------
Cash Flows from operating activities:
Net loss $ (67,109,519) $ (19,358,259) $ (89,924,553)
Adjustments to reconcile net loss to net cash (used
in) operating activities:
Depreciation and amortization 350,107 3,161 353,268
Organizational expenses -- -- 88,500
Preferred shares issued in exchange for services -- 1,500,000 1,500,000
Warrants issued in exchange for services rendered 7,358,568 2,019,862 9,378,430
Income attributable to re-pricing of warrants (16,700,991) 16,700,991)
Financing costs attributable to issuance of warrants 23,148,214 23,148,214
Amortization of beneficial conversion feature 8,836,000 1,625,000 10,461,000
Debt in exchange for common stock at fair market
price 1,365,000 1,365,000
Common stock issued: in exchange for services
rendered 18,176,641 10,105,382 30,574,373
Common stock issued: in exchange for intellectual
property 14,689,100 -- 14,689,100
Common stock issued in connection with penalties
pursuant to registration 776,529 -- 776,529
Common stock canceled--previously issued for services
rendered (578,270) (285,575) (863,845)
Changes in assets and liabilities:
Increase in Accounts Receivable (12,429) -- (12,429)
Security Deposits 9,297 (23,559) (14,262)
Increase in--Other Assets -- -- (13,890)
Increase (decrease) in: --
Increase in due related parties (111,943) 20,000 40,753
Accounts payable and accrued liabilities 663,748 1,301,710 2,419,457
----------------------------------------------------------------
Net cash (used in) operating activities (9,139,948) (3,092,278) (12,735,346)
Cash flows from investing activities:
Acquisition (disposal) of property and equipment, net 16,757 (29,507) (12,750)
Payments for Patent Filing (4,347) (21,351) (25,698)
----------------------------------------------------------------
Net cash provided by (used in) investing activities 12,410 (74,417) (38,448)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost -- -- 432,000
Proceeds from issuance of convertible debt 9,079,000 124,000 9,204,000
Proceeds from sale of options 102,750 87,000 343,750
Repayment of debt (24,854) (24,854)
See the accompanying notes to the financial statements.
F-67
APPLIED DNA SCIENCES, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Period
September 16, 2002
(Date of
For the Year Ended For the Year Ended Inception)
September 30, September 30, through September
2005 2004 30, 2005
RESTATED RESTATED
----------------------------------------------------------------
Net advances from (to)shareholders -- (9,504) 100,088
Proceeds from loans -- 2,750,000 2,750,000
----------------------------------------------------------------
Net cash provided by financing activities 9,156,896 2,951,496 12,804,984
----------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 29,358 (191,640) 31,190
Cash and cash equivalents, beginning of year 1,832 193,471 --
----------------------------------------------------------------
Cash and cash equivalents, end of year $ 31,190 $ 1,832 $ 31,190
================================================================
Supplemental Information:
Cash paid during the period for interest $ -- $ -- $ --
Cash paid during the year for taxes -- -- --
Non--cash disclosures:
Common stock issued for services $ 18,176,641 $ 10,105,382 $ 30,574,373
Common stock issued in exchange for intellectual
property $ 9,430,900 $ -- $ 9,430,900
Common stock issued in exchange for
previously incurred debt $ 3,109,533 $ -- $ 3,109,533
================================================================
Common stock issued for ESOP shares $ 3,960,000 $ -- $ 3,960,000
================================================================
Common stock penalty shares issued pursuant to
Pending SB--2 registration $ 776,529 $ -- $ 776,529
================================================================
Amortization of beneficial conversion feature $ 8,836,000 $ 1,625,000 $ 10,461,000
Common stock canceled--previously issued for
services rendered $ (478,270) $ (285,575) $ (763,845)
================================================================
Preferred shares issued in exchange for
service at $25 per share in September 2004 $ -- $ 1,500,000 $ 1,500,000
================================================================
Fair value of warrants issued to consultants
for services $ 7,358,568 $ 2,019,862 $ 9,378,430
================================================================
Acquisition:
Common stock retained $ -- $ 1,015
Assets acquired -- (135)
----------------------------------------
Total consideration paid $ -- $ 880
========================================
Organization expenses-- note issued in
exchange of shares retired $ -- $ 88,500
========================================
See the accompanying notes to the financial statements
F-68
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
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, 2005, the Company has accumulated losses of
$89,924,553.
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 recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
requires that four basic criteria must be met before revenue can be recognized
:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred;
(3) the selling price is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the selling prices of the
products delivered and the collectibility of those amounts. Provisions for
discounts and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
On December 17, 2003, the SEC staff released Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. The staff updated and revised the existing revenue
recognition in Topic 13, Revenue Recognition, to make its interpretive guidance
consistent with current accounting guidance, principally EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." Also, SAB 104 incorporates
portions of the Revenue Recognition in Financial Statements - Frequently Asked
Questions and Answers document that the SEC staff considered relevant and
rescinds the remainder. The company's revenue recognition policies are
consistent with this guidance; therefore, this guidance will not have an
immediate impact on the company's consolidated financial statements.
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.
F-69
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives of 3 to 5 years using the straight line method. At September 30,
2005 property and equipment consist of:
September
30, 2005
------------
Furniture $ 12,750
Accumulated depreciation 4,686
------------
Net $ 8,064
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 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.
F-70
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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. Fully diluted shares outstanding
were 112,230,392 and 23,981,054 for the years ended September 30, 2005 and 2004,
respectively.
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 3employee 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, 2005 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 G):
F-71
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
For the Period
September, 16
2002 (Date of
For The Year For The Year Inception
ended Sept 30 ended Sept 30 through
2005 2004 Sept 30,2005
---------------- ---------------- ----------------
Net loss - as reported $ (67,109,519) $ (19,358,259) $ (89,924,553)
Add: Total stock based employee
compensation expense as reported under
intrinsic value method ( APB No. 25) - - -
Deduct: Total stock based employee
compensation expense as reported under
fair value method ( APB No. 123) (1,406,350) - (1,406,350)
---------------- ---------------- ----------------
Net loss - Pro Forma $ (68,515,869) $ (19,358,259) $ (91,330,908)
================ ================ ================
Net loss attributable to common
stockholders - Pro Forma $ (68,515,869) $ (19,258,259) $ (91,330,908)
================ ================ ================
Basic (and assuming dilution) loss
per share - as reported $ (1.05) $ (0.93) $ (2.53)
================ ================ ================
Basic (and assuming dilution) loss
per share - Pro Forma $ (1.08) $ (0.93) $ (2.57)
================ ================ ================
Liquidity
As shown in the accompanying financial statements, the Company incurred a net
loss of $89,924,553 during the period September 16, 2002 (date of inception)
through September 30, 2005. The Company's current liabilities exceeded its
current assets by $2,936,929 as of September 30, 2005.
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.
F-72
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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 incurred
research and development expenses of $638,873, $238,535 and $877,408 for the
years ended September 30, 2005, September 30, 2004 and from September 16, 2002
(date of inception) through September 30, 2005, respectively. On July 12, 2005,
the Company exchanged 36 million shares of stock with a value of $24,120,000 for
intellectual property acquired from Biowell Technology, Inc.(see Note B). The
Company capitalized $9,430,900 as an intangible asset and expensed $14,689,100
to acquisition costs in the year ended September 30, 2005
Reclassifications
Certain reclassifications have been made in prior year's financial statements to
conform to classifications used in the current year.
Intangible Assets
The Company amortized its intangible assets using the straight-line method over
their estimated period of benefit. The estimated useful for patents is five
years while intellectual property uses a seven year useful life. 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
SFAS 123R. On March 31, 2004 the Financial Accounting Standards Board ("FASB")
issued its exposure draft, "Share-Based Payments", which is a proposed amendment
to SFAS 123. The exposure draft would require all share-based payments to
employees, including grants of employee stock options and purchases under
employee stock purchase plans, to be recognized in the statement of operations
based on their fair value. The FASB issued the final standard in December 2004
that is effective for small business issuers for annual periods beginning after
December 15, 2005. The Company has not yet assessed the impact of adopting this
new standard.
F-73
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
SFAS 151. In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This
Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter
4, previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company does not anticipate that
the implementation of this standard will have a material impact on its financial
position, results of operations or cash flows.
SFAS 152. In December 2004, the FASB issued SFAS No.152, "Accounting for Real
Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67"
("SFAS 152) The amendments made by Statement 152 This Statement amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also amends
FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of
Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to real
estate time-sharing transactions. The accounting for those operations and costs
is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. with
earlier application encouraged. The Company does not anticipate that the
implementation of this standard will have a material impact on its financial
position, results of operations or cash flows.
SFAS 153. On December 16, 2004, FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions (" SFAS 153"). This statement
amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. Under SFAS 153, if
a nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
NOTE B - ACQUISITION OF INTANGIBLE ASSETS
The Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets,
whereby the Company periodically test its intangible assets for impairment. On
an annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.
Biowell Technology, Inc.
On July 12, 2005, the Company acquired certain intellectual properties from
Biowell Technology, Inc. ("Biowell") through an Asset Purchase Agreement
("Agreement") in exchange for 36 million shares of the Company's restricted
common stock having an aggregate fair value at the date of issuance of
$24,120,000. The intangible assets acquired consist of proprietary DNA
anti-counterfeit trade secrets created by Biowell that are intended to protect
intellectual property from counterfeiting, fraud, piracy, product diversion and
unauthorized intrusion.
F-74
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE B - ACQUISITION OF INTANGIBLE ASSETS (continued)
The purchase price has been allocated as follows:
Amortizable intangible assets acquired is comprised of :
Developed core technologies $ 2,260,900
Developed product technologies 7,170,000
---------
Total amortizable intangible assets $ 9,430,900
Transaction costs 14,869,100
----------
Total purchase price $24,120,000
===========
In Process Research & Development
The Company concluded as of the date of acquisition, the acquired intangible
assets, consisting of developed core and product technologies had reached full
development and that it was not the intention of the Company's management to
utilize the asset in specific research and development activities as defined in
SFAS No. 2 Accounting for Research & Development Costs, As a result, the Company
determined there was no in-process research and development ("IPR& D") projects
in place related to the technology acquired , nor any future research and
development activities planned. Accordingly, there is no charge to operations
during the year ended September 30, 2005 for IPR&D in connection with the
acquisition of the assets.
Transaction costs
The amount of the purchase price that could not be allocated to acquired
identifiable intangible assets or IPR & D was $14,689,100 and was charged to
operations as a cost of the transaction during the year ended September 30,
2005.
The identifiable intangible assets acquired and their carrying value at
September 30, 2005 are:
Weighted
Gross Average
Carrying Accumulated Residual Amortization
Amount Amortization Net Value Period
(Years)
Amortizable
Intangible
Assets:
Trade secrets and
developed
technologies $ 9,430,900 $ 336,818 $ 9,094,082 - 7
Patents 34,237 11,764 22,493 - 5
----------- --------- ----------- -------- -------
Total
Amortized
Identifiable
Intangible Assets $9,465,137 $348,582 $9,116,575 - 6.99
F-75
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE B - ACQUISITION OF INTANGIBLE ASSETS
Total amortization expense charged to operations for the year ended September
30, 2005 and 2004 were $ 346,825 and $1,756 respectively.
Estimated amortization expense as of September 30, 2005 is as follows:
2006 $ 1,357,279
2007 1,357,279
2008 1,349,748
2009 1,349,271
2010 and after 3,704,998
-----------
Total $ 9,116,575
===========
NOTE C - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30, 2005 are as follows:
Accounts payable $ 345,849
Accrued consulting fees 1,202,795
Accrued taxes 260,523
Other accrued expenses (see Note E) 760,952
----------
Total $2,570,119
==========
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES
$ 1,675,000 Convertible Notes
Convertible notes payable ("Bridge Unit Offering") in quarterly installments of
interest only at 10% per annum, secured by all assets of the Company and due on
the earlier of the 9 month anniversary date of the initial closing of the
offering or the completion of any equity financing of $3,000,000 or more; the
Company, at its sole discretion may prepay principal at any time without
penalty. The Bridge Unit Offering Notes, along with accrued and unpaid interest
were converted to an aggregate of 4,988,051 shares of the Company's common
shares at a price equal to approximately $. 33 per share during the quarter
ended March 31, 2005.
$ 1,465,000 Convertible Notes
Beginning in December, 2004, the Company sold a 10% convertible debenture in the
aggregate amount of $1,465,000 in a private placement and exempt offerings to
sophisticated investors, net of costs and fees ("Convertible Notes").
The Convertible Note's terms called for the debt to automatically convert at
$.50 per share upon the filing a of a registration statement with the Securities
and Exchange Commission.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 2,930,000 shares of the
Company's common stock in February, 2005.
F-76
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 2,930,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants were issued in February, 2005 and lapse if unexercised by
February, 2010. A registration rights agreement was executed in December 2004
and consummated in February, 2005 requiring the Company to register the shares
of its common stock underlying the Convertible Notes and warrants so as to
permit the public resale thereof. The registration rights agreement provided for
the payment of liquidated damages of 3.5% of the aggregate Convertible Note
financing per month if the stipulated registration deadlines were not met. The
liquidated damages, which approximate $ 51,275 per month, may be paid, at the
Company's option, in cash or unregistered shares of the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $1,465,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in February, 2005, the debt discount
attributed to the beneficial conversion feature of $1,465,000 was charged to
interest expense in its entirety during the year ended September 30, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued a warrant in February, 2005 that has registration rights
for the underlying shares. As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet $3,845,039 and charged to operations as interest
expense. Upon the registration statement being declared effective, the fair
value of the warrant on that date will be reclassified to equity. The Company
initially valued the warrants using the Black-Scholes pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of
148.66%, (3) risk-free interest rate of 3.21%, and (4) expected life of 3 years.
In connection with the placement of the $1,465,000 of convertible notes as
described above, the Company agreed to registered shares of the Company's common
stock underlying certain previously issued and outstanding warrants that were
not subject to a registration rights agreement at the time the warrants were
issued. These warrants consist of following:
o 105,464 warrants entitling the holder to purchase 105,464 shares of the
Company's common stock at the price of $ .10 per share. These warrants
were issued in July, 2004 and lapse if unexercised by July, 2009.
o 1,602,500 warrants entitling the holder to purchase 1,602,500 shares of
the Company's common stock at the price of $ .60 per share. These
warrants were issued in October, 2003 and lapse if unexercised by
October, 2008.
As a result, the Company is required to classify the warrants as derivative
liabilities and mark then to market at each reporting date. The fair value of
the warrants that were subject to registration reclassified as liabilities from
additional paid in capital in February, 2005 totaled $3,108,851. Upon the
registration statement being declared effective, the fair value of the warrants
on that date will be reclassified to equity. The Company initially valued the
warrants using the Black-Scholes pricing model with the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 148.66%, (3) risk-free
interest rate of 3.21%, and (4) expected life of 3 years.
F-77
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
$ 7,371,000 Convertible Notes
In January and February, 2005, the Company sold a 10% convertible debenture in
the aggregate amount of $7,371,000 in a private placement and exempt offerings
to sophisticated investors, net of costs and fees ("Convertible Notes").
The Convertible Note's terms called for the debt to automatically convert at
$.50 per share upon the filing of a registration statement with the Securities
and Exchange Commission.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 14,742,000 shares of the
Company's common stock.
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 14,742,000
common shares of the Company's common stock at the price of $ .75 per share.
These warrants lapse if unexercised by February, 2010. A registration rights
agreement was executed and consummated in January, 2005 requiring the Company to
register the shares of its common stock underlying the Convertible Notes and
warrants so as to permit the public resale thereof. The registration rights
agreement provided for the payment of liquidated damages of 3.5% of the
aggregate Convertible Note financing per month if the stipulated registration
deadlines were not met. The liquidated damages, which approximate $ 257,985 per
month, may be paid, at the Company's option, in cash or unregistered shares of
the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $ 7,731,000 of the proceeds, which is equal to the intrinsic value of the
imbedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in February, 2005, 2005, the debt
discount attributed to the beneficial conversion feature of $ 7,371,000 was
charged to interest expense in its entirety during the year ended September 30,
2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued a warrant that has registration rights for the underlying
shares. As the contract must be settled by the delivery of registered shares and
the delivery of the registered shares is not controlled by the Company, pursuant
to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the net value of the warrants at
the date of issuance was recorded as a warrant liability on the balance sheet
$19,303,175 and charged to operations as interest expense. Upon the registration
statement being declared effective, the fair value of the warrant on that date
will be reclassified to equity. The Company initially valued the warrants using
the Black-Scholes pricing model with the following assumptions: (1) dividend
yield of 0%; (2) expected volatility of 152.59%, (3) risk-free interest rate of
3.67%, and (4) expected life of 5 years.
Revaluation of Warrant Liability
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company revalued the warrants issued subject to registration
rights as of September 30, 2005 using the Black-Scholes option pricing model
(see Note G). Assumptions regarding the life, the expected dividend yield and
volatility were left unchanged but the Company did apply a risk free interest
rate of 4.18%, a volatility of 155.91% and a deemed fair value of common stock
of $0.57, which was the closing price of the Company's common stock on September
30, 2005. The difference of $16,700,991 between the fair value of the warrants
as of September 30, 2005 and the previous valuation as of February , 2005 has
been recorded as a gain on revaluation of warrant liability, and included in the
accompanying consolidated financial statements.
F-78
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE E - RELATED PARTY TRANSACTIONS
At September 30, 2005, notes payable are as follows:
Note payable, unsecured, related party, payable from August 1, 2005, $410,429
right to convert to restricted stock in lieu of cash, rate of interest
2%, 160,000 shares prior to October 31, 2005 or 180,000 shares after
that date. Since September 2005, the Company has made no payments and
---------
is now in default.
Less: current portion 410,429
---------
410,429
---------
Note payable - long-term $ --
On October 18, 2005, Maureen Huppe, a Company shareholder obtained a judgment in
Los Angeles County, California against Lawrence Lee, director of the Company,
for short swing profits as a result of trading Company shares. Per the judgment,
Mr. Lee is obligated to reimburse the Company $245,911 in damages plus legal
fees. In addition, the Company owes Mr. Lee $35,162 in outstanding accrued
liabilities. In offsetting the outstanding liability against the pending
reimbursement, the Company is seeking approximately $211,000 from Mr. Lee. The
Company will recognize the reimbursement upon receipt of the funds from Mr. Lee.
In February, 2005, the Company issued 1,500,000 shares of its restricted common
stock to a Company officer and Director in exchange for $600,000 of previously
incurred debt. The debt was in the form of a promissory note.
The Company valued the shares at $1.31 per share for a total of $1,965,000,
which represents the fair value of the common stock on the date of the exchange.
The difference between the fair value of the common stock of $1,965,000 and the
face value of the debt of $600,000 or $1,365,000 has been charged to current
period interest expense.
The Company's current and former officers and shareholders have advanced funds
to the Company for travel related and working capital purposes. No formal
repayment terms or arrangements exist. The amount of the advances due at
September 30, 2005 was $52,662 and is included in accounts payable and accrued
expenses (see Note C).
NOTE F - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$.001 par value per share. The Company is authorized to issue 250,000,000 shares
of common stock, with a $0.001 par value per share as the result of a
shareholder meeting conducted on February 14, 2005. Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares with a par value of $0.50. In February 2005, the
Company passed a resolution authorizing change in the par value per common
shares from $0.50 per share to $0.001 per share.
The preferred stock is convertible at the option of the holder into common stock
at the rate of twenty-five (25) shares of common for every one share of
preferred at the option of the holder .
F-79
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE F - CAPITAL STOCK (continued)
Preferred and Common Stock Transactions During the Year Ended September 30, 2003
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.
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
During the fiscal year ended September 30, 2003, the Company issued 2,369,130
shares of common stock, net of cancellation of 860,000 shares in exchange for
consulting services. The Company valued the shares issued at $2,191,227, net of
cancellation of $60,008, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In November 2002, the Company issued 876,000 shares of common stock in exchange
for subscription at approximately $ 0.065 per share.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement (see Note J). The Company valued the shares issued at
approximately $ .065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth granted the Company an option to acquire up to 8,500,000 shares of
the Company's common stock in exchange for $100,000. The option expires on
December 10, 2004. On June 30, 2003, the Company exercised its option and
acquired 7,500,000 common shares under this agreement in exchange for an $88,500
convertible promissory note payable to the former controlling owner. The Company
has an option through December 10, 2004 to acquire the remaining 1,000,000
shares from the former controlling owner in exchange for $11,500. On June 30,
2003, the Company retired the 7,500,000 shares common acquired pursuant to the
option agreement.
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
During the fiscal year ended September 30, 2003, the Company issued 154,000
shares of common stock in exchange for previously issued options to purchase the
Company's common stock at $1.00 per share.
During the fiscal year ended September 30, 2003, the Company issued 74,400
shares of common stock in exchange for cash at approximately $0.89 per share.
F-80
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE F - CAPITAL STOCK (continued)
Preferred and Common Stock Transactions During the Year Ended September 30, 2004
In October 2003, the Company issued 15,000 shares of convertible preferred stock
in exchange for services. The Company valued the shares issued at the $15 par
value and recorded the value for services when the shares were converted into
common shares as identified below.
During the fiscal year ended September 30, 2004, the Company issued 5,149,472
shares of common stock, net of cancellation of 155,000 shares, in exchange for
consulting services. The Company valued the shares issued at $8,787,315, net of
cancellation of $408,575, which represents the fair value of the services
received which did not differ materially from the value of the stock issued
During the fiscal year ended September 30, 2004, the Company issued 340,500
shares of common stock for shares previously subscribed at approximately $2.04
per share.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
During the fiscal year ended September 30 2004, the Company converted 15,000
preferred shares into 375,000 shares of common stock at $1.47 per share in
exchange for employee services valued at $549,750.
In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share
for total proceeds of $250,000 pursuant to private placement.
In September 2004, the Company issued 60,000 convertible preferred shares at
$25.00, in exchange for consulting services valued at $1,500,000.
Preferred and Common Stock Transactions During the Year Ended September 30, 2005
During the fiscal year ended September 30, 2005, the Company issued 11,040,647
shares of common stock, net of cancellation of 2,329,600 shares, in exchange for
consulting and employee services. The Company valued the shares issued at
$13,008,371, net of cancellation of $1,328,269, which represents the fair value
of the services received which did not differ materially from the value of the
stock issued
During the fiscal year ended September 30, 2005, the Company issued 1,500,000
shares of common stock for shares previously subscribed at approximately $.54
per share.
During the fiscal year ended September 30, 2005, the Company issued 267,500
shares of common stock for warrants and options exercised at approximately $0.39
per share
In October 2004, the Company issued 500,000 shares of common stock in exchange
for debt at $0.50 per share.
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
F-81
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE F - CAPITAL STOCK (continued)
In February 2005, the Company in exchange for a related party note in the
outstanding principal amount of $600,000 and as settlement for certain claims
related thereto issued 1,500,000 shares of common stock using a price of $1.31
per share. (See note E)
In July 2005, the Company issued 36 million shares in exchange for intellectual
property at approximately $0.67 per share for a total of $24,120,000. The value
of the acquired intangible assets was established at $9,430,900, with the
balance of the purchase price, or $14,689,100, charged to operations as a cost
of the transaction. (See Note B)
During the year ended September 30, 2005, the Company issued 8,550,000 shares of
its common stock without restriction to employees in exchange for services
rendered. The Company valued the shares issued at market value and charged
operations in the period the shares were issued. The Company is investigating
the circumstances surrounding the issuance of the shares and the possible
subsequent resale of certain of the shares on the open market and the
possibility of violations of securities laws (see Note J).
Until the Company successfully completes its pending registration statement on
SEC Form SB-2, the Company is subject to liquidated damages (see Note D). In
connection with the $1,465,000 and $7,371,000 million convertible debt
financing, the Company was obligated to deliver registered shares underlying the
convertible notes and warrants by July 2005. Since the registration was not
effective by July 2005, the Company has been accruing the charging to operations
the stipulated liquidated dames in shares of Company's common stock accruing at
the rate of 3.5% per month on the face value of the previously issued
convertible notes. During the year ended September 30, 2005, the Company has
paid and charged to operations penalties of $776,529 in the form of 605,382
unregistered shares of its common stock to the former note holders.
NOTE G - STOCK OPTIONS AND WARRANTS
Warrants
The Company issued options and warrants during the years ended September 30,
2005 and 2004 for consulting and employee services, fees in connection with
obtaining financing and various other services. The following table summarizes
the changes in options and warrants outstanding and the related prices for the
shares of the Company's common stock issued to shareholders of the Company.
These warrants were granted in lieu of cash compensation for services performed
or financing expenses in connection with the sale of the Company's common stock.
F-82
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
Warrants
Warrants Outstanding Exercisable
Weighted Average Weighed Weighted
Number Remaining Contractual Average Number Average
Exercise Exercise Exercise
Prices Outstanding Life (Years) Price Exercisable Price
------------- -------------- ------------------------- ----------- -------------- -------------
$0.10 105,464 3.79 $ 0.10 105,464 $ 0.10
$0.20 5,000 3.13 $ 0.20 5,000 $ 0.20
$0.50 50,000 4.02 $ 0.50 50,000 $ 0.50
$0.55 9,000,000 2.72 $ 0.55 9,000,000 $ 0.55
$0.60 9,132,000 3.63 $ 0.60 9,132,000 $ 0.60
$0.70 750,000 1.84 $ 0.70 750,000 $ 0.70
$0.75 17,727,000 4.00 $ 0.75 17,727,000 $ 0.75
$1.00 100,000 1.04 $ 1.00 100,000 $ 1.00
---------- ----------
36,869,464 36,869,464
Transactions involving warrants are summarized as follows:
Weighted Average Price
Number of Shares Per Share
Balance, September 30, 2003 383,500 $ 1.38
------------------ -----------------
Granted 4,574,753 0.58
Exercised (88,000) 1.00
Canceled or expired -- --
------------------ -----------------
Balance, September 30, 2004 4,870,253 $ 0.63
------------------ -----------------
Granted 32,873,000 0.67
Exercised (142,500) 0.10
Canceled or expired (731,289) 0.60
------------------ -----------------
Balance, September 30, 2005 36,869,464 $ 0.67
------------------ -----------------
In July 2005, the Company consummated an agreement with Trilogy Capital
Partners, Inc. and Joff Pollon ("Trilogy" and "Pollon") to provide marketing
services to the Company for a term of one year, and terminable thereafter by
either party upon 30 days prior written notice. In connection with the
agreement, the Company agreed to pay Trilogy a monthly fee of $12,500. The
Company also issued to Trilogy and Pollon warrants purchasing an aggregate of
9,000,000 shares of common stock at $0.55 per share, exercisable for a period of
three years from issuance. As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the warrants at the date of issuance was recorded as a warrant
liability of $4,117,500 and charged to operations as consulting fees.
Upon the registration statement being declared effective, the fair value of the
warrants on that date will be reclassified to equity. The Company initially
valued the warrants using the Black-Scholes pricing model with the following
assumptions: (1) dividend yield of 0%; (2) expected volatility of 155.3%, (3)
risk-free interest rate of 3.82%, and (4) expected life of 3 years.
F-83
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company revalued the warrants as of September 30, 2005 using
the Black-Scholes option pricing model. The difference between the fair value of
the warrants as of September 30, 2005 and the previous valuation as of July,
2005 has been recorded as a gain on revaluation of warrant liability, and
included in the accompanying consolidated financial statements.
During the quarter ended December 31, 2004, the Company granted 6,063,500
warrants to non employees in exchange for services and financing expenses. The
estimated fair value of the compensatory warrants granted to the non-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 from 2.47% to 3.53%, a dividend yield of
0% and volatility from 65.7% to 148.7%. The amount of the expense charged to
operations for compensatory warrants granted in exchange for services and
financing expenses was $3,169,052 for the quarter ended December 31, 2004.
During the quarter ended March 31, 2005, the Company granted 55,000 warrants to
non employees in exchange for services. The estimated fair value of the
compensatory warrants granted to the non employees in exchange for services was
determined using the Black-Scholes pricing model with the following assumptions:
contractual term of 5 years, a risk free interest rate of 3.67%, a dividend
yield of 0% and volatility of 152.59%. The amount of the expense charged to
operations for compensatory warrants granted in exchange for services was
$72,017 for the quarter ended March 31, 2005
During the year ended September 30, 2004, the Company granted 2,841,000 warrants
to non-employees and consultants in exchange for the services. The estimated
fair value of the compensatory warrants granted to the non-employees in exchange
for services was determined using the Black-Scholes pricing model with the
following assumptions: contractural term of 2-5 years, a risk free rate of 3.0%
to 3.4%, a dividend yield of 0% and volatility of 65.7% to 74.78%. The amount of
expenses charged to operations in exchange for services was $2,019,862 for the
year ended September 30, 2004.
The aggregate amounts of the expense charged to operations for compensatory
warrants granted in exchange for services and financing expenses was $7,358,569
and $2,019,862, respectively, for the years ended September 30, 2005 and 2004.
Employee Stock Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
$ 0.68 3,660,000 4.75 $ 0.68 2,745,000 $ 0.68
F-84
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
Transactions involving stock options issued to employees are summarized as
follows:
Number of Weighted Average Exercise
Shares Price Per Share
Outstanding at October 1, 2004 - $ -
Granted 3,660,000 0.68
Exercised - -
Cancelled or expired - -
---------- --------
Outstanding at September 30, 2005 3,660,000 $ 0.68
The weighted-average fair value of stock options granted to employees during the
year ended September 30, 2005 and 2004 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
2005 2004
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant 3.5% N/A
date
Expected stock price volatility 85% N/A
Expected dividend payout -- --
Expected option life (in years) 5 N/A
If the Company recognized compensation cost for the non-qualified employee stock
option plan in accordance with SFAS No. 123, the Company's pro forma net loss
and net loss per share would have been $68,515,869 and $(1.08), respectively,
for the year ended September 30, 2005. There were no options issued in 2004.
During the quarter ended March 31, 2005, the Company granted an aggregate of
300,000 stock options to directors that vested immediately. The exercise prices
of the stock options granted were below the fair value of the Company's common
stock at the grant date. Compensation expense of $180,000 was charged to
operations during the period ended March 30, 2005. In the quarter ended June 30,
2005, the Company canceled the unexercised 300,000 stock options and credited
expense for the previously recorded $180,000 in compensation.
NOTE H - 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, 2005, the Company has available for federal income tax purposes
a net operating loss carryforward of approximately $72,000,000, 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. Components of deferred tax assets
as of September 30, 2005 are as follows:
F-85
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE H - INCOME TAXES (continued)
Non current:
Net operating loss carryforward $24,400,000
------------
Valuation allowance (24,400,000)
------------
Net deferred tax asset $ --
------------
NOTE I-LOSS PER SHARE
The following table presents the computation of basic and diluted losses per
share:
RESTATED
For the Year Ended For the Year Ended
September 30, 2005 September 30, 2004
-------------------- ------------------
Loss available for common shareholders $ ($67,109,519) $ (19,358,259)
-------------------- ------------------
Basic and fully diluted loss per share $ ($1.05) $ (0.93)
-------------------- ------------------
Weighted average common shares outstanding 63,917,009 20,819,700
Net loss per share is based upon the weighted average of shares of common stock
outstanding
NOTE J- COMMITMENTS AND CONTINGENCIES
Consulting Agreements
On August 6, 2004 the Company retained Giuliani Partners, on a non-exclusive
basis, to provide advice and assistance to the Company regarding issues
associated with Applied DNA's proprietary DNA embedded security. On April 8,
2005 Giuliani Partners terminated the agreement with the Company. Total
compensation paid to Giuliani Partners through September 30, 2005 was
$1,250,000.
On March 24, 2005, the Company amended its existing Cooperative Research and
Development Agreement ("CRADA") with Battelle Energy Alliance, LLC, and the
Department of Energy's National Laboratory in Idaho Falls, Idaho (the
Amendment"). The Amendment adds additional joint research projects, including
development of marker applications for textiles, inks, gasoline, and explosive
materials. Per the Amendment and at the Company's discretion, the Company can
spend up to $1,701,216 to further develop and refine selected DNA and related
applications. In November 2005, the agreement was terminated.
F-86
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE J- COMMITMENTS AND CONTINGENCIES (continued)
Litigation
In January, 2005, Stern & Co. commenced this action against the Company in the
United States District Court for the Southern District of New York. In this
action, Stern & Co. alleges that it entered into a contract with us to perform
media and investor relations for a monthly fee of $5,000 and stock options.
Stern & Co. claims that we failed to make certain payments pursuant to the
contract and seeks damages in the amount of $96,042. We answered the complaint
on May 12, 2005, denying Stern & Co.'s allegations and we asserted a number of
defenses. This action is in the early stages of discovery and we intend to
vigorously defend this matter. Management believes the ultimate outcome of this
matter will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
In November, 2004, Oceanic Consulting, S.A. commenced this action against the
Company in the Supreme Court of the State of New York, County of New York.
Oceanic Consulting, S.A. asserts a cause of action for breach of contract based
upon the allegation that we failed to make payments pursuant to a consulting
agreement. Oceanic Consulting, S.A. also asserts a causes of action in which it
seeks reimbursement of its expenses and attorneys' fees. Oceanic Consulting,
S.A. seeks damages in the amount of $137,500.00. Oceanic Consulting, S.A. moved
for a default judgment, which we have opposed based upon Oceanic Consulting,
S.A.'s failure to properly serve the complaint as well as our meritorious
defenses. Thereafter, Oceanic Consulting, S.A. agreed to withdraw its motion for
a default judgment and accepted service of our answer on May 23, 2005. We
dispute the allegations of the complaint. This action is in the early stages of
discovery and we intend to vigorously defend this matter. Management believes
the ultimate outcome of this matter will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
In April, 2005, Crystal Research Associates, LLC obtained a default judgment
against the Company for $13,000 in the Superior Court of New Jersey, Middlesex
County. We intend to move to vacate the default judgment on various grounds. We
dispute the allegations of the complaint and we intend to vigorously defend this
matter.
The Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity.
Franchising and Distribution Agreements
In connection with the acquisition of certain intellectual properties from
Biowell (see Note B) , the Company terminated the October 2002 license agreement
with Biowell, replacing it with a new license agreement granting Biowell an
exclusive license in selected Asian countries for an initial period through
December 31, 2010. If Biowell meets its performance goals, the license agreement
extends for an additional five year term. Sub-license payments due to the
Company are 50% for all fees, payments and consideration received. Biowell is
required to pay a royalty of 10% on all net sales made and is required to meet
certain minimum annual net sales in its various territories. Under this
agreement, the Company recognized $3,129 in revenues in this year ended
September 30, 2005.
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, 2005
and 2004 the Company has received the initial $0 and $25,000, as installment and
has recognized the receipt as other income in the accompanying financial
statements.
F-87
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE J- COMMITMENTS AND CONTINGENCIES (continued)
Operating Lease Commitments
The Company leases office space under operating lease in Los Angeles, California
for its corporate use from an entity controlled by significant former
shareholder, expiring in November 2006. In November 2005, the Company vacated
the Los Angeles facility to relocate to the new Stony Brook New York address
(see Note K). Total lease rental expenses for the years ended on September 30,
2005 and 2004, was $138,661 and $120,804, respectively.
Commitments for minimum rentals under non-cancelable lease at September 30, 2005
are as follows:
Year ended September 30, 2006 $ 51,562
2007 4,687
-----------
$ 56,249
Employment and Consulting Agreements
The Company has employment agreements with some of the Company's officers and
certain employees. These employment agreements provide for salaries and
benefits, including stock options. In June of 2005, an Addendum was made to
several employment agreements providing defined commitments should the Company
terminate the employee with or without cause. It is the Company's position that
the form of Addendum was not approved by the Board of Directors, and is
therefore null and void.
The Company has consulting agreements with two outside contractors to provide
marketing and financial advisory services. The Agreements are generally for a
term of 12 months from inception and renewable automatically from year to year
unless either the Company or consultant terminates such engagement by written
notice.
As part of the Biowell acquisition (see Note B), the Company entered into a
consulting agreement with Timpix International Limited for the consulting
services of three former Biowell employees, Jun-Jei Sheu, Ben Liang and Johnson
Chen. The consulting agreement is for the shorter of two years, or until all of
the consultants have obtained a visa to work in the United States and execute
employment agreements with the Company. Such consulting agreement shall
automatically renew for one year periods until terminated. Pursuant to the
consulting agreement, the Company shall pay $47,000 per month, which is
apportioned at $20,000 per month for Mr. Sheu, $15,000 per month for Mr. Liang
and $12,000 per month for Mr. Chen. In the event that either of Messrs. Sheu,
Liang or Chen becomes employed by the Company, the monthly consulting fee shall
be reduced accordingly.
Matters Voluntarily Reported to the SEC and Securities Act Violations
We previously disclosed that we were investigating the circumstances surrounding
certain issuances of 8,550,000 shares to employees and consultants in July 2005
(see Note F), and have engaged our new outside counsel to conduct this
investigation. We have voluntarily reported our current findings from the
investigation to the SEC, and we have agreed to provide the SEC with further
information arising from the investigation. We believe that the issuance of
8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of the Board of Directors. These former officers received a total of
3,000,000 of these shares. In addition, it appears that the 8,000,000 shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance with the Securities Act of 1933, as amended. Our investigation is
continuing. The members of our management who effectuated the stock issuances
that are being examined in the investigation no longer work for us. We believe
that we may incur significant costs and expenses in continuing this
investigation. In the event that any of the exemptions from registration with
respect to the issuance of the Company's common stock under federal and
F-88
applicable state securities laws were not available, the Company may be subject
to claims by federal and state regulators
F-89
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE J- COMMITMENTS AND CONTINGENCIES (continued)
for any such violations. In addition, if any purchaser of the Company's common
stock were to prevail in a suit resulting from a violation of federal or
applicable state securities laws, the Company could be liable to return the
amount paid for such securities with interest thereon, less the amount of any
income received thereon, upon tender of such securities, or for damages if the
purchaser no longer owns the securities. As of the date of these financial
statements, the Company is not aware of any alleged specific violation or the
likelihood of any claim. There can be no assurance that litigation asserting
such claims will not be initiated, or that the Company would prevail in any such
litigation.
The Company is unable to predict the extent of its ultimate liability with
respect to any and all future securities matters. The costs and other effects of
any future litigation, government investigations, legal and administrative cases
and proceedings, settlements, judgments and investigations, claims and changes
in this matter could have a material adverse effect on the Company's financial
condition and operating results
NOTE K- SUBSEQUENT EVENTS
In November 2005, the Company closed its Los Angeles facility and relocated to
Stony Brook, New York. As part of the relocation, the Company terminated many of
its Los Angeles based employees, sold excess office furnishings and terminated
its facility lease. In anticipation of future expenses related to the
relocation, the Company established a reserve , which was charged to operations
during the year ended September 30, 2005, for severed employees, lease
termination and new office relocation expenses in the amount of $451,000 (see
Note J).
In October 2005, the Company received a Notice of Termination from the Idaho
National Laboratory. The Notice gives APDN 90-day advance notice of termination.
The effective Termination date is January 23, 2006. We are exploring a
settlement and mutual release with the Idaho National Laboratory.
NOTE L - 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,
2005, the Company incurred a loss of $89,924,553. 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-90
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE M - RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its financial statements for the year ended September
30, 2005 and the period September 16, 2002 (date of inception) through September
30, 2005 to correct the following errors in the financial statements previously
filed:
o The Company did not record as a current period expense, warrants
issued to consultants and non-employees having a fair value of
$7,358,568 (see Note G)
o The Company erroneously recorded the value of shares issued to a
former Director in exchange for previously incurred debt of $1,365,000
(see Note E)
o The Company did record the fair value of warrants issued to note
holders and consultants having registration rights aggregating
$23,148,214 as a charge of operations and a liability in accordance
with EITF 00-21 (see Note D)
o The Company did not record the gain of $16,700,991 on revaluation fo
the warrant liability as of September 30, 2005 (see Note D)
The net effect of the correction of these errors was to:
o Increase the Company's reported net loss for the year ended September
30, 2005 by $14,499,139 from $52,610,380 to $67,109,529.
o Increase the Company's current liabilities as of September 30, 2005 by
$384,651 from $2,595,897 to $2,980,548
o Increase the Company's other liabilities, representing warranty
liabilities, as of September 30, 2005 by $13,673,574 from $0 to $13,
673,574
Following are reconciliations of the Company's restatement of the Consolidated
Balance Sheet as of September 30, 2005:
As of September 30, 2005
---------------------------------
(As Restated) (As Reported)
------------- -------------
ASSETS $ 9,182,520 $ 9,182,520
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Total Current Liabilities 2,980,548 2,595,897
Warrant Liability 13,673,574 -
Deficiency in Stockholders' Equity:
Preferred Stock 6 6
Common Stock 112,230 112,230
Common Stock Subscription 20,000 20,000
Additional Paid-In-Capital 82,320,715 81,879,801
Deficit Accumulated During Development Stage (89,924,553) (75,425,414)
------------- -------------
Total Stockholders' Equity (deficit) (7,471,602) 6,586,623
------------- -------------
Total Liabilities and Deficiency in Stockholders'
Equity $ 9,182,520 $ 9,182,250
F-91
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE M - RESTATEMENT OF FINANCIAL STATEMENTS (continued)
Following are reconciliations of the Company's restatement of the Consolidated
Statement of Losses for the year ended September 30, 2005 and the period
September 16, 2002 (date of inception) through September 30, 2005
For the Period September 16, 2002 (Date of
For the Year Ended September 30, 2005 Inception) Through September 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
----------------- ---------------- --------------- ------------------
Operating Expenses:
Selling general and
administrative $ 50,714,017 $ 42,662,152 $ 71,535,604 $ 63,483,689
Research and development 638,873 638,873 877,408 877,408
Depreciation and
amortization 356,266 356,266 359,427 359,427
----------------- ---------------- --------------- ------------------
Total Operating Expenses 51,709,156 43,657,291 72,772,439 64,720,524
----------------- ---------------- --------------- ------------------
Operating Loss (51,709,156) (43,657,291) (72,772,439) (64,720,524)
Net gain/(loss) on
revaluation of warrant
liability 16,700,990 - 16,700,990 -
Other income (expense) 4,957 4,957 31,342 31,342
Interest income (expense) (32,106,310) (8,958,046) (33,884,446) (10,736,232)
----------------- ---------------- --------------- ------------------
Net Income (Loss) $ (67,109,519) $ (52,610,380) $ (89,924,553) $ (75,425,414)
================= ================ =============== ==================
Gain (Loss) per common
share $ (1.05) $ (0.82) $ (2.53) $ (2.12)
================= ================ =============== ==================
(basic and assuming
dilution) Weighted average
shares outstanding 63,917,009 63,905,259 35,590,559 35,570,871
================= ================ =============== ==================
The result of the Cash Flow restatement is:
o increase the net loss by $14,499,139
o adjust the net loss to cash used in operations for the fair value of
warrants issued in connection with financing ($23,148,214); fair value
of warrants issued for services ($7,358,568); and income attributable
to warrant re-pricing ($16,700,991).
F-92
APPLIED DNA SCIENCES, INC
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE M - RESTATEMENT OF FINANCIAL STATEMENTS (continued)
Following are reconciliations of the Company's restatement of the Consolidated
Statement of Cash Flows for the year ended September 30, 2005 and the period
September 16, 2002 (date of inception) through September 30, 2005.
For the Period September 16, 2002
(Date of Inception) Through September
For the Year Ended September 30, 2005 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
--------------- --------------- --------------- ---------------
Cash Flows from operating
activities:
Net loss $ (67,109,519) $ (52,610,380) $ (89,924,553) $ (75,425,414)
Summary of adjustments to
reconcile net loss to net cash
(used in) operating activities:
Change in fair value of
warrant liabilities, net
of warrant re-pricing 6,447,223 - 6,447,223 -
Fair value of warrants issued
in exchange for services 7,358,568 - 9,378,530 -
Other operating activities -
see Cash Flow statement for
full details 44,163,780 43,494,335 61,363,454 62,684,464
Net cash (used in) operating
activities (9,139,948) (9,116,045) (12,735,346) (12,740,950)
Cash flows from investing
activities:
- see Cash Flow statement for
full details
Net cash (used in) investing
activities 12,410 (4,347) (38,448) (25,698)
Cash flows from financing
activities:
- see Cash Flow statement for
full details
Net cash provided by financing
activities 9,156,896 9,149,750 12,804,984 12,797,838
Increase (decrease) in cash
and cash
equivalents 29,358 29,358 31,190 31,190
Cash and cash equivalents,
beginning of year 1,832 1,832 - -
Cash and cash equivalents, end
of year $ 31,190 31,190 $ 31,190 31,190
F-93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers. In addition, we have entered into indemnification agreements with our
officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we have paid or will pay, in connection with the issuance and
distribution of the securities being registered:
NATURE OF EXPENSE AMOUNT
Registration fee $ 6,639.68
Accounting fees and expenses $ 50,000.00*
Legal fees and expenses $300,000.00*
Miscellaneous $ 50,000.00*
------------
TOTAL $406,639.68*
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Between October and December 2003, we sold 167.5 units for a total of $670,000,
to five accredited investors. 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. This issuance is considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933 as well as
Regulation D of the Act, and Rule 506 promulgated thereunder.
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. This issuance is considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933 as well as
Regulation D of the Act, and Rule 506 promulgated thereunder.
On November 3, 2003, we issued 100,000 shares of common stock to an employee as
a signing bonus and for sales and marketing services in lieu of salary. This
issuance is considered exempt from registration by reason of Section 4(2) of the
Securities Act of 1933.
From November 18, 2003 through December 5, 2003, we issued a total of 106,400
shares of common stock to two accredited investors in our 2003 Private Placement
of Units for total proceeds of $266,000. These issuances are considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933 as
well as Regulation D of the Act, and Rule 506 promulgated thereunder.
From December 5, 2003 through December 24, 2004, we issued a total of 275,500
shares of common stock to consultants and employees for their investor
relations, sales, marketing and advisory services. These issuances are
considered exempt from registration by reason of the Section 4(2) of the
Securities Act of 1933.
On December 17, 2003, we issued a total of 1,850,000 shares of common stock to
ten consultants in connection with our agreement with the company's investment
bankers, VC Arjent. These issuances are considered exempt from registration by
reason of the Section 4(2) of the Securities Act of 1933.
In January 2004, we issued a total of 41,600 shares of common stock at $2.50 per
share in fulfillment of a stock subscription made in December 2003 to various
consultants in exchange for administrative, marketing, financial advisory and
legal consulting services. These issuances are considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
To conserve capital, in February 2004, we issued 6,283 shares of common stock to
employees in lieu of their cash salaries. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
In March 2004, we issued 44,740 shares of common stock in exchange for
consulting services. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
In March 2004, we issued 55,000 shares of common stock for options exercised at
$1.00 per share.
In March 2004, we issued 125,018 shares of common stock in exchange for employee
services. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
In March 2004, we issued 22,500 shares of common stock at $0.10 for subscription
of warrants to be exercised. This issuance is considered exempt under Regulation
D of the Securities Act of 1933 and Rule 506 promulgated thereunder, as well as
Section 4(2) of the Act.
In March 2004, we issued 5,443 shares of common stock at $3.00 per share in
exchange for employee services valued at $16,344. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
In March 2004, we issued 5,769 shares of common stock at $3.15 per share in
exchange for employee services valued at $18,177. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
II-2
In March 2004, we issued 8,806 shares of common stock at $3.03 per share in
exchange for employee services valued at $26,639. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
In April 2004, we issued 22,500 shares of common stock at $0.10 for subscription
of warrants to be exercised. Such issuance was considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
In April 2004, we issued 9,860 shares of common stock at $2.58 per share in
exchange for employee services valued at $25,441. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
In April 2004, we issued 11,712 shares of common stock at $2.35 per share in
exchange for consulting services valued at $27,523. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
In April 2004, we issued 367,500 shares of common stock at $1.50 per share in
exchange for consulting services valued at $551,250. Such issuance was
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
In April 2004, we retired 50,000 shares of common stock previously issued for
consulting services at $0.065 per share or $3,250.
In May 2004, we issued 100,000 shares of common stock at $1.01 per share in
exchange for consulting services valued at $101,250. Such issuance was
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
In May 2004, we issued 10,000 shares of common stock at $0.10 per share in a
stock subscription for $1,000. Such issuance was considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
In May 2004, we issued 137,000 shares of common stock at $0.86 per share in
exchange for consulting services valued at $119,413. Such issuance was
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
In May 2004, we issued 26,380 shares of common stock at $1.15 per share in
exchange for consulting services valued at $30,337. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
In June 2004, we retired 5,000 shares of common stock previously issued for
consulting services at $0.065 per share or $325. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
In June 2004, we issued 270,500 shares of common stock at $0.67 per share in
exchange for consulting services valued at $180,560. Such issuance was
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
In June 2004, we issued 8,000 shares of common stock at $0.89 per share in
exchange for consulting services valued at $7,120. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
In June 2004, we issued 50,000 shares of common stock at $0.64 1/2 per share in
exchange for consulting services valued at $32,250. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
In June 2004, we sold 250,000 shares of common stock at $1.00 per share for
total proceeds of $250,000 pursuant to private placement. Such issuance was
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
On June 30, 2004, we issued 50,000 shares of common stock to an investor
relations firm as compensation for services performed on our behalf. Such
issuance was considered exempt from registration by reason of Section 4(2) of
the Securities Act of 1933.
On July 23, 2004 and August 2, 2004, we issued an aggregate of 55,000 shares of
common stock to our legal counsel as compensation for legal services performed
on our behalf. Such issuance was considered exempt from registration by reason
of Section 4(2) of the Securities Act of 1933.
II-3
From July through September 2004, we issued an aggregate of 1,550,000 shares of
common stock to certain of our officers, directors and employees as compensation
for services performed on our behalf. Such issuance was considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On September 21, 2004, we issued 100,000 shares of common stock pursuant to a
conversion by one of the holders of our convertible preferred stock. Such
issuance was considered exempt from registration by reason of Section 4(2) of
the Securities Act of 1933.
On October 1, 2004, we issued a total of 199,999 shares of common stock to
parties related to an investment banker with which we have a non-exclusive
engagement. Such issuance was considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
On October 13, 2004, we issued a total of 257,500 shares of common stock to two
consultants for financial advisory and marketing services. Such issuance was
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
On October 18, 2004, we issued a total of 347,500 shares of common stock to
previous investors as consideration for our agreement to extend our registration
commitment. Such issuance was considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
On October 19, 2004, we issued 1,000,000 shares of common stock to a single
investor for total proceeds of $500,000. Such issuance was considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
On October 26, 2004, we issued a total of 500,000 shares of common stock to
parties related to our investment banker in settlement for various breaches made
in our Placement Agent Agreement. Such issuance was considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On November 4, 2004, we issued 100,000 shares of common stock to an employee as
compensation for services previously rendered. Such issuance was considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On November 15, 2004 through December 17, 2004, we issued a total of 415,000
shares of common stock to a consultant for financial advisory services. Such
issuance was considered exempt from registration by reason of Section 4(2) of
the Securities Act of 1933.
On December 17, 2004, we issued 5,000 shares of common stock to an employee for
services previously rendered. Such issuance was considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
We sold $1,465,000 in convertible promissory notes to 13 accredited investors in
December 2004. Each promissory note was automatically convertible into shares of
our common stock, at a price of $0.50 per share, upon the closing of a private
placement for $1 million or more. In connection with the sale of the convertible
promissory notes, we issued 2,930,000 warrants to purchase shares of our common
stock. The warrants are exercisable until three years from the date of issuance
at a purchase price of $0.75 per share. This issuance is considered exempt under
Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder.
On January 4, 2005 we issued 25,000 shares of common stock related to warrant
exercises for which we received $2,500. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
On January 10, 2005, we issued 1,628,789 shares of common stock in exchange for
debt valued at $537,500. Such issuances were considered exempt from registration
by reason of Section 4(2) of the Securities Act of 1933.
On January 10, 2005, we issued 17,500 shares related to warrant exercises for
which we received $1,750. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On January 21, 2005, we issued 2,399,012 shares of common stock in exchange for
debt valued at $791,674. Such issuances were considered exempt from registration
by reason of Section 4(2) of the Securities Act of 1933.
On January 21, 2005, we issued 315,636 shares of common stock in exchange for
legal services valued at $157,818. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On February 1, 2005, we issued 75,757 shares of common stock in exchange for
debt valued at $25,000. Such issuances were considered exempt from registration
by reason of Section 4(2) of the Securities Act of 1933.
II-4
On February 3, 2005 we issued 20,000 shares of common stock related to warrant
exercises for which we received $2,000. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
On February 4, 2005, we issued 606,060 shares of common stock in exchange for
debt valued at $200,000. Such issuances were considered exempt from registration
by reason of Section 4(2) of the Securities Act of 1933.
On February 4, 2005 we issued 45,000 shares of common stock related to warrant
exercises for which we received $4,500. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
On February 4, 2005, we issued 1,500,000 shares of common stock in exchange for
debt valued at $600,000. Such issuances were considered exempt from registration
by reason of Section 4(2) of the Securities Act of 1933.
On February 10, 2005, we issued 278,433 shares of common stock in exchange for
debt valued at $91,883. Such issuances were considered exempt from registration
by reason of Section 4(2) of the Securities Act of 1933.
On February 10, 2005, we issued 17,236 shares of common stock in exchange for
financial advisory services valued at $8,618. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On February 10, 2005, we issued 300,000 shares of common stock related to the
January/February PPM subscription for which we received $150,000. Such issuances
were considered exempt from registration by reason of Section 4(2) of the
Securities Act of 1933.
On February 22, 2005, we issued 716,500 shares of common stock in exchange for
financial advisory services valued at $358,250. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On February 22, 2005, we issued 10,500 shares of common stock related to the
repricing of a previous financing valued at $3,465. Such issuances were
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
We conducted a private placement offering in January and February 2005, in which
we sold $7,371,000 of 10% Secured Convertible Promissory Notes to 61 accredited
investors. The 10% Secured Convertible Promissory Notes automatically convert
into shares of our common stock, at a price of $0.50 per share, upon the filing
of this registration statement. In connection with the private placement
offering, we have issued 15,242,000 warrants. The warrants are exercisable until
five years from the date of issuance at a purchase price of $0.75 per share.
This placement was considered exempt under Regulation D of the Securities Act of
1933 and Rule 506 promulgated thereunder and/or Section 4(2) of the Securities
Act of 1933.
On March 3, 2005, we issued 185,000 shares of common stock in exchange for
employee services valued at $111,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On March 8, 2005 we issued 100,000 shares of common stock related to warrant
exercises for which we received $60,000. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
On March 14, 2005, we issued 1,675,272 shares of common stock in exchange for
financial advisory services valued at $837,636. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On March 18, 2005, we issued 24,333 shares of common stock in exchange for legal
services valued at $12,167. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On March 29, 2005, we issued 15,000 shares of common stock in exchange for
employee services valued at $9,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On March 31, 2005, we issued 1,240,000 shares of common stock related to the
January/February PPM subscription for which we received $620,000. Such issuances
were considered exempt from registration by reason of Section 4(2) of the
Securities Act of 1933.
II-5
On March 31, 2005, we issued 1,500,000 shares of common stock related to the
January/February PPM subscription for which we received $600,000. Such issuances
were considered exempt from registration by reason of Section 4(2) of the
Securities Act of 1933.
On March 31, 2005, we issued 10,000 shares of common stock in exchange for
financial advisory services valued at $5,000. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On April 6, 2005, we issued 40,000 shares of common stock in exchange for
employee services valued at $20,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
On April 6, 2005, we issued 160,000 shares of common stock in exchange for
financial advisory services valued at $80,000. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On April 13, 2005, we issued 500,000 shares of common stock related to the
repricing of a previous financing valued at $165,000. Such issuances were
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
On April 13, 2005, we issued 850,000 shares of common stock in exchange for
financial advisory services valued at $425,000. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On April 13, 2005, we retired 10,000 shares of common stock previously issued in
exchange for financial advisory services valued at $34,200. Such issuances were
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
On April 25, 2005, we issued 75,758 shares of common stock in exchange for debt
valued at $25,000. Such issuances were considered exempt from registration by
reason of Section 4(2) of the Securities Act of 1933.
On April 29, 2005, we issued 50,000 shares of common stock in exchange for
financial advisory services valued at $25,000. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
On May 19, 2005 we issued 185,000 shares of common stock related to warrant
exchanges valued at $111,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
During the three months ended June 30, 2005, we issued 575,758 shares of common
stock in exchange for debt. We valued the shares issued at approximately $0.29
per share for a total of $165,000. Such issuances were considered exempt from
registration by reason of Section 4(2) of the Securities Act of 1933.
During the three months ended June 30, 2005, we issued 1,080,000 shares of
common stock in exchange for consulting services valued at $792,300, which
represents the fair value of the services received which did not differ
materially from the value of the stock issued. Such issuances were considered
exempt from registration by reason of Section 4(2) of the Securities Act of
1933.
During the three months ended June 30, 2005, we granted options to purchase
3,660,000 shares of our common stock pursuant to the 2005 Incentive Stock Plan.
Such issuances were considered exempt from registration by reason of Section
4(2) of the Securities Act of 1933.
In July 2005, we issued 157,000 shares of common stock in exchange for
consulting services. We valued the shares issued at approximately $0.60 per
share for a total of $94,200, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
Such issuances were considered exempt from registration by reason of Section
4(2) of the Securities Act of 1933.
In July 2005, we issued 36,000,000 shares of common stock in exchange for
intellectual property at approximately $0.67 per share for a total of
$24,120,000.
In July 2005, we issued 640,000 shares of common stock in exchange for
consulting services. We valued the shares issued at approximately $0.60 per
share for a total of $384,000, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
Such issuances were considered exempt from registration by reason of Section
4(2) of the Securities Act of 1933.
II-6
In July 2005, we issued 121,985 shares of common stock in exchange for
consulting services. We valued the shares issued at approximately $0.94 per
share for a total of $168,339, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
Such issuances were considered exempt from registration by reason of Section
4(2) of the Securities Act of 1933.
In July and August 2005, we issued a total of 8,550,000 shares of our common
stock to nine employees and consultants. Such issuances were considered exempt
from registration by reason of Section 4(2) of the Securities Act of 1933.
In July/August 2005, we issued 814,158 penalty shares pursuant to the
registration rights agreement entered into in connection with the private
placement in January and February, 2005. Pursuant to such agreement, we were
obligated to complete a stock registration by July 2005. Since the registration
statement was not effective by July 2005, we paid the required $257,985 of
liquidated damages in shares of our stock accruing at the rate of 3.5% per month
on the face value of the notes for the month of July and August 2005. We valued
the shares issued at approximately $0.62 per share for a total of $502,672. Such
issuances were considered exempt from registration by reason of Section 4(2) of
the Securities Act of 1933.
In September 2005, we issued 391,224 penalty shares pursuant to the registration
rights agreement entered into in connection with the private placement in
January and February, 2005. Pursuant to such agreement, we were obligated to
complete a stock registration by July 2005. Since the registration statement was
not effective by July 2005, we paid the required $257,985 of liquidated damages
in shares of our stock accruing at the rate of 3.5% per month on the face value
of the notes for the month of September 2005. We valued the shares issued at
approximately $0.70 per share for a total of $273,856. Such issuances were
considered exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
In September 2005, we issued 185,000 shares of common stock in exchange for
consulting services. We valued the shares issued at approximately $0.94 per
share for a total of $173,900, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
Such issuances were considered exempt from registration by reason of Section
4(2) of the Securities Act of 1933.
In October, 2005, the Company issued 400,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $200,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
In October 2005, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.75 per share for a total of $75,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2005, the Company cancelled 350,000 shares previously issued for
services valued at $210,000.
In October 2005, the Company issued 505,854 penalty shares pursuant to the
registration rights agreement entered into in connection with the private
placement in January and February, 2005. Pursuant to such agreement, we were
obligated to complete a stock registration by July 2005. Since the registration
statement was not effective by July 2005, the Company paid the required $257,985
of liquidated damages in shares of Company stock accruing at the rate of 3.5%
per month on the face value of the Notes for the month of October 2005. The
Company valued the shares issued at approximately $0.49 per share for a total of
$247,868. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
In November, 2005, the Company issued and sold a promissory note in principal
amount of $550,000, and warrants to purchase a total of 5,500,000 shares of our
common stock at an exercise price of $0.50 per share, and paid $55,000 in cash
to VC Arjent for its services as the placement agent for this placement. All
principal and accrued but unpaid interest under this note was paid in full
shortly after the closing of and from the proceeds of the March 8, 2006
placement. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
In November 2005, the Company issued 806,212 penalty shares pursuant to the
registration rights agreement entered into in connection with the private
placement in January and February, 2005. Pursuant to such agreement, we were
obligated to complete a stock registration by July 2005. Since the registration
statement was not effective by July 2005, the Company paid the required $257,985
of liquidated damages in shares of Company stock accruing at the rate of 3.5%
per month on the face value of the Notes for the month of November 2005. The
Company valued the
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shares issued at approximately $0.32 per share for a total of $257,987. Such
issuances were considered exempt from registration by reason of Section 4(2) of
the Securities Act of 1933.
In December 2005, the Company issued 1,289,927 penalty shares pursuant to the
registration rights agreement entered into in connection with the private
placement in January and February, 2005. Pursuant to such agreement, we were
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of December 2005. The Company
valued the shares issued at approximately $0.20 per share for a total of
$257,985. Such issuances were considered exempt from registration by reason of
Section 4(2) of the Securities Act of 1933.
In December 2005, the Company issued 40,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $20,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
On March 8, 2006, the Company completed a private placement offering in which 30
units (the "Units") of our securities were sold, each Unit consisting of (i) a
$50,000 Principal Amount 10% Secured Convertible Promissory Note (the "Notes")
and (ii) warrants (the "Warrants") to purchase 100,000 shares of our common
stock, or an aggregate of $1,500,000 in principal amount of Notes and Warrants
to purchase 3,000,000 shares of common stock, for aggregate gross proceeds of
$1,500,000. The Units were sold pursuant to Subscription Agreements, by and
between each of the purchasers and Applied DNA Operations Management, Inc., our
wholly owned subsidiary. This issuance is considered exempt under Regulation S
of the Securities Act of 1933. On May 2, 2006, we closed on the first tranche of
the Offshore Offering in which we sold 20 units for aggregate gross proceeds of
$1,000,000. On June 15, 2006, we completed the second tranche of the Offshore
Offering in which we sold 59 units for aggregate gross proceeds of $2,950,000.
The units being sold consist of (i) a $50,000 principal amount secured
convertible promissory note and (ii) a warrant to purchase 100,000 shares of our
common stock at a price of $0.50 per share. These issuances are considered
exempt under Regulation S of the Securities Act of 1933.
On July 10, 2006, we issued 2,400,000 shares of common stock in exchange for
services rendered. We valued the shares issued at $0.20 per share for a total of
$480,000, which did not differ materially from the value of the stock issued and
represented the fair value of the services received.
* All of the above offerings and sales were deemed to be exempt under Rule
506 of Regulation D and/or Section 4(2) of the Securities Act of 1933, as
amended. No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of
persons, all of whom were accredited investors, business associates of
Applied DNA Sciences or executive officers of Applied DNA Sciences, and
transfer was restricted by Applied DNA Sciences in accordance with the
requirements of the Securities Act of 1933. In addition to representations
by the above-referenced persons, we have made independent determinations
that all of the above-referenced persons were accredited or sophisticated
investors, and that they were capable of analyzing the merits and risks of
their investment, and that they understood the speculative nature of their
investment. Furthermore, all of the above-referenced persons were provided
with access to our SEC filings. Except as disclosed above, we have not
employed any underwriters in connection with any of the above transactions.
Except as expressly set forth above, the individuals and entities to whom we
issued securities as indicated in this section of the registration statement are
unaffiliated with us.
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ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References to
"the Company" in this Exhibit List mean Applied DNA Sciences, Inc., a Nevada
corporation.
Exhibit No. Description
----------- -----------
2.1 Articles of Merger of Foreign and Domestic Corporations, filed December
19, 1998 with the Nevada Secretary of State, filed as an exhibit to the
annual report on Form 10-KSB filed with the Commission on December 29,
2003 and incorporated herein by reference.
3.1 Articles of Incorporation of DCC Acquisition Corporation, filed April
20, 1998 with the Nevada Secretary of State, filed as an exhibit to the
annual report on Form 10-KSB filed with the Commission on December 29,
2003 and incorporated herein by reference.
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 as an exhibit to
the annual report on Form 10-KSB filed with the Commission on December
29, 2003 and incorporated herein by reference.
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, filed as
an exhibit to the annual report on Form 10-KSB filed with the Commission
on December 29, 2003 and incorporated herein by reference.
3.5 By-Laws of Applied DNA Sciences, Inc., filed as an exhibit to the annual
report on Form 10-KSB filed with the Commission on December 29, 2003 and
incorporated herein by reference.
4.1 Form of Subscription Agreement, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 28, 2005 and
incorporated herein by reference.
4.2 Form of 10% Secured Convertible Promissory Note, filed as an exhibit to
the current report on Form 8-K filed with the Commission on January 28,
2005 and incorporated herein by reference.
4.3 Form of Warrant Agreement, filed as an exhibit to the current report on
Form 8-K filed with the Commission on January 28, 2005 and incorporated
herein by reference.
4.4 Registration Rights Agreement, dated January 28, 2005, between the
Company and Vertical Capital Partners, Inc., on behalf of the investors,
filed as an exhibit to the current report on Form 8-K filed with the
Commission on January 28, 2005 and incorporated herein by reference.
4.5 Security Agreement, dated January 28, 2005, between the Company and
Vertical Capital Partners, Inc., on behalf of the investors, filed as an
exhibit to the current report on Form 8-K filed with the Commission on
January 28, 2005 and incorporated herein by reference.
4.6 Form of Subscription Agreement, filed as an exhibit to the current
report on Form 8-K filed with the Commission on March 14, 2006 and
incorporated herein by reference.
4.7 Form of 10% Secured Convertible Promissory Note of Applied DNA Sciences,
Inc., filed as an exhibit to the current report on Form 8-K filed with
the Commission on March 14, 2006 and incorporated herein by reference.
4.8 Form of Warrant Agreement of Applied DNA Sciences, Inc., filed as an
exhibit to the current report on Form 8-K filed with the Commission on
March 14, 2006 and incorporated herein by reference.
4.9 Form of Subscription Agreement by and between the Company and each
purchaser of a unit, filed as an exhibit to the current report on Form
8-K filed with the Commission on May 4, 2006 and incorporated herein by
reference.
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4.10 Form of 10% Secured Convertible Promissory Note of the Company filed as
an exhibit to the current report on Form 8-K filed with the Commission
on May 4, 2006 and incorporated herein by reference.
4.11 Form of Warrant Agreement of the Company filed as an exhibit to the
current report on Form 8-K filed with the Commission on May 4, 2006 and
incorporated herein by reference.
4.12 Form of Registration Rights Agreement by and between the Company and
each purchaser of a unit, filed as an exhibit to the current report on
Form 8-K filed with the Commission on May 4, 2005 and incorporated
herein by reference.
4.13 Form of Warrant Agreement of the Company filed as an exhibit to the
current report on Form 8-K filed with the Commission on September 7,
2006 and incorporated herein by reference.
5.1 Snell & Wilmer LLP Opinion and Consent (filed herewith).
10.1 Exclusive License Agreement between Biowell Technology, Inc. and Applied
DNA Sciences, Inc. executed on October 8, 2002, filed as an exhibit to
the registration statement on Form SB-2 filed with the Commission on
February 15, 2005 and incorporated herein by reference.
10.2 Sub-License Agreement with G. A. Corporate Finance Ltd. Applied DNA
Sciences, Inc., executed on July 29, 2003, as amended, filed as an
exhibit to the current report on Form 8-K filed with the Commission on
September 29, 2003 and incorporated herein by reference.
10.3 Indemnification Agreement with Larry Lee, filed as an exhibit to the
registration statement on Form SB-2 filed with the Commission on
February 15, 2005 and incorporated herein by reference.
10.4 Indemnification Agreement with Robin Hutchison, filed as an exhibit to
the registration statement on Form SB-2 filed with the Commission on
February 15, 2005 and incorporated herein by reference.
10.5 Indemnification Agreement with Peter Brocklesby, filed as an exhibit to
the registration statement on Form SB-2 filed with the Commission on
February 15, 2005 and incorporated herein by reference.
10.6 Indemnification Agreement with Adrian Botash, filed as an exhibit to the
registration statement on Form SB-2 filed with the Commission on
February 15, 2005 and incorporated herein by reference.
10.7 Giuliani Partners Strategic Marketing Partnership Agreement, filed as an
exhibit to the registration statement on Form SB-2 filed with the
Commission on February 15, 2005 and incorporated herein by reference
10.8 Stock Purchase Agreement, dated as of January 28, 2005, by and between
Applied DNA Sciences, Inc. and Biowell Technology, Inc., filed as an
exhibit to the current report on Form 8-K filed with the Commission on
February 2, 2005 and incorporated herein by reference.
10.9 Investment Advisory Agreement, dated as of February 14, 2005, by and
between Applied DNA Sciences, Inc. and First London Finance, Ltd., filed
as an exhibit to the registration statement on Form SB-2 filed with the
Commission on February 15, 2005 and incorporated herein by reference.
10.10 Amendment to the License Agreement, dated as of November 2, 2004, by and
between Applied DNA Sciences, Inc. and Biowell Technology Inc., filed as
an exhibit to the registration statement on Form SB-2 filed with the
Commission on June 16, 2005 and incorporated herein by reference.
10.11 Termination Agreement, dated as of April 11, 2005, by and between
Applied DNA Sciences, Inc. and Giuliani Partners LLC, filed as an
exhibit to the current report on Form 8-K filed with the Commission on
April 20, 2005 and incorporated herein by reference.
10.12 Joint Product Development and Marketing Agreement, dated as of November
10, 2004, by and between Applied DNA Sciences, Inc. and Hologrammas S.A.
de C.V., filed as an exhibit to the registration statement on Form SB-2
filed with the Commission on October 28, 2005 and incorporated herein by
reference.
10.13 Cooperative Research and Development Agreement, dated as of September
2, 2004, by and between Applied DNA Sciences, Inc. and Bechtel BWXT
Idaho, LLC, filed as an exhibit to the registration statement on Form
SB-2 filed with the Commission on October 28, 2005 and incorporated
herein by reference.
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10.14 Amendment to the Cooperative Research and Development Agreement, dated
as of March 24, 2005, by and between Applied DNA Sciences, Inc. and
Battelle Energy Alliance, LLC, filed as an exhibit to the current report
on Form 8-K filed with the Commission on May 10, 2005 and incorporated
herein by reference.
10.15 Stock Purchase Amendment Agreement, dated as of July 12, 2005, by and
between Applied DNA Sciences, Inc. and Biowell Technology, Inc., filed
as an exhibit to the current report on Form 8-K filed with the
Commission on July 21, 2005 and incorporated herein by reference.
10.16 License Agreement, dated as of July 12, 2005, by and between Applied DNA
Sciences, Inc. and Biowell Technology, Inc., filed as an exhibit to the
current report on Form 8-K filed with the Commission on July 21, 2005
and incorporated herein by reference.
10.17 Amendment to the License Agreement, dated as of October 10, 2005, by and
between Applied DNA Sciences, Inc. and Biowell Technology, Inc., filed
as an exhibit to the registration statement on Form SB-2 filed with the
Commission on October 28, 2005 and incorporated herein by reference.
10.18 Consulting Agreement, dated as of July 12, 2005, by and between Applied
DNA Sciences, Inc. and Timpix International Limited, filed as an exhibit
to the current report on Form 8-K filed with the Commission on July 21,
2005 and incorporated herein by reference.
10.19 Letter of Engagement, dated as of June 20, 2005, by and between Applied
DNA Sciences, Inc. and Trilogy Capital Partners, Inc., filed as an
exhibit to the current report on Form 8-K filed with the Commission on
July 21, 2005 and incorporated herein by reference.
10.20 Lease Agreement, dated as of November 1, 2005, by and between Applied
DNA Sciences, Inc. and Long Island High Technology Incubator, Inc.,
filed as an exhibit to the current report on Form 8-K filed with the
Commission on October 27, 2005 and incorporated herein by reference.
10.21 Consulting Agreement, dated as of October 18, 2005, by and between
Applied DNA Sciences, Inc. and Karin Klemm, filed as an exhibit to the
current report on Form 8-K filed with the Commission on October 27, 2005
and incorporated herein by reference.
21.1 List of subsidiaries, filed as an exhibit to the Form SB-2 Amendment
No.6 filed with the Commission on January 18, 2006 and incorporated
herein by reference.
23.1 Consent of Russell Bedford Stefanou Mirchandani LLP (filed herewith).
23.2 Consent of legal counsel (see Exhibit 5.1).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of the securities offered
would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) under the Securities Act if,
in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement, and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
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(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and authorizes this
Amendment No. 8 to Registration Statement on Form SB-2 to be signed on its
behalf by the undersigned, in the City of Stony Brook, State of New York, on
November 13, 2006.
APPLIED DNA SCIENCES, INC.
By: /s/ JAMES A. HAYWARD
---------------------------------
James A. Hayward, Chief Executive Officer
(Director, Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
In accordance with the requirements of the Securities Act of 1933, as
amended this registration statement was signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
-------- ----- -----
/s/ JAMES A. HAYWARD Director, Chief Executive Officer, November 13, 2006
----------------------- Principal Financial Officer and
James A. Hayward Principal Accounting Officer
/s/ JUN-JEI SHEU Chairman of the Board of Directors November 13, 2006
-----------------------
Jun-Jei Sheu
/s/ YACOV SHAMASH Director November 13, 2006
-----------------------
Yacov Shamash
/s/ SANFORD R. SIMON Director November 13, 2006
-----------------------
Sanford R. Simon