t65056_s1.htm
Asfiled with the Securities and Exchange Commission on April 24,2009
RegistrationNo.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 |
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| | | FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 | | |
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| | | Applied DNA Sciences, Inc.
(Exact name of registrant as specified in its charter) | | |
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| Delaware | | 2836 | | 59-2262718 |
| (State or other jurisdiction of | | (Primary Standard Industrial | | (I.R.S. Employer |
| incorporation or organization) | | Classification Code Number) | | Identification Number) |
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| | | 25 Health Sciences Drive, Suite 113 | | |
| | | Stony Brook, New York 11790 | | |
| | | (631) 444-6862 | | |
| (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) |
| 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- 6370 |
| (Name, address, including zip code, and telephone number, including area code, of agent for service) |
| With copies to: |
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| | | Merrill Kraines, Esq. | | |
| | | Fulbright & Jaworski L.L.P. | | |
| | | 666 Fifth Avenue | | |
| | | New York, New York 10103 | | |
| | | Telephone: 212.318.3261 | | |
| | | Facsimile: 212.318.3400 | | |
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Approximate date of commencement of proposed sale to the public: As soon aspracticable after this Registration Statement is declaredeffective.
Ifany of the securities being registered on this Form are to be offered on adelayed or continuous basis pursuant to Rule 415 under the Securities Act, checkthe following box. x
Ifthis Form is filed to register additional securities for an offering pursuant toRule 462(b) under the Securities Act, please check the following box and listthe Securities Act registration statement number of the earlier effectiveregistration statement for the same offering. o
Ifthis Form is a post-effective amendment filed pursuant to Rule 462(c) under theSecurities Act, check the following box and list the Securities Act registrationstatement number of the earlier effective registration statement for the sameoffering. o
Ifthis Form is a post-effective amendment filed pursuant to Rule 462(d) under theSecurities Act, check the following box and list the Securities Act registrationstatement number of the earlier effective registration statement for the sameoffering. o
Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company x |
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| | | | | | | Proposed Maximum | | | Proposed Maximum | | | |
| Title of Each Class of | | | Amount to be | | | Offering Price | | | Aggregate Offering | | | Amount of |
| Securities to be Registered | | | Registered | | | per Share(1) | | | Price(1) | | | Registration Fee |
| Common Stock, $0.001 par value per share | | | 3,000,000 | | | $0.11 | | | $330,000 | | | $20 |
| Total Registration Fee | | | | | | | | | | | | |
| (1) | In accordance with Rule 457(c) under the Securities Act of 1933, the price is estimated solely for the purposes of calculating the registration fee and is the average of the reported high and low sale prices of the common stock as reported on April 22,2009. |
Theregistrant hereby amends this Registration Statement on such date or dates asmay be necessary to delay its effective date until the registrant shall file afurther amendment which specifically states that this Registration Statementshall thereafter become effective in accordance with Section 8(a) of theSecurities Act or until this Registration Statement shall become effective onsuch date as the Commission, acting pursuant to said Section 8(a), maydetermine.
Theinformation in this Prospectus is not complete and may be changed. The sellingstockholder may not sell these securities until the registration statement filedwith the Securities and Exchange Commission is effective. This prospectus is notan offer to sell these securities and is not soliciting an offer to buy thesesecurities in any state where the offer or sale is not permitted.
PRELIMINARYPROSPECTUS SUBJECT TO COMPLETION, DATED APRIL 24, 2009
APPLIEDDNA SCIENCES, INC.
3,000,000SHARES OF
COMMONSTOCK
Thisprospectus relates to the resale of up to 3,000,000 shares of our common stockby the selling stockholder named herein. For information about the sellingstockholder, see "Selling Stockholder" on page 54. We are not selling anysecurities under this prospectus and will not receive any of the proceeds fromthe sale of shares by the selling stockholder. We will pay theexpenses of registering these shares.
Ourshares of common stock are quoted on the OTC Bulletin Board. Our shares arequoted under the symbol “APDN.OB”. On April 22, 2009, the closing sales pricefor our common stock on the OTC Bulletin Board was $0.11 per share.
Thepurchase of the securities offered through this prospectus involves a highdegree of risk. See section entitled “Risk Factors” beginning on page4.
Neitherthe U.S. Securities and Exchange Commission (“SEC”) nor any state securitiescommission has approved or disapproved of these securities or passed upon theadequacy or accuracy of this prospectus. Any representation to the contrary is acriminal offense.
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| | The Date of This Prospectus Is , 2009. | |
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TABLEOF CONTENTS
Pleaseread this prospectus carefully. It describes our business, our financialcondition and results of operations. We have prepared this prospectus so thatyou will have the information necessary to make an informed investment decision.You should rely only on information contained in this prospectus. We have notauthorized any other person to provide you with different information. Theselling stockholder is offering to sell shares of our common stock andseeking offers to buy shares of our common stock only in jurisdictions whereoffers and sales are permitted. The information contained in this prospectus isaccurate only as of the date of the prospectus, regardless of the time theprospectus is delivered or the common stock is sold.
In thisprospectus “Applied DNA,” “we,” “us” and “our” refer to Applied DNA Sciences,Inc. and its subsidiaries. Applied DNA and SigNature are the subject of ourtrademark applications pending registration with the United States Patent andTrademark Office. This prospectus contains other product names, trade names andtrademarks of Applied DNA Sciences, Inc. and of otherorganizations.
| 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. Our Company We use the DNA of plants and innovative technologies to provide anti-counterfeiting and product authentication solutions and to manufacture ingredients for personal care products and textiles. SigNature® DNA and BioMaterial™ Genotyping, our principal anti-counterfeiting and product authentication solutions, allow users to accurately and effectively protect branded products, artwork and collectibles, fine wine, digital media, financial instruments, identity cards and other official documents. Our BioActive™ Ingredients, which are being used by our customers in personal care products, such as skin care products, and in textiles, such as intimate apparel, are custom-manufactured to address a customer’s specific need. SigNature DNA. We use the DNA of plants to manufacture highly customized and encrypted botanical DNA markers, or SigNature DNA Markers, which we believe are virtually impossible to replicate. We have embedded SigNature DNA Markers into a range of our customers’ products, including various inks, thermal ribbon, thread, varnishes and adhesives. These items can then be tested for the presence of SigNature DNA Markers through an instant field detection or a forensic level authentication. Our SigNature DNA solution provides a secure, accurate and cost-effective means for users to incorporate our SigNature DNA Markers in, and then quickly and reliably authenticate and identify, a broad range of items such as branded products, artwork and collectibles, cash-in-transit, fine wine, 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. BioMaterial GenoTyping. Our BioMaterial GenoTyping solution refers to the development of genetic assays to distinguish between varieties or strains of biomaterials, such as cotton, wool, tobacco, fermented beverages, natural drugs and foods, that contain their own source DNA. We have developed two proprietary genetic tests (FiberTyping™ and PimaTyping™) to track American Pima cotton from the field to finished garments. These genetic assays provide the cotton industry with the first authentication tools that can be applied throughout the U.S. and worldwide cotton industry from cotton growers, mills, wholesalers, distributors, manufacturers and retailers through trade groups and government agencies. BioActive Ingredients. Our BioActive Ingredients program began in 2007, based on the biofermentation expertise developed during the manufacturing of DNA for our SigNature DNA and BioMaterial Genotyping solutions. Our BioActive Ingredients have been used by our customers in personal care products, such as skin care products, and in textiles, such as intimate apparel. For the year ended September 30, 2008, we generated revenues of $873,010 and had net losses of $6.8 million, and for the quarter ended December 31, 2008, we generated revenues of $146,575 and had net losses of $3.3 million. Our registered independent certified public accountants have stated in their report dated December 15, 2008, that our financial statements for the year ended September 30, 2008 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 ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including by the sale of our securities, obtaining loans from financial institutions, or obtaining grants from various organizations or governments, where possible. Summary Risks Before you invest in our stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors.” We believe that the following are some of the major risks and uncertainties that may affect us: |
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| | • | We have a short operating history, a relatively new business model, and have not produced significant revenues, which makes it difficult to evaluate our future prospects and increases the risk that we will not be successful; |
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| | • | We have a history of losses which may continue, and which may harm our ability to obtain financing and continue our operations; |
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| | • | If we are unable to obtain additional financing our business operations will be harmed or discontinued, and if we do obtain additional financing our stockholders may suffer substantial dilution; |
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| | • | 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; |
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| | • | 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; |
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| | • | If we are unable to retain the services of Drs. Hayward or Liang we may not be able to continue our operations; |
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| | • | 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; |
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| | • | We need to expand our sales, marketing and support organizations and our distribution arrangements to increase market acceptance of our products and services; |
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| | • | A manufacturer’s inability or willingness to produce our goods on time and to our specifications could result in lost revenue and net losses and if we need to replace manufacturers, our expenses could increase, resulting in smaller profit margins; and |
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| | • | Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand. |
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| Corporate Information Our principal offices are located at 25 Health Sciences Drive, Suite 113, Stony Brook, New York 11790, and our telephone number is (631) 444-6370. We are a Delaware corporation, which was initially formed in 1983 under the laws of the State of Florida as Datalink Systems, Inc. In 1998, we reincorporated in Nevada, and in 2002, we changed our name to our current name, Applied DNA Sciences, Inc. In December 2008, we completed our reincorporation from Nevada to the State of Delaware. We maintain a website at www.adnas.com. The information contained on that website is not deemed to be a part of this prospectus. Our corporate headquarters are located at the Long Island High Technology Incubator at Stony Brook University in Stony Brook, New York, where 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 not produced significantrevenues. |
| The Offering | | |
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| Common stock offered by the selling stockholder | Up to 3,000,000 shares of our common stock. |
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| | This number represents less than 1% of our current outstanding stock |
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| Common stock to be outstanding after the offering | Up to 260,511,148 shares |
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| Use of proceeds | We will not receive any proceeds from the sale of the common stock by the selling stockholders. |
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| OTC Bulletin Board | Our shares are quoted on the OTC Bulletin Board under the symbol “APDN.OB”. |
Thisinvestment has a high degree of risk. Before you invest you should carefullyconsider the risks and uncertainties described below and the other informationin this prospectus. If any of the following risks actually occur, our business,operating results and financial condition could be harmed and the value of ourstock could go down. This means you could lose all or a part of yourinvestment.
RisksRelating To Our Business:
Wehave a short operating history, a relatively new business model, and have notproduced significant revenues. This makes it difficult to evaluate our futureprospects and increases the risk that we will not be successful.
We have ashort operating history with our current business model, which involves themarketing, sale and distribution of anti-counterfeiting and productauthentication solutions as well as ingredients for use in personal care andother products. Our operations since inception have produced insignificantrevenues, 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 toreduce or discontinue our operations. If we create significant revenues in thefuture, we will derive most of such revenues from the sale ofanti-counterfeiting and product authentication solutions as well as ingredients,which are immature industries. You must consider our business and prospects inlight of the risks and difficulties we will encounter as an early-stage companyin a new and rapidly evolving industry. We may not be able to successfullyaddress these risks and difficulties, which could significantly harm ourbusiness, operating results, and financial condition.
Wehave a history of losses which may continue, and which may harm our ability toobtain financing and continue ouroperations.
Weincurred net losses of $6.8 million for the year ended September 30, 2008 and$3.3 million for the quarter ended December 31, 2008. These net losses haveprincipally 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 incurredinterest expense on notes and warrants we issued to obtain financing. Ouroperations are subject to the risks and competition inherent in a company thatmoved from the development stage to an operating company. We may not generatesufficient revenues from operations to achieve or sustain profitability on aquarterly, annual or any other basis in the future. Our revenues and profits, ifany, will depend upon various factors, including whether our existing productsand services or any new products and services we develop will achieve any levelof market acceptance. If we continue to incur losses, our accumulated deficitwill continue to increase, which might significantly impair our ability toobtain additional financing. As a result, our business, results of operationsand financial condition would be significantly harmed, and we may be required toreduce or terminate our operations.
Wewill require additional financing which may require the issuance of additionalshares which would dilute the ownership held by our stockholders.
We willneed to raise funds through either debt or the sale of our shares in order toachieve our business goals. Any sale of additional shares or securitiesconvertible into any such shares by us would further dilute the percentageownership by the stockholders. Furthermore, if we raise funds in equitytransactions through the issuance of convertible securities which areconvertible at the time of conversion at a discount to the prevailing marketprice, substantial dilution is likely to occur resulting in a material declinein the price of your shares.
Ifwe are unable to obtain additional financing our business operations will beharmed or discontinued, and if we do obtain additional financing ourstockholders may suffer substantial dilution.
Webelieve that our existing capital resources will enable us to fund ouroperations until approximately June 2009. We believe we will be required to seekadditional capital to sustain or expand our prototype and sample manufacturing,and sales and marketing activities, and to otherwise continue our businessoperations beyond that date. We have no commitments for any future funding, andmay not be able to obtain additional financing or grants on terms acceptable tous, if at all, in the future. If we are unable to obtain additional capital thiswould restrict our ability to grow and may require us to curtail or discontinueour business operations. Additionally, while a reduction in our businessoperations may prolong our ability to operate, that reduction would harm ourability to implement our business strategy. If we can obtain any equityfinancing, it may involve substantial dilution to our then existingstockholders.
Ourindependent auditors have expressed substantial doubt about our ability tocontinue as a going concern, which may hinder our ability to obtain futurefinancing.
In theirreport dated December 15, 2008, our independent auditors stated that ourfinancial statements for the year ended September 30, 2008 were preparedassuming that we would continue as a going concern, and that they havesubstantial doubt about our ability to continue as a going concern. Ourauditors’ doubts are based on our incurring net losses of $6.8 million for theyear ended September 30, 2008. We continue to experience net operating losses.Our ability to continue as a going concern is subject to our ability to generatea profit and/or obtain necessary funding from outside sources, including by thesale of our securities, obtaining loans from financial institutions, orobtaining grants from various organizations or governments, where possible. Ourcontinued net operating losses and our auditors’ doubts increase the difficultyof our meeting such goals and our efforts to continue as a going concern may notprove successful.
Generaleconomic conditions and the current global financial crisis may adversely affectour business, operating results and financial condition.
Thecurrent global economy and economic slowdown may have serious negativeconsequences for our business and operating results. Since our customersincorporate our products into a variety of consumer goods, the demand for ourproducts is subject to worldwide economic conditions and their impact on levelsof consumer spending. Some of the factors affecting consumer spending includegeneral economic conditions, unemployment, consumer debt, reductions in networth based on recent severe market declines, residential real estate andmortgage markets, taxation, energy prices, interest rates, consumer confidenceand other macroeconomic factors. During a period of economic weakness oruncertainty, demand for consumer goods incorporating our products may weaken,and current or potential customers may defer purchases of ourproducts.
Therecent distress in the credit and financial markets has also resulted in extremevolatility in security prices and diminished liquidity, and there can be noassurance that our liquidity will not be affected by changes in the financialmarkets and the global economy. Moreover, the current crisis has had asignificant material adverse impact on a number of financial institutions andhas limited access to capital and credit for many companies. This could, amongother things, make it more difficult for us to obtain, or increase our costof obtaining, capital and financing for our operations. Our access toadditional capital may not be available on terms acceptable to us or atall.
Ifour existing products and services are not accepted by potential customers or wefail to introduce new products and services, our business, results of operationsand financial condition will be harmed.
There hasbeen limited market acceptance of our botanical DNA encryption, encapsulation,embedment and authentication products and services to date. Some of the factorsthat will affect whether we achieve market acceptance of our solutionsinclude:
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| | • | availability, quality and price relative to competitive solutions; |
| | • | customers’ opinions of the solutions’ utility; |
| | • | ease of use; |
| | • | consistency with prior practices; |
| | • | scientists’ opinions of the solutions’ usefulness; |
| | • | citation of the solutions in published research; and |
| | • | general trends in anti-counterfeit and security solutions’ research. |
Theexpenses or losses associated with the continued lack of market acceptance ofour solutions will harm our business, operating results and financialcondition.
Rapidtechnological changes and frequent new product introductions are typical for themarkets we serve. Our future success may depend in part on continuous, timelydevelopment and introduction of new products that address evolving marketrequirements. We believe successful new product introductions may provide asignificant competitive advantage because customers invest their time inselecting and learning to use new products, and are often reluctant to switchproducts. To the extent we fail to introduce new and innovative products, we maylose any market share we then have to our competitors, which will be difficultor impossible to regain. Any inability, for technological or other reasons, tosuccessfully develop and introduce new products could reduce our growth rate ordamage our business. We may experience delays in the development andintroduction of products. We may not keep pace with the rapid rate of change inanti-counterfeiting and security products’ research, and any new productsacquired or developed by us may not meet the requirements of the marketplace orachieve market acceptance.
Ifwe are unable to retain the services of Drs. Hayward or Liang we may not be ableto continue our operations.
Oursuccess depends to a significant extent upon the continued service of Dr. JamesA. Hayward, one of our directors, our President and Chief Executive Officer; andDr. Benjamin Liang, our Secretary and Strategic Technology Development Officer.We do not have employment agreements with Drs. Hayward or Liang. Loss of theservices of Drs. Hayward or Liang could significantly harm our business, resultsof operations and financial condition. We do not maintain key-man insurance onthe lives of Drs. Hayward or Liang.
Themarkets for our anti-counterfeiting and product authentication solutions as wellas our BioActive Ingredients are very competitive, and we may be unable tocontinue to compete effectively these industries in the future.
Theprincipal markets for our our anti-counterfeiting and product authenticationsolutions as well as our BioActive Ingredients are intensely competitive. Manyof our competitors, both in the United States and elsewhere, are majorpharmaceutical, chemical and biotechnology companies, or have strategicalliances with such companies, and many of them have substantially greatercapital resources, marketing experience, research and development staff, andfacilities than we do. Any of these companies could succeed in developingproducts that are more effective than the products that we have or may developand may be more successful than us in producing and marketing their existingproducts. Some of our competitors that operate in the anti-counterfeiting andfraud prevention markets include: Authentix, Collectors Universe Inc., Data DotTechnology, Digimarc Corp., DNA Technologies, Inc., ID Global, Informium AG,Inksure Technologies, Kodak, L-1 Identity Solutions, Manakoa, OpSec SecurityGroup, SmartWater Technology, Inc., Sun Chemical Corp, andTracetag.
We expectthis competition to continue and intensify in the future. Competition in ourmarkets is primarily driven by:
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| | • | product performance, features and liability; |
| | • | price; |
| | • | timing of product introductions; |
| | • | ability to develop, maintain and protect proprietary products and technologies; |
| | • | sales and distribution capabilities; |
| | • | technical support and service; |
| | • | brand loyalty; |
| | • | applications support; and |
| | • | breadth of product line. |
If acompetitor develops superior technology or cost-effective alternatives to ourproducts, our business, financial condition and results of operations could besignificantly harmed.
Weneed to expand our sales, marketing and support organizations and ourdistribution arrangements to increase market acceptance of our products andservices.
Wecurrently have few sales, marketing, customer service and support personnel andwill need to increase our staff to generate a greater volume of sales and tosupport any new customers or the expanding needs of existing customers. Theemployment market for sales, marketing, customer service and support personnelin our industry is very competitive, and we may not be able to hire the kind andnumber of sales, marketing, customer service and support personnel we aretargeting. Our inability to hire qualified sales, marketing, customer serviceand support personnel may harm our business, operating results and financialcondition. We do not currently have any arrangements with any distributors andwe may not be able to enter into arrangements with qualified distributors onacceptable terms or at all. If we are not able to develop greater distributioncapacity, we may not be able to generate sufficient revenue to support ouroperations.
Amanufacturer’s inability or willingness to produce our goods on time and to ourspecifications could result in lost revenue and net losses.
Though wemanufacture prototypes, samples and some of our own products, we currently donot own or operate any significant manufacturing facilities and depend uponindependent third parties for the manufacture of some of our products to ourspecifications. The inability of a manufacturer to ship orders of such productsin a timely manner or to meet our quality standards could cause us to miss thedelivery date requirements of our customers for those items, which could resultin cancellation of orders, refusal to accept deliveries or a reduction inpurchase prices, any of which could harm our business by resulting in decreasedrevenues or net losses upon sales of products, if any sales could bemade.
Ifwe need to replace manufacturers, our expenses could increase, resulting insmaller profit margins.
Wecompete with other companies for the production capacity of our manufacturersand import quota capacity. Some of these competitors have greater financial andother resources than we have, and thus may have an advantage in the competitionfor production and import quota capacity. If we experience a significantincrease in demand, or if our existing manufacturers must be replaced, we willneed to establish new relationships with another or multiple manufacturers. Wecannot assure you that this additional third party manufacturing capacity willbe available when required on terms that are acceptable to us or terms similarto those we have with our existing manufacturers, either from a productionstandpoint or a financial standpoint. We do not have long-term contracts withour manufacturers, and our manufacturers do not produce our productsexclusively. Should we be forced to replace our manufacturers, we may experiencean adverse financial impact, or an adverse operational impact, such as beingforced to pay increased costs for such replacement manufacturing or delays upondistribution and delivery of our products to our customers, which could cause usto lose customers or lose revenues because of late shipments.
Ifa manufacturer fails to use acceptable labor practices, we might have delays inshipments or face joint liability for violations, resulting in decreased revenueand increased expenses.
While werequire our independent manufacturers to operate in compliance with applicablelaws and regulations, we have no control over their ultimate actions. While ourinternal and vendor operating guidelines promote ethical business practices andour staff and buying agents periodically visit and monitor the operations of ourindependent manufacturers, we do not control these manufacturers or their laborpractices. The violation of labor or other laws by our independentmanufacturers, or by one of our licensing partners, or the divergence of anindependent manufacturer’s or licensing partner’s labor practices from thosegenerally accepted as ethical in the United States, could interrupt, orotherwise disrupt the shipment of finished products to us or damage ourreputation. Any of these, in turn, could have a material adverse effect on ourfinancial condition and results of operations, such as the loss of potentialrevenue and incurring additional expenses.
Failureto license new technologies could impair sales of our existing products or anynew product development we undertake in the future.
Togenerate broad product lines, it is advantageous to sometimes licensetechnologies from third parties rather than depend exclusively on thedevelopment efforts of our own employees. As a result, we believe our ability tolicense new technologies from third parties is and will continue to be importantto our ability to offer new products. In addition, from time to time we arenotified or become aware of patents held by third parties that are related totechnologies we are selling or may sell in the future. After a review of thesepatents, we may decide to seek a license for these technologies from these thirdparties. There can be no assurance that we will be able to successfully identifynew technologies developed by others. Even if we are able to identify newtechnologies of interest, we may not be able to negotiate a license on favorableterms, or at all. If we lose the rights to patented technology, we may need todiscontinue selling certain products or redesign our products, and we may lose acompetitive advantage. Potential competitors could license technologies that wefail to license and potentially erode our market share for certain products.Intellectual property licenses would typically subject us to variouscommercialization, sublicensing, minimum payment, and other obligations. If wefail to comply with these requirements, we could lose important rights under alicense. In addition, certain rights granted under the license could be lost forreasons beyond our control, and we may not receive significant indemnificationfrom a licensor against third party claims of intellectual propertyinfringement.
Ourfailure to manage our growth in operations and acquisitions of new product linesand new businesses could harm ourbusiness.
Anygrowth in our operations, if any, will place a significant strain on our currentmanagement resources. To manage such growth, we would need to improveour:
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| | • | operations and financial systems; |
| | • | procedures and controls; and |
| | • | training and management of our employees. |
Ourfuture growth, if any, may be attributable to acquisitions of new product linesand new businesses. Future acquisitions, if successfully consummated, wouldlikely create increased working capital requirements, which would likely precedeby several months any material contribution of an acquisition to our net income.Our failure to manage growth or future acquisitions successfully could seriouslyharm our operating results. Also, acquisition costs could cause our quarterlyoperating results to vary significantly. Furthermore, our stockholders would bediluted if we financed the acquisitions by incurring convertible debt or issuingsecurities.
Althoughwe currently only have operations within the United States, if we were toacquire an international operation; we would face additional risks,including:
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| | • | difficulties in staffing, managing and integrating international operations due to language, cultural or other differences; |
| | • | different or conflicting regulatory or legal requirements; |
| | • | foreign currency fluctuations; and |
| | • | diversion of significant time and attention of our management. |
Failureto attract and retain qualified scientific, production and managerial personnelcould harm our business.
Recruitingand retaining qualified scientific and production personnel to perform andmanage prototype, sample, and product manufacturing and business developmentpersonnel to conduct business development are critical to our success. Inaddition, our desired growth and expansion into areas and activities requiringadditional expertise, such as clinical testing, government approvals,production, and marketing will require the addition of new management personneland the development of additional expertise by existing management personnel.Because the industry in which we compete is very competitive, we facesignificant challenges attracting and retaining a qualified personnel base.Although we believe we have been and will be able to attract and retain thesepersonnel, we may not be able to continue to successfully attract qualifiedpersonnel. The failure to attract and retain these personnel or, alternatively,to develop this expertise internally would harm our business since our abilityto conduct business development and manufacturing will be reduced or eliminated,resulting in lower revenues. We generally do not enter into employmentagreements requiring our employees to continue in our employment for any periodof time.
Ourintellectual property rights are valuable, and any inability to protect themcould reduce the value of our products, services and brand.
Ourpatents, trademarks, trade secrets, copyrights and all of our other intellectualproperty rights are important assets for us. There are events that are outsideof our control that pose a threat to our intellectual property rights as well asto our products and services. For example, effective intellectual propertyprotection may not be available in every country in which our products andservices are distributed. The efforts we have taken to protect our proprietaryrights may not be sufficient or effective. Any significant impairment of ourintellectual property rights could harm our business or our ability to compete.Protecting our intellectual property rights is costly and time consuming. Anyincrease in the unauthorized use of our intellectual property could make it moreexpensive to do business and harm our operating results. Although we seek toobtain patent protection for our innovations, it is possible we may not be ableto protect some of these innovations. Given the costs of obtaining patentprotection, we may choose not to protect certain innovations that later turn outto be important. There is always the possibility that the scope of theprotection gained from one of our issued patents will be insufficient or deemedinvalid or unenforceable. We also seek to maintain certain intellectual propertyas trade secrets. The secrecy could be compromised by third parties, orintentionally or accidentally by our employees, which would cause us to lose thecompetitive advantage resulting from these trade secrets.
Intellectualproperty litigation could harm our business.
Litigationregarding patents and other intellectual property rights is extensive in thebiotechnology industry. In the event of an intellectual property dispute, we maybe forced to litigate. This litigation could involve proceedings instituted bythe U.S. Patent and Trademark Office or the International Trade Commission, aswell as proceedings brought directly by affected third parties. Intellectualproperty litigation can be extremely expensive, and these expenses, as well asthe consequences should we not prevail, could seriously harm ourbusiness.
If athird party claims an intellectual property right to technology we use, we mightneed to discontinue an important product or product line, alter our products andprocesses, pay license fees or cease our affected business activities. Althoughwe might under these circumstances attempt to obtain a license to thisintellectual property, we may not be able to do so on favorable terms, or atall. Furthermore, a third party may claim that we are using inventions coveredby the third party’s patent rights and may go to court to stop us from engagingin our normal operations and activities, including making or selling our productcandidates. These lawsuits are costly and could affect our results of operationsand divert the attention of managerial and technical personnel. A court maydecide that we are infringing the third party’s patents and would order us tostop the activities covered by the patents. In addition, a court may order us topay the other party damages for having violated the other party’s patents. Thebiotechnology industry has produced a proliferation of patents, and it is notalways clear to industry participants, including us, which patents cover varioustypes of products or methods of use. The coverage of patents is subject tointerpretation by the courts, and the interpretation is not always uniform. Ifwe are sued for patent infringement, we would need to demonstrate that ourproducts or methods of use either do not infringe the patent claims of therelevant patent and/or that the patent claims are invalid, and we may not beable to do this. Proving invalidity, in particular, is difficult since itrequires a showing of clear and convincing evidence to overcome the presumptionof validity enjoyed by issued patents.
Becausesome patent applications in the United States may be maintained in secrecy untilthe patents are issued, because patent applications in the United States andmany foreign jurisdictions are typically not published until eighteen monthsafter filing, and because publications in the scientific literature often lagbehind actual discoveries, we cannot be certain that others have not filedpatent applications for technology covered by our or our licensor’s issuedpatents or pending applications or that we or our licensors were the first toinvent the technology. Our competitors may have filed, and may in the futurefile, patent applications covering technology similar to ours. Any such patentapplication may have priority over our or our licensors’ patent applications andcould further require us to obtain rights to issued patents covering suchtechnologies. If another party has filed a United States patent application oninventions similar to ours, we may have to participate in an interferenceproceeding declared by the United States Patent and Trademark Office todetermine priority of invention in the United States. The costs of theseproceedings could be substantial, and it is possible that such efforts would beunsuccessful, resulting in a loss of our United States patent position withrespect to such inventions.
Some ofour competitors may be able to sustain the costs of complex patent litigationmore effectively than we can because they have substantially greater resources.In addition, any uncertainties resulting from the initiation and continuation ofany litigation could have a material adverse effect on our ability to raise thefunds necessary to continue our operations.
Accidentsrelated to hazardous materials could adversely affect our business.
Some ofour operations require the controlled use of hazardous materials. Although webelieve our safety procedures comply with the standards prescribed by federal,state, local and foreign regulations, the risk of accidental contamination ofproperty or injury to individuals from these materials cannot be completelyeliminated. In the event of an accident, we could be liable for any damages thatresult, which could seriously damage our business and results ofoperations.
Potentialproduct liability claims could affect our earnings and financialcondition.
We face apotential risk of liability claims based on our products and services, and wehave faced such claims in the past. Though we have product liability insurancecoverage which we believe is adequate, we may not be able to maintain thisinsurance at reasonable cost and on reasonable terms. We also cannot assure thatthis insurance, if obtained, will be adequate to protect us against a productliability claim, should one arise. In the event that a product liability claimis successfully brought against us, it could result in a significant decrease inour liquidity or assets, which could result in the reduction or termination ofour business.
Litigationgenerally could affect our financial condition and results ofoperations.
Wegenerally may be subject to claims made by and required to respond to litigationbrought by customers, former employees, former officers and directors, formerdistributors and sales representatives, and vendors and service providers. Wehave faced such claims and litigation in the past and we cannot assure that wewill not be subject to claims in the future. In the event that a claim issuccessfully brought against us, considering our lack of material revenue andthe losses our business has incurred for the period from our inception toDecember 31, 2008, this could result in a significant decrease in our liquidityor assets, which could result in the reduction or termination of ourbusiness.
Wewere obligated to pay liquidated damages as a result of our failure to have ourregistration statement declared effective prior to June 15, 2005, and anypayment of liquidated damages will either result in depletion of our limitedworking capital or issuance of shares of common stock which would cause dilutionto our existing stockholders.
Pursuantto the terms of a registration rights agreement with respect to common stockunderlying convertible notes and warrants we issued in private placements inNovember and December, 2003, December, 2004, and January and February, 2005, foreach month after June 15, 2005 that we did not have a registration statementregistering the shares underlying these convertible notes and warrants declaredeffective, we were obligated to pay liquidated damages in the amount of 3.5% permonth of the face amount of the notes, an amount equal to $367,885. OnJuly 24, 2008, the SEC declared effective our registration statement withrespect to common stock underlying convertible notes and warrants we issued inprivate placements in November and December, 2003, December, 2004, and Januaryand February, 2005. At our option, these liquidated damages can be paid in cashor unregistered shares of our common stock. To date we have decided to paycertain of these liquidated damages in common stock, although any futurepayments of liquidated damages may, at our option, be made in cash. If we decideto pay such liquidated damages in cash, we would be required to use our limitedworking capital and potentially raise additional funds. If we decide to pay theliquidated damages in shares of common stock, the number of shares issued woulddepend on our stock price at the time that payment is due. Based on the closingmarket prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our commonstock 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 of3,807,375 shares of common stock in liquidated damages from August, 2005 toJanuary, 2006 to persons who invested in the January and February, 2005 privateplacements.The issuance of shares upon any payment by us of further liquidated damages willhave the effect of further diluting the proportionate equity interest and votingpower of holders of our common stock, including investors in thisoffering.
We paidliquidated 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 andFebruary, 2005 private placements. We believe that we have no enforceableobligation to pay liquidated damages to holders of any shares we agreed toregister under the registration rights agreement for periods after the firstanniversary of the date of issuance of such shares, since they were eligible forresale under Rule 144 of the Securities Act during such periods, and suchliquidated damages are grossly inconsistent with actual damages to such persons.Nonetheless, as of February 18, 2009 we have accrued approximately $12.0million in penalties representing further liquidated damages associated with ourfailure to have the registration statement declared effective by the deadline,and have included this amount in accounts payable and accruedexpenses.
Mattervoluntarily reported to the Securities and Exchange Commission
Duringthe months of March, May, July and August 2005, we issued a total of 8,550,000shares of our common stock to certain employees and consultants pursuant to the2005 Incentive Stock Plan. We engaged our outside counsel to conduct aninvestigation of the circumstances surrounding the issuance of these shares. OnApril 26, 2006, we voluntarily reported the findings from this investigation tothe SEC, and agreed to provide the SEC with further information arising from theinvestigation. We believe that the issuance of 8,000,000 shares to employees inJuly 2005 was effectuated by both our former President and our former ChiefFinancial Officer/Chief Operating Officer without approval of our board ofdirectors. 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 wellas an additional 550,000 shares issued to employees and consultants in March,May and August 2005, were improperly issued without a restrictive legend statingthat the shares could not be resold legally except in compliance with theSecurities Act of 1933, as amended. The members of the Company's management whoeffectuated the stock issuances no longer work for the Company. These shareswere not registered under the Securities Act of 1933, or the securities laws ofany state, and we believe that certain of these shares may have been sold on theopen market, though we have been unable to determine the magnitude of suchsales. Since our voluntary report of the findings of our internal investigationto the SEC on April 26, 2006, we have received no communication from the SEC orany third party with respect to this matter. If violations of securities lawsoccurred in connection with the resale of certain of these shares, the employeesand consultants or persons who purchased shares from them may have rights tohave their purchase rescinded or other claims against us for violation ofsecurities laws, which could harm our business, results of operations, andfinancial condition.
RisksRelating to Our Common Stock:
Thereare a large number of shares underlying our options and warrants that may beavailable for future sale and the sale of these shares may depress the marketprice of our common stock and will cause immediate and substantial dilution toour existing stockholders.
As of April 22, 2009, wehad 260,511,148 shares of common stock issued and outstanding andoutstanding options and warrants to purchase 113,105,964 shares of commonstock. All of the shares issuable upon exercise of our options and warrants maybe sold without restriction. The sale of these shares may adversely affect themarket price of our common stock. The issuance of shares upon exercise ofoptions and warrants will cause immediate and substantial dilution to theinterests of other stockholders since the selling stockholder may convert andsell the full amount issuable on exercise.
Ifwe fail to remain current on our reporting requirements, we could be removedfrom the OTC bulletin board which would limit the ability of broker-dealers tosell our securities and the ability of stockholders to sell their securities inthe secondary market.
Companiestrading on The Over The Counter Bulletin Board (the “OTC Bulletin Board”), suchas us, must be reporting issuers under Section 12 or Section 15(d) of theSecurities Exchange Act of 1934, as amended, and must be current in theirreports under Section 13, in order to maintain price quotation privileges on theOTC 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 marketliquidity for our securities could be severely adversely affected by limitingthe ability of broker-dealers to sell our securities and the ability ofstockholders to sell their securities in the secondary market. Prior to May2001, we were delinquent in our reporting requirements, having failed to fileour quarterly and annual reports for the years ended 1998 – 2000 (except thequarterly reports for the first two quarters of 1999). We have been current inour reporting requirements for the last six years, however, there can be noassurance that in the future we will always be current in our reportingrequirements.
Ourcommon stock is subject to the “penny stock” rules of the SEC and the tradingmarket in our securities is limited, which makes transactions in our stockcumbersome and may reduce the value of an investment in our stock.
The SEChas adopted Rule 15g-9 which establishes the definition of a “penny stock,” forthe purposes relevant to us, as any equity security that has a market price ofless than $5.00 per share or with an exercise price of less than $5.00 pershare, subject to certain exceptions. For any transaction involving a pennystock, unless exempt, the rules require:
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| | • | that a broker or dealer approve a person’s account for transactions in penny stocks; and |
| | • | 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 orderto approve a person’s account for transactions in penny stocks, the broker ordealer must:
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| | • | obtain financial information and investment experience objectives of the person; and |
| | • | 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. |
Thebroker or dealer must also deliver, prior to any transaction in a penny stock, adisclosure schedule prescribed by the SEC relating to the penny stock market,which, in highlight form:
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| | • | sets forth the basis on which the broker or dealer made the suitability determination; and |
| | • | 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 ofour common stock and cause a decline in the market value of ourstock.
Disclosurealso has to be made about the risks of investing in penny stocks in both publicofferings and in secondary trading and about the commissions payable to both thebroker-dealer and the registered representative, current quotations for thesecurities and the rights and remedies available to an investor in cases offraud in penny stock transactions. Finally, monthly statements have to be sentdisclosing recent price information for the penny stock held in the account andinformation on the limited market in penny stocks.
We willnot receive any proceeds from the sale of the shares of common stock by theselling stockholder, except for funds received from the exercise of warrantsheld by certain of the selling stockholder, if and when exercised. We plan touse the net proceeds received from the exercise of any warrants, if any, forworking capital and general corporate purposes. The actual allocation ofproceeds realized from the exercise of these securities will depend upon theamount and timing of such exercises, our operating revenues and cash position atsuch time and our working capital requirements. There can be no assurances thatany of the outstanding warrants will be exercised.
OurCommon Stock is traded over-the-counter on The Over The Counter Bulletin Board(the “OTC Bulletin Board”) maintained by the National Association of SecuritiesDealers under the symbol “APDN.” There is no certainty that the Common Stockwill continue to be quoted or that any liquidity exists for ourstockholders.
Thefollowing table sets forth the quarterly quotes of high and low prices for ourCommon Stock on the OTC Bulletin Board during the fiscal years ended September30, 2007 and September 30, 2008 and each of the fiscal quarters endedDecember 31, 2008 and March 31, 2009. In February of 2003, we changed our yearend to September 30. We changed our fiscal year end in connection with a reversemerger we entered into in December 2002, in which the acquirer for accountingpurposes had a fiscal year end of September 30. For ease of fiscal reporting, weadopted the same fiscal year end.
| Year ended 9/30/07 | | High | | | Low | |
| December 31, 2006 | | $ | 0.12 | | | $ | 0.07 | |
| March 31, 2007 | | $ | 0.28 | | | $ | 0.09 | |
| June 30, 2007 | | $ | 0.23 | | | $ | 0.10 | |
| September 30, 2007 | | $ | 0.15 | | | $ | 0.08 | |
| Year ended 9/30/08 | | High | | | Low | |
| December 31, 2007 | | $ | 0.17 | | | $ | 0.09 | |
| March 31, 2008 | | $ | 0.22 | | | $ | 0.09 | |
| June 30, 2008 | | $ | 0.14 | | | $ | 0.09 | |
| September 30, 2008 | | $ | 0.10 | | | $ | 0.03 | |
| Year ended 9/30/09 | | High | | | Low | |
| December 31, 2008 | | $ | 0.07 | | | $ | 0.03 | |
| March 31, 2009 | | $ | 0.12 | | | $ | 0.02 | |
Holders
As ofApril 22, 2009, we had approximately 1,062 holders of our common stock. Thenumber of record holders was determined from the records of our transfer agentand does not include beneficial owners of common stock whose shares are held inthe names of various security brokers, dealers, and registered clearingagencies. The transfer agent of our common stock is American Stock Transfer& Trust Company, 6201 15th Avenue,Brooklyn, New York 11219.
Dividends
We havenever declared or paid any cash dividends on our common stock. We do notanticipate paying any cash dividends to stockholders in the foreseeable future.In addition, any future determination to pay cash dividends will be at thediscretion of the Board of Directors and will be dependent upon our financialcondition, results of operations, capital requirements, and such other factorsas the Board of Directors deem relevant.
EquityCompensation Plan Information
2002Professional/Employee/Consultant Compensation Plan
InNovember of 2002, we created a special compensation plan to pay the founders,consultants and professionals that had been contributing valuable services to usduring the previous nine months. This plan, under which 2,000,000 shares of ourcommon stock were reserved for issuance, is called theProfessional/Employee/Consultant Compensation Plan (the “Compensation Plan”).Share and option issuances from the Compensation Plan were to be staggered overthe following six to eight months, and consultants that were to continueproviding services thereafter either became employees or received renewedcontracts from us in July of 2003, which contracts contained a more traditionalcash compensation component. Each qualified and eligible recipient of sharesand/or options under the Compensation Plan received securities in lieu of cashpayment for services. Each recipient agreed, in his or her respective consultingcontract with us, to sell a limited number of shares monthly. In December of2004, we adjusted the exercise price of options under the Compensation Plan to$0.60 per share. As of February 18, 2009, a total of 1,440,000 shares have beenissued from, and options to purchase 560,000 shares have been issued under theCompensation Plan, and options to purchase 264,000 shares have been exercised asof that date.
2005Incentive Stock Plan
OnJanuary 26, 2005, the Board of Directors, and on February 15, 2005, the holdersof a majority of the outstanding common stock of the Company approved the 2005Incentive Stock Plan and authorized the issuance of 16,000,000 shares of commonstock as stock awards and stock options thereunder. On May 16, 2007, at theannual meeting of stockholders, the holders of a majority of the outstandingcommon stock of the Company approved an increase in the number of shares subjectto the 2005 Incentive Stock Plan to 20,000,000 shares of common stock. On June17, 2008, the Board of Directors unanimously adopted an amendment to the 2005Incentive Stock Plan that will increase the total number of shares of commonstock issuable pursuant to the 2005 Incentive Stock Plan from a total of20,000,000 shares to a total of 100,000,000 shares, which was approved by ourstockholders at the 2008 annual meeting of stockholders.
The 2005Incentive Stock Plan is designed to retain directors, executives, and selectedemployees and consultants by rewarding them for making contributions to oursuccess with an award of shares of our common stock. As of April 22, 2009, atotal of 8,550,000 shares have been issued and options to purchase 44,330,000shares have been granted under the 2005 Incentive Stock Plan.
The Boardof Directors, in their discretion, may award stock and stock options toexecutive officers and key employees as part of their compensation foremployment or for retention purposes.
Thefollowing table sets forth certain information regarding our compensation plansas of April 22,2009:
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| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | |
| | | (a) | | (b) | | (c) | |
| | | | | | | | | | | |
| 2005 Incentive Stock Plan approved on January 26, 2005 | | | 44,330,000 | | $ | 0.16 | | | 47,120,000 | |
| Total | | | 44,330,000 | | $ | 0.16 | | | 47,120,000 | |
Amendmentto the 2005 Incentive Stock Plan and Recent Equity AwardGrants
On June17, 2008, the Board of Directors adopted an amendment to the 2005 IncentiveStock Plan that will increase the total number of shares of common stockissuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000shares to a total of 100,000,000 shares, was approved by our stockholders at the2008 annual meeting of stockholders. In connection with the share increaseamendment, the Board of Directors granted and we issued options to purchasea total of 37,670,000 shares to certain key employees and non-employee directorsunder the 2005 Incentive Stock Plan, including 17,000,000, 5,000,000 and7,000,000 to James A. Hayward, Kurt H. Jensen and Ming-Hwa Liang, respectively.The options granted to our key employees and non-employee directors vested withrespect to 25% of the underlying shares on the date of grant and the remainingwill vest ratably each anniversary thereafter until fully vested on the thirdanniversary of the date of grant.
Theeffectiveness of the share increase amendment and the exercise of these stockoptions by the key employees and non-employee directors was subject tostockholder approval, which was obtained at the 2008 annual meeting ofstockholders held on December 16, 2008.
Forward-lookingInformation
ThisRegistration Statement on Form S-1 (including the section regarding Management’sDiscussion and Analysis of Financial Condition and Results of Operations)contains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”) and Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), includingstatements 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 readstatements that contain these words carefully because they:
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| | Ÿ | discuss our future expectations; |
| | Ÿ | contain projections of our future results of operations or of our financial condition; and |
| | Ÿ | state other “forward-looking”information. |
Webelieve it is important to communicate our expectations. However, forwardlooking statements involve risks and uncertainties and our actual results andthe timing of certain events could differ materially from those discussed inforward-looking statements as a result of certain factors, including those setforth under “Risk Factors,” “Business” and elsewhere in this prospectus. Allforward-looking statements and risk factors included in this document are madeas of the date hereof, based on information available to us as of the datethereof, and we assume no obligations to update any forward-looking statement orrisk factor, unless we are required to do so by law.
Introduction
We usethe DNA of plants and innovative technologies to provide anti-counterfeiting andproduct authentication solutions and to manufacture ingredients for personalcare products and textiles. SigNature® DNA and BioMaterial™ Genotyping, ourprincipal anti-counterfeiting and product authentication solutions, allow usersto accurately and effectively protect branded products, artwork andcollectibles, fine wine, digital media, financial instruments, identity cardsand other official documents. Our BioActive™ Ingredients, which are being usedby our customers in personal care products, such as skin care products, and intextiles, such as intimate apparel, are custom-manufactured to address acustomer’s specific need.
SigNatureDNA. We use the DNA of plants to manufacture highly customized andencrypted botanical DNA markers, or SigNature DNA Markers, which we believe arevirtually impossible to replicate. We have embedded SigNature DNA Markers into arange of our customers’ products, including various inks, thermal ribbon,thread, varnishes and adhesives. These items can then be tested for the presenceof SigNature DNA Markers through an instant field detection or a forensic levelauthentication. Our SigNature DNA solution provides a secure, accurate andcost-effective means for users to incorporate our SigNature DNA Markers in, andthen quickly and reliably authenticate and identify, a broad range of items suchas branded products, artwork and collectibles, cash-in-transit, fine wine,digital media, financial instruments, identity cards and other officialdocuments. Having the ability to reliably authenticate and identify counterfeitversions of such items enables companies and governments to detect, deter,interdict and prosecute counterfeiting enterprises and individuals.
BioMaterialGenoTyping. Our BioMaterial GenoTyping solution refers to the developmentof genetic assays to distinguish between varieties or strains of biomaterials,such as cotton, wool, tobacco, fermented beverages, natural drugs and foods,that contain their own source DNA. We have developed two proprietary genetictests (FiberTyping™ and PimaTyping™) to track American Pima cotton from thefield to finished garments. These genetic assays provide the cotton industrywith the first authentication tools that can be applied throughout the U.S. andworldwide cotton industry from cotton growers, mills, wholesalers, distributors,manufacturers and retailers through trade groups and governmentagencies.
BioActiveIngredients. Our BioActive Ingredients program began in 2007, based onthe biofermentation expertise developed from our experience with the manufactureof DNA for our SigNature DNA and BioMaterial Genotyping solutions. We initiallytargeted potential customers in the personal care products, industry, and wedeveloped DermalRx Hydroseal, which has been incorporated into the fabric of anew line of intimate apparel currently being test marketed by a global marketerof intimate apparel. In addition, we developed DermalRx SRC, Skin ResurfacingComplex, an ingredient designed to promote smoother more radiant skin bystimulating the skin’s own exfoliation process.
Planof Operations
General
We expectto generate revenues principally from sales of our SigNature Program,BioMaterial Genotyping and BioActive Ingredients. We are currently attempting todevelop business in the following target markets: art and collectibles,cash-in-transit, fine wine, consumer products, digital recording media,pharmaceuticals, and homeland security driven programs. We intend to pursue bothdomestic and international sales opportunities in each of these verticalmarkets.
Webelieve that our existing capital resources will enable us to fund ouroperations until approximately June 2009. We believe we may be required toseek additional capital to sustain or expand our prototype and samplemanufacturing, and sales and marketing activities, and to otherwise continue ourbusiness operations beyond that date. We have no commitments for any futurefunding, and may not be able to obtain additional financing or grants on termsacceptable to us, if at all, in the future. If we are unable to obtainadditional capital this would restrict our ability to grow and may require us tocurtail or discontinue our business operations. Additionally, while a reductionin our business operations may prolong our ability to operate, that reductionwould harm our ability to implement our business strategy. If we can obtain anyequity financing, it may involve substantial dilution to our then existingstockholders.
ProductResearch and Development
Weanticipate spending approximately $150,000 for product research and developmentactivities during the next 12 months.
Acquisitionof Plant and Equipment and Other Assets
We do notanticipate the sale of any material property, plant or equipment during the next12 months. We do anticipate spending approximately $30,000 on the acquisition ofleasehold improvements during the next 12 months. We believe our current leasedspace is adequate to manage our growth, if any, over the next 2 to 3years.
Numberof Employees
Wecurrently have 13 full-time employees and two part-time employees, including twoin management, nine in operations, three in sales and marketing and one ininvestor relations. The company expects to increase its staffing dedicated tosales, product prototyping, manufacturing of DNA markers and forensicauthentication services. Expenses related to travel, marketing, salaries, andgeneral overhead will be increased as necessary to support our growth inrevenue. In order for us to attract and retain quality personnel, we anticipatewe will have to offer competitive salaries to future employees. We anticipatethat it may become desirable to add additional full and or part-time employeesto discharge certain critical functions during the next 12 months. Thisprojected increase in personnel is dependent upon our ability to generaterevenues and obtain sources of financing. There is no guarantee that we will besuccessful in raising the funds required or generating revenues sufficient tofund the projected increase in the number of employees. As we continue toexpand, we will incur additional costs for personnel.
Critical AccountingPolicies
FinancialReporting Release No. 60, published by the SEC, recommends that all companiesinclude a discussion of critical accounting policies used in the preparation oftheir financial statements. While all these significant accounting policiesimpact our financial condition and results of operations, we view certain ofthese policies as critical. Policies determined to be critical are thosepolicies that have the most significant impact on our consolidated financialstatements and require management to use a greater degree of judgment andestimates. Actual results may differ from those estimates.
Webelieve that given current facts and circumstances, it is unlikely that applyingany other reasonable judgments or estimate methodologies would cause a materialeffect on our consolidated results of operations, financial position orliquidity for the periods presented in this report.
Theaccounting policies identified as critical are as follows:
| | ● | Equity issued with registration rights; |
| | ● | Revenue recognition; |
| | ● | Allowance for Doubtful Accounts; and |
| | ● | Fair value of intangible assets. |
| | ● | Use of estimates |
EquityIssued with Registration Rights
Inconnection with placement of our convertible notes and warrants to certaininvestors during the fiscal quarters ended December 31, 2003, December 31, 2004,March 31, 2005, March 31, 2006 and June 30, 2006, we granted certainregistration rights that provide for liquidated damages in the event of failureto timely perform under the agreements. Although these notes and warrants do notprovide for net-cash settlement, the existence of liquidated damages providesfor a defacto net-cash settlement option. Therefore, the common stockunderlying the notes and warrants subject to such liquidated damages does notmeet the tests required for shareholders’ equity classification in the past, andaccordingly has been reflected between liabilities and equity in our previousconsolidated balance sheet.
InSeptember 2007, we exchanged our common stock for the remaining SecuredConvertible Promissory Note that contained embedded derivatives such as certainconversion features, variable interest features, call options and defaultprovisions.
We had anaccumulative accrual of $12,023,888 in liquidating damages in relationship tothe previously outstanding convertible promissory notes and relatedwarrants.
RevenueRecognition
Revenuesare derived from research, development, qualification and production testing forcertain commercial products.
Revenuefrom fixed price testing contracts is generally recorded upon completion of thecontracts, which are generally short-term, or upon completion of identifiablecontractual tasks. At the time the Company enters into a contract that includesmultiple tasks, the Company estimates the amount of actual labor and other coststhat will be required to complete each task based on historical experience.Revenues are recognized which provide for a profit margin relative to thetesting performed. Revenue relative to each task and from contracts which aretime and materials based is recorded as effort is expended. Billings in excessof amounts earned are deferred. Any anticipated losses on contracts are chargedto income when identified. To the extent management does not accurately forecastthe level of effort required to complete a contract, or individual tasks withina contract, and the Company is unable to negotiate additional billings with acustomer for cost over-runs, the Company may incur losses on individualcontracts. All selling, general and administrative costs are treated as periodcosts and expensed as incurred.
Forrevenue from product sales, the Company recognizes revenue in accordance withStaff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), andStaff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS("SAB101"). SAB 101 requires that four basic criteria must be met before revenuecan be recognized: (1) persuasive evidence of an arrangement exists; (2)delivery has occurred; (3) the selling price is fixed and determinable; and (4)collectability is reasonably assured. Determination of criteria (3) and (4) arebased on management's judgments regarding the fixed nature of the selling pricesof the products delivered and the collectability of those amounts. Provisionsfor discounts and rebates to customers, estimated returns and allowances, andother adjustments are provided for in the same period the related sales arerecorded. The Company defers any revenue for which the product has not beendelivered or is subject to refund until such time that the Company and thecustomer jointly determine that the product has been delivered or no refund willbe required.
SAB 104incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”), MULTIPLEDELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting forarrangements that may involve the delivery or performance of multiple products,services and/or rights to use assets. The effect of implementing EITF00-21 on the Company’s financial position and results of operations was notsignificant.
Allowancefor Uncollectible Receivables
TheCompany maintains an allowance for doubtful accounts for estimated lossesresulting from the inability of customers to make required payments. The Companyuses a combination of write-off history, aging analysis and any specific knowntroubled accounts in determining the allowance. If the financial condition ofcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances could be required.
FairValue of Intangible Assets
TheCompany has adopted Statement of Financial Accounting Standards No. 144 (SFASNo. 144). The Statement requires that long-lived assets and certainidentifiable intangibles held and used by the Company be reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. Events relating to recoverabilitymay include significant unfavorable changes in business conditions, recurringlosses, or a forecasted inability to achieve break-even operating results overan extended period.
TheCompany evaluates the recoverability of long-lived assets based upon forecastedundiscounted cash flows. Should impairment in value be indicated, the carryingvalue of intangible assets will be adjusted, based on estimates of futurediscounted cash flows resulting from the use and ultimate disposition of theasset. SFAS No. 144 also requires assets to be disposed of bereported at the lower of the carrying amount or the fair value less costs tosell.
Useof Estimates
Inpreparing financial statements in conformity with accounting principlesgenerally accepted in the United States of America, management is required tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and revenue and expenses during the reportingperiod. Actual results could differ from those estimates.
Comparisonof the Year Ended September 30, 2008 to the Year Ended September 30,2007
Revenues
For theyears ended September 30, 2008 and 2007, we generated $873,010 and $121,920 inrevenues from operations, respectively. Our cost of sales for the year endedSeptember 30, 2008 was $171,332, netting us a gross profit of $701,678. Our costof sales for the year ended September 30, 2007 was $23,073, netting us a grossprofit of $98,847.
Costsand Expenses
Selling,General and Administrative
Selling,general and administrative expenses for the twelve months ended September 30,2008 decreased 65% to $4.3 million from $12.1 million in the same period in2007. Included within the selling, general and administrative expenses for theyears ended September 30, 2008 and 2007 were expenses relating to liquidationdamage accrual, fund raising and consultant costs of $1.1 million and $7.9million, respectively.
Researchand Development
Researchand development expenses increased $34,987 for the twelve months ended September30, 2008 compared to the same period in 2007 from $110,845 to $145,832,primarily due to customer related activity in research and development with ourchange in focus to marketing activities.
Depreciationand Amortization
In thetwelve months ended September 30, 2008, depreciation and amortization increased$1,834 for the period compared to 2007 from $432,582 to $434,416. The increaseis attributable to the increase of fixed assets acquired during the year endedSeptember 30, 2008.
TotalOperating Expenses
Totaloperating expenses decreased to $4.9 million from $12.6 million, or a decreaseof $7.7 million, primarily due to the reduction in accrual for liquidationdamages and less consulting costs for the year ended September 30, 2008 ascompared to September 30, 2007.
OtherIncome/Loss
Otherincome for the twelve months ended September 30, 2008 decreased from a gain of$1.4 million to $0 million. Other income for the year ended September 30, 2007was a result primarily from the change in fair value of our recorded warrantliabilities.
As ofSeptember 30, 2007, we exchanged common stock for the previously issuedConvertible Promissory Notes that contained certain embedded derivativefinancial instruments. As a result, we reclassified the warrant liabilitiesrecorded in conjunction with the convertible promissory notes to equity as ofthe conversion date of the remaining note
InterestExpenses
Interestexpenses for the twelve months ended September 30, 2008, increased to $2.6million from $2.2 million in the same period of 2007, an increase of $0.4million as a result of additional borrowings.
Net loss
Net lossfor the twelve months ended September 30, 2008 decreased to a loss of $6.8million from a loss of $13.3 million in the prior period as a result of thecombination of factors described above..
Comparisonof Results of Operations for the Three Months Ended December 31, 2008 and2007
Revenues
For thethree months ended December 31, 2008, we generated $146,575 in revenues fromoperations, principally from the sales of BioActive Ingredients, and our cost ofsales for the three months ended December 31, 2008 was $43,741, netting us agross profit of $102,834. For the three months ended December 31, 2007, wegenerated $123,167 in revenues from operations and our cost of sales for thethree months ended December 31, 2008 was $27,890, netting us a gross profit of$95,277.
Costsand Expenses
Selling,General and Administrative
Selling,general and administrative expenses increased from $1,698,269 for the threemonths ended December 31, 2007 to $2,764,009 for the three months endedDecember 31, 2008. The increase of $1,065,740, or 62.8%, is primarilyattributable to the fair value of vested options granted to officers andemployees, net with a decrease in cost incurred in connection with professionalservices.
Researchand Development
Researchand development expenses increased from $36,326 for the three months endedDecember 31, 2007 to $62,529 for the three months ended December 31, 2008.The increase of $26,203 is attributed to more research and developmentactivity related to the recent development and feasibility studyagreements.
Depreciationand Amortization
In thethree months ended December 31, 2008, depreciation and amortization increased by$1,180 from $107,804 for the three months ended December 31, 2007 to$108,984 for the three months ended December 31, 2008. Theincrease is attributable to the additions to our property andequipment.
TotalOperating Expenses
Totaloperating expenses increased to $2,935,522 from $1,842,399, or an increaseof $1,093,123 primarily attributable to the fair value of vested optionsgranted and additional R&D expenditures, net with a decrease in costsincurred in connection with professional services.
InterestExpenses
Interestexpense for the three months ended December 31, 2008 increased by$97,207 to $482,829 from $385,622 in the same period of 2007. Theincrease in interest expense was due to additional borrowing during the year2008.
Net lossfor the three months ended December 31, 2008 increased to $3,316,014 from anet loss of $2,132,744 in the prior period primarily attributable tofactors described above.
Liquidityand Capital Resources
Ourliquidity needs consist of our working capital requirements, indebtednesspayments and research and development expenditure funding. Historically, we havefinanced our operations through the sale of equity and convertible debt as wellas borrowings from various credit sources.
Ourregistered independent certified public accountants have stated in their reportdated December 15, 2008, that we have incurred operating losses in the last twoyears, and that we are dependent upon management’s ability to develop profitableoperations and raise additional capital. These factors among others may raisesubstantial doubt about our ability to continue as a goingconcern..
As ofDecember 31, 2008, we had a working capital deficit of $13.7 million. For theyear ended September 30, 2008, we generated a net cash flow deficit fromoperating activities of $2.9 million consisting primarily of year to date lossesof $6.8 million. Non cash adjustments included $3.2 million in depreciation andamortization charges and $1.0 million for common stock issued in exchange forservices. Additionally we had a net increase in current assets of $0.05 millionand a net decrease in current liabilities of $0.3 million. Cash provided byinvesting activities totaled $0.4 million, primarily provided by reduction incash held in escrow net with $0.02 million in acquisition of property andequipment. Cash provided by financing activities for the year ended September30, 2008 totaled $2.7 million consisting of proceeds from issuance ofconvertible debt. For thethree months ended December 31, 2008, we generated a net cash flow deficit fromoperating activities of $585,259 consisting primarily of year to date losses of$3,316,014. Non-cash adjustments included $610,702 indepreciation and amortization charges and the fair value of vested options forservices provided of $1,850,247. Additionally, we had a net decrease in currentassets of $35,401 and a net decrease in current liabilities of$234,405. We met our cash flow needs by issuance of convertible notesof $500,000, net, for the three months ended December 31,2008.
We expectcapital expenditures to be less than $75,000 in fiscal 2009. Our primaryinvestments will be in laboratory equipment to support prototyping and ourauthentication services.
Exploitationof potential revenue sources will be financed primarily through the sale ofsecurities and convertible debt, issuance of notes payable and other debt or acombination thereof, depending upon the transaction size, market conditions andother factors.
While wehave raised capital to meet our working capital and financing needs in the past,additional financing is required within the next three months in order to meetour current and projected cash flow deficits from operations and development. Wehave sufficient funds to conduct our operations untilapproximately June 2009. There can be no assurance that financing will beavailable in amounts or on terms acceptable to us, if at all.
Byadjusting our operations and development to the level of capitalization, webelieve we have sufficient capital resources to meet projected cash flowdeficits. However, if during that period or thereafter, we are not successful ingenerating sufficient liquidity from operations or in raising sufficient capitalresources, on terms acceptable to us, this could have a material adverse effecton our business, results of operations liquidity and financialcondition.
Wepresently do not have any available credit, bank financing or other externalsources of liquidity. Due to our brief history and historical operating losses,our operations have not been a source of liquidity. We will need to obtainadditional capital in order to expand operations and become profitable. Weintend to pursue the building of a re-seller network outside the United States,and if successful, the re-seller agreements would constitute a source ofliquidity and capital over time. In order to obtain capital, we may need to selladditional shares of our common stock or borrow funds from private lenders.There can be no assurance that we will be successful in obtaining additionalfunding and execution of re-seller agreements outside the UnitesStates.
Webelieve we may be required to seek additional capital to sustain or expand ourprototype and sample manufacturing, and sales and marketing activities, and tootherwise continue our business operations beyond that date. We have nocommitments for any future funding, and may not be able to obtain additionalfinancing or grants on terms acceptable to us, if at all, in the future. If weare unable to obtain additional capital this would restrict our ability to growand may require us to curtail or discontinue our business operations.Additionally, while a reduction in our business operations may prolong ourability to operate, that reduction would harm our ability to implement ourbusiness strategy. If we can obtain any equity financing, it may involvesubstantial dilution to our then existing stockholders.
Additionalinvestments are being sought, but we cannot guarantee that we will be able toobtain such investments. Financing transactions may include the issuance ofequity or debt securities, obtaining credit facilities, or other financingmechanisms. However, the trading price of our common stock and the downturn inthe U.S. stock and debt markets could make it more difficult to obtain financingthrough the issuance of equity or debt securities. Even if we are able to raisethe funds required, it is possible that we could incur unexpected costs andexpenses, fail to collect significant amounts owed to us, or experienceunexpected cash requirements that would force us to seek alternative financing.Further, if we issue additional equity or debt securities, stockholders mayexperience additional dilution or the new equity securities may have rights,preferences or privileges senior to those of existing holders of our commonstock. If additional financing is not available or is not available onacceptable terms, we will have to curtail our operations.
Substantiallyall of the real property used in our business is leased under operating leaseagreements.
RecentDebt and Equity Financing Transactions
Fiscal2007
Duringthe year ended September 30, 2007, we issued and sold an aggregate principalamount of $850,000 in secured convertible promissory notes bearing interest at10% per annum and warrants to purchase an aggregate of 1,700,000 shares of ourcommon stock to James A. Hayward, our President, Chairman and Chief ExecutiveOfficer.
On April23, 2007, we issued and sold to James A. Hayward a $100,000 principal amountsecured promissory note (“April Note”) bearing interest at a rate of 10% perannum and a warrant (“April Warrant”) to purchase 200,000 shares of our commonstock. On June 30, 2007, we issued and sold to James A. Hayward a $250,000principal amount secured promissory note (“June Note”) bearing interest at arate of 10% per annum and a warrant (“June Warrant”) to purchase 500,000 sharesof our common stock. On July 30, 2007, we issued and sold to James A. Hayward a$200,000 principal amount secured promissory note (“July Note”) bearing interestat a rate of 10% per annum and a warrant (“July Warrant”) to purchase 400,000shares of our common stock. On September 28, 2007, we issued and sold to JamesA. Hayward a $300,000 principal amount secured promissory note (“SeptemberNote”) bearing interest at a rate of 10% per annum and a warrant (“SeptemberWarrant”) to purchase 600,000 shares of our common stock.
The AprilNote and accrued but unpaid interest thereon converted on April 22, 2008 at aconversion price of $0.15 into 733,334 shares of our common stock. The AprilWarrant is exercisable for a four-year period commencing on April 23, 2008, andexpiring on April 22, 2012, at a price of $0.50 per share. The April Warrant maybe redeemed at our option at a redemption price of $0.01 upon the earlier of (i)April 22, 2010, and (ii) the date our common stock is quoted on The Over theCounter Bulletin Board at or above $1.00 per share for 20 consecutive tradingdays.
The JuneNote and accrued but unpaid interest thereon converted on June 30, 2008 at aconversion price of $0.087732076 per share, which is equal to a 20% discount tothe average volume, weighted average price of our common stock for the tentrading days prior to issuance into 3,134,543 shares of our common stock. TheJune Warrant is exercisable for a four-year period commencing on June 30, 2008,and expiring on June 29, 2012, at a price of $0.50 per share. The June Warrantmay be redeemed at our option at a redemption price of $0.01 upon the earlier of(i) June 29, 2010, and (ii) the date our common stock has traded on The Over theCounter Bulletin Board at or above $1.00 per share for 20 consecutive tradingdays.
The JulyNote and accrued but unpaid interest thereon converted on July 30, 2008 at aconversion price of $0.102568072 per share, which is equal to a 20% discount tothe average volume, weighted average price of our common stock for the tentrading days prior to issuance, into 2,144,917 shares of our common stock. TheJuly Warrant is exercisable for a four-year period commencing on July 30, 2008,and expiring on July 29, 2012, at a price of $0.50 per share. The July Warrantmay be redeemed at our option at a redemption price of $0.01 upon the earlier of(i) July 29, 2010, and (ii) the date our common stock has traded on The Over theCounter Bulletin Board at or above $1.00 per share for 20 consecutive tradingdays.
TheSeptember Note and accrued but unpaid interest thereon converted on September28, 2008 at a conversion price of $0.066429851 per share, which is equal to a30% discount to the average volume, weighted average price of our common stockfor the ten trading days prior to issuance, into 4,967,646 shares of our commonstock. The September Warrant is exercisable for a four-year period commencing onJuly 30, 2008, and expiring on September 27, 2012, at a price of $0.50 pershare. The September Warrant may be redeemed at our option at a redemption priceof $0.01 upon the earlier of (i) September 27, 2010, and (ii) the date ourcommon stock has traded on The Over the Counter Bulletin Board at or above $1.00per share for 20 consecutive trading days.
Inaddition, on June 27, 2007, we completed a private placement offering ofconvertible debt and associated warrants in which we issued and sold to certaininvestors an aggregate of 3 units of our securities, each unit consisting of (i)a $50,000 Principal Amount of 10% Secured Convertible Promissory Note and (ii)warrants to purchase 100,000 shares of our common stock. The notes and accruedbut unpaid interest thereon converted at $0.15 per share on June 27, 2008 intoan aggregate of 1,100,000 shares of our common stock. The warrants areexercisable for a four year period commencing on June 27, 2008, and expiring onJune 26, 2012, at a price of $0.50 per share. On August 8, 2007, we issued andsold a $100,000 principal amount secured promissory note bearing interest at arate of 10% per annum and a warrant to purchase 200,000 shares of our commonstock to an “accredited investor,” as defined in regulations promulgated underthe Securities Act. The promissory note and accrued but unpaid interest thereonconverted on August 8, 2008 at a conversion price of $0.096274883 per share,which is equal to a 20% discount to the average volume, weighted average priceof our common stock for the ten trading days prior to issuance, into 1,142,562shares of our common stock. The warrant is exercisable for a four-year periodcommencing on August 8, 2008, and expiring on August 7, 2012, at a price of$0.50 per share.
Fiscal2008
Duringthe year ended September 30, 2008, we sold an aggregate of thirty-six units at aprice of $100,000 per unit for sale to “accredited investors,” as defined inregulations promulgated under the Securities Act, for aggregate gross proceedsof $3,600,000. Each unit consists of (i) a $100,000 Principal Amount 10% SecuredConvertible Promissory Note and (ii) a warrant to purchase 200,000 shares of ourcommon stock. The promissory notes and accrued but unpaid interest thereonautomatically convert one year after issuance at a conversion price equal to adiscount to the average volume, weighted average price of our common stock forthe ten trading days prior to issuance, and are convertible into shares of ourcommon stock at the option of the holder at any time prior to such automaticconversion at a price equal to the greater of (i) 50% of the average price ofour common stock for the ten trading days prior to the date of the notice ofconversion and (ii) the automatic conversion price. In addition, any time priorto conversion, we have the irrevocable right to repay the unpaid principal andaccrued but unpaid interest under the notes on three days notice. The promissorynotes bear interest at the rate of 10% per annum and are due and payable in fullon the one year anniversary of their issuance. The warrants are exercisable forcash or on a cashless basis for a period of four years commencing one year afterissuance at a price of $0.50 per share. Each warrant may be redeemed at ouroption at a redemption price of $0.01 upon the earlier of (i) three years afterthe issuance, and (ii) the date our common stock has traded on The Over theCounter Bulletin Board at or above $1.00 per share for 20 consecutive tradingdays.
Fiscal2009
OnOctober 21, 2008, we issued and sold to James A. Hayward a $500,000 principalamount secured promissory note (“October Note”) bearing interest at a rate of10% per annum and a warrant (“October Warrant”) to purchase 1,000,000 shares ofour common stock. The October Note and accrued but unpaid interest thereon isconvertible into shares of our common stock at a price of $0.50 per share by theholder at any time from October 21, 2008, through October 20, 2009, and shallautomatically convert on October 21, 2009 at a conversion price of $0.026171520per share, which is equal to a 30% discount to the average volume, weightedaverage price of our common stock for the ten trading days prior to issuance. Atany time prior to conversion, we have the right to prepay the October Note andaccrued but unpaid interest thereon upon 3 days prior written notice (duringwhich period the holder can elect to convert the note). The October Warrant isexercisable for a four-year period commencing on October 21, 2009, and expiringon October 20, 2013, at a price of $0.50 per share. The October Warrant may beredeemed at our option at a redemption price of $0.01 upon the earlier of (i)October 20, 2011, and (ii) the date our common stock has traded on The Over theCounter Bulletin Board at or above $1.00 per share for 20 consecutive tradingdays.
OnJanuary 29, 2009, we issued and sold to James A. Hayward a $150,000 principalamount secured promissory note (“January Note”) bearing interest at a rate of10% per annum and a warrant (“January Warrant”) to purchase 300,000 shares ofour common stock. The January Note and accrued but unpaid interestthereon shall automatically convert on January 29, 2010 at a conversionprice of $0.033337264 per share, which is equal to a 20% discount to the averagevolume, weighted average price of our common stock for the ten trading daysprior to issuance, and are convertible into shares of our common stock at theoption of the noteholder at any time prior to such automatic conversion at aprice equal to the greater of (i) 50% of the average price of our common stockfor the ten trading days prior to the date of the notice of conversion and (ii)the automatic conversion price. In addition, any time prior toconversion, we have the irrevocable right to repay the unpaid principal andaccrued but unpaid interest under the January Note on three days written notice(during which period the holder can elect to convert the note). The JanuaryNote bears interest at the rate of 10% per annum and is due and payable in fullon January 29, 2010. Until the principal and accrued but unpaid interestunder the January Note are paid in full, or converted into our common stock, theJanuary Note will be secured by a security interest in all of our assets. TheJanuary Warrant is exercisable for a four-year period commencing on January 29,2010, and expiring on January 28, 2014, at a price of $0.50 pershare. The January Warrant may be redeemed at our option at aredemption price of $0.01 upon the earlier of (i) January 29, 2012, and (ii) thedate our common stock has been quoted on The Over the Counter Bulletin Board ator above $1.00 per share for 20 consecutive trading days.
OnFebruary 27, 2009, we issued and sold a $200,000 principal amount securedpromissory note (“February Note”) bearing interest at a rate of 10% per annum toJames A. Hayward, our Chairman, President and Chief ExecutiveOfficer. The February Note and accrued but unpaid interest thereonshall automatically convert into shares of our common stock on February 27, 2010at a conversion price of $0.046892438 per share, which is equal to a 20%discount to the average volume, weighted average price of our common stock forthe ten trading days prior to issuance, and is convertible into shares of ourcommon stock at the option of the noteholder at any time prior to such automaticconversion at a price equal to the greater of (i) 50% of the average price ofour common stock for the ten trading days prior to the date of the notice ofconversion and (ii) the automatic conversion price. In addition, anytime prior to conversion, we have the irrevocable right to repay the unpaidprincipal and accrued but unpaid interest under the February Note on three dayswritten notice (during which period the holder can elect to convert the FebruaryNote). The February Note bears interest at the rate of 10% per annumand is due and payable in full on February 27, 2010. Until theprincipal and accrued but unpaid interest under the February Note are paid infull, or converted into shares of our common stock, the February Note will besecured by a security interest in all of our assets.
On March30, 2009, we issued and sold a $250,000 principal amount secured promissory note(“March Note”) bearing interest at a rate of 10% per annum to James A. Hayward,our Chairman, President and Chief Executive Officer. The March Noteand accrued but unpaid interest thereon shall automatically convert into sharesof our common stock on March 30, 2010 at a conversion price of $0.043239467 pershare, which is equal to a 20% discount to the average volume, weighted averageprice of our common stock for the ten trading days prior to issuance, and isconvertible into shares of our common stock at the option of the noteholder atany time prior to such automatic conversion at a price equal to the greater of(i) 50% of the average price of our common stock for the ten trading days priorto the date of the notice of conversion and (ii) the automatic conversionprice. In addition, any time prior to conversion, we have theirrevocable right to repay the unpaid principal and accrued but unpaid interestunder the March Note on three days written notice (during which period theholder can elect to convert the March Note). The March Note bearsinterest at the rate of 10% per annum and is due and payable in full on March30, 2010. Until the principal and accrued but unpaid interest underthe March Note are paid in full, or converted into shares of our common stock,the March Note will be secured by a security interest in all of ourassets.
On April14, 2009, we issued and sold an aggregate of $300,000 principal amount securedpromissory notes (“April Notes”) bearing interest at a rate of 10% per annum tocertain investors. The April Notes and accrued but unpaid interestthereon shall automatically convert into shares of our common stock on April 14,2010 at a conversion price of $0.070756456 per share, which is equal to a 20%discount to the average volume, weighted average price of our common stock forthe ten trading days prior to issuance, and is convertible into shares of ourcommon stock at the option of the noteholders at any time prior to suchautomatic conversion at a price equal to the greater of (i) 50% of the averageprice of our common stock for the ten trading days prior to the date of thenotice of conversion and (ii) the automatic conversion price. Inaddition, any time prior to conversion, we have the irrevocable right to repaythe unpaid principal and accrued but unpaid interest under the April Notes onthree days written notice (during which period the holders can elect to convertthe April Notes). The April Notes bear interest at the rate of 10%per annum and are due and payable in full on April 14, 2010. Untilthe principal and accrued but unpaid interest under the April Notes are paid infull, or converted into shares of our common stock, the April Notes will besecured by a security interest in all of our assets.
Off-BalanceSheet Arrangements
We do nothave any off-balance sheet arrangements.
Inflation
Theeffect of inflation on our revenue and operating results was notsignificant.
GoingConcern
Theaccompanying audited condensed consolidated financial statements included inthis filing have been prepared in conformity with generally accepted accountingprinciples that contemplate our continuance as a going concern. Our auditors, intheir report dated December 15, 2008, have expressed substantial doubt about ourability to continue as going concern. Our cash position may be inadequate to payall of the costs associated with the testing, production and marketing of ourproducts. Management intends to use borrowings and the sale of equity orconvertible debt to mitigate the effects of its cash position, however noassurance can be given that debt or equity financing, if and when required willbe available. The accompanying audited condensed consolidated financialstatements do not include any adjustments relating to the recoverability andclassification of recorded assets and classification of liabilities that mightbe necessary should we be unable to continue existence.
Overview
We usethe DNA of plants and innovative technologies to provide anti-counterfeiting andproduct authentication solutions and to manufacture ingredients for personalcare products and textiles. SigNature® DNA and BioMaterial™ Genotyping, ourprincipal anti-counterfeiting and product authentication solutions, allow usersto accurately and effectively protect branded products, artwork andcollectibles, fine wine, digital media, financial instruments, identity cardsand other official documents. Our BioActive™ Ingredients, which are being usedby our customers in personal care products, such as skin care products, and intextiles, such as intimate apparel, are custom-manufactured to address acustomer’s specific need.
SigNatureDNA. We use the DNA of plants to manufacture highly customized andencrypted botanical DNA markers, or SigNature DNA Markers, which we believe arevirtually impossible to replicate. We have embedded SigNature DNA Markers into arange of our customers’ products, including various inks, thermal ribbon,thread, varnishes and adhesives. These items can then be tested for the presenceof SigNature DNA Markers through an instant field detection or a forensic levelauthentication. Our SigNature DNA solution provides a secure, accurate andcost-effective means for users to incorporate our SigNature DNA Markers in, andthen quickly and reliably authenticate and identify, a broad range of items suchas branded products, artwork and collectibles, cash-in-transit, fine wine,digital media, financial instruments, identity cards and other officialdocuments. Having the ability to reliably authenticate and identify counterfeitversions of such items enables companies and governments to detect, deter,interdict and prosecute counterfeiting enterprises and individuals.
BioMaterialGenoTyping. Our BioMaterial GenoTyping solution refers to the developmentof genetic assays to distinguish between varieties or strains of biomaterials,such as cotton, wool, tobacco, fermented beverages, natural drugs and foods,that contain their own source DNA. We have developed two proprietary genetictests (FiberTyping™ and PimaTyping™) to track American Pima cotton from thefield to finished garments. These genetic assays provide the cotton industrywith the first authentication tools that can be applied throughout the U.S. andworldwide cotton industry from cotton growers, mills, wholesalers, distributors,manufacturers and retailers through trade groups and governmentagencies.
CorporateHistory
We are aDelaware corporation, which was initially formed in 1983 under the laws of theState of Florida as Datalink Systems, Inc. In 1998, we reincorporated in Nevada,and in 2002, we changed our name to our current name, Applied DNA Sciences, Inc.In December 2008, we completed our reincorporation from Nevada to the State ofDelaware. Our corporate headquarters are located at the Long Island HighTechnology Incubator at Stony Brook University in Stony Brook, New York, wherewe established laboratories for the manufacture of DNA markers and productprototypes, and DNA authentication. To date, the company has a very limitedoperating history, and as a result, the company’s operations have not producedsignificant revenues.
BioActiveIngredients. Our BioActive Ingredients program began in 2007, based onthe biofermentation expertise developed during the manufacturing of DNA for ourSigNature DNA and BioMaterial Genotyping solutions. Our BioActive Ingredientshave been used by our customers in personal care products, such as skin careproducts, and in textiles, such as intimate apparel.
IndustryBackground
Counterfeiting,product diversion, piracy, forgery, identity theft, and unauthorized intrusioninto physical locations and databases create significant and growing problems tocompanies in a wide range of industries as well as governments and individualsworldwide. The U.S. Chamber of Commerce reported in 2007 that counterfeiting andpiracy cost the U.S. economy between $200-$250 billion per year, or an estimated750,000 American jobs, and pose a real threat to consumer health and safety. TheWorld Customs Organization and Interpol estimate that annual global trade inillegitimate goods was $650 billion in 2007.
Productcounterfeiting and diversion particularly harms manufacturers of consumerproducts, especially for prestige and established brands, and the consumers whopurchase them. This total includes:
| | | |
| | Ÿ | $34 billion of software products; |
| | Ÿ | $12 billion of apparel and footwear; |
| | Ÿ | $193 million of cigarettes and tobacco products; |
| | Ÿ | $32 billion of pharmaceuticals; |
| | Ÿ | $18 million in wine; |
| | Ÿ | $500 million of sports equipment; |
| | Ÿ | $35 million of electronic equipment and supplies; |
| | Ÿ | $3 billion in cosmetics; |
| | Ÿ | $12 billion in automobile parts; |
| | Ÿ | $11 million of food and alcohol products; |
| | Ÿ | $11 million in jewelry and watches; |
| | Ÿ | $10 million of computer equipment and supplies; and |
| | Ÿ | $123 million of other goods. |
Theartworks and collectibles markets are also particularly vulnerable tocounterfeiting, forgery and fraud. New works are produced and then passed off asoriginating from a particular artistic period or source, authentic fragments arepieced together to simulate an original work, and existing works are modified inorder to increase their purported value. Such phony artwork and collectibles arethen often sold with fake or questionable signatures and “provenance,” ordocumented ownership histories that confirm authenticity.
Cash-in-transitbusinesses transport and store cash and ATM cassettes. In the U.K. alone, thereis an estimated £500 billion being transported each year, or £1.4 billion perday. The nature of this business makes cash-in-transit an attractive target forcriminals, and as a result the industry invests in excess of £100 million peryear in security equipment and devices. Currently, a system of cash degradation,using a smoke or liquid dye to permanently mark and essentially destroy stolencash, is used. The incidence of cash-in-transit based crime has increased over170% in London since 2006, according to the Metropolitan Police.
Governmentsare increasingly vulnerable to counterfeiting, terrorism and other securitythreats at least in part because currencies, identity and security cards andother official documents can be counterfeited with relative ease. For instance,the DOPIP valued 2005 seizures and losses associated with counterfeit currencyat around $609 billion, and counterfeit identification at $124 million.Governments must also enforce the various anti-counterfeiting and anti-piracyregimes of their respective jurisdictions which becomes increasingly difficultwith the continued expansion of global trade.
Thedigital and recording media industry, including the segment that recordscomputer software on compact discs, has long been a victim of piracy, or theproduction of illegal copies of genuine media or software, and thecounterfeiting and distribution of imitation media or software. Compact discs,DVDs, videotapes, computer software and other digital and recording media thatappears identical to genuine products are sold at substantial discounts byvendors at street and night markets, via mail order catalogs and on the internetat direct retail websites or at auction sites. In 2008 the Business SoftwareAlliance (“BSA”) reported that in 2007, the United States lost $8.0 billion as aresult of software piracy. The BSA also estimated that 33 percent of softwareprograms in the U.S. are unlicensed and that since January 1, 2000, the BSA hassettled with 1,668 companies for a total of $81,821,895. In a white paperpublished in December 2005, the BSA and the IDC also reported that they found ina 2007 study that for every two dollars worth of software purchasedlegitimately, one dollar was obtained illegally.
Thepharmaceutical industry also faces major problems relative to counterfeit,diluted, or falsely labeled drugs that make their way through healthcare systemsworldwide, posing a health threat to patients and a financial threat todrugmakers and distributors. In 2006 the Center for Medicine in the PublicInterest predicted that counterfeit drug sales will reach $75 billion globallyin 2010, an increase of more than 90% from 2005. In February, 2006, the WorldHealth Organization (“WHO”) estimated that counterfeits account for more than10% of the global pharmaceuticals market, and 25% of pharmaceuticals consumed indeveloping countries and that as much as 50% in some countries, are counterfeit.According to the WHO, counterfeiting can apply to both branded and genericproducts and counterfeit pharmaceuticals may include products with the correctingredients but fake packaging, with the wrong ingredients, without activeingredients or with insufficient active ingredients. The challenges presented bytraditional counterfeiters have recently been supplemented by the many websites,from direct retailers to auction sites, that offer counterfeit prescriptiondrugs online. As a result, the pharmaceutical industry and regulators areexamining emerging anti-counterfeit technologies, including radio-frequencyidentification tags and electronic product codes, known as EPCs, to help stemthe wave of counterfeit drugs and better track legitimate drugs frommanufacturing through the supply chain.
As moreand more companies in each of these markets begin to address the problem ofcounterfeiting, we expect that different systems will compete to be the leadingstandards by which products can be tracked across world markets. Historically,counterfeiting, product diversion and other types of fraud have been combattedby embedding various authentication systems and rare and easily distinguishablematerials into products, such as radio frequency identification (“RFID”) devicesand banknote threads in packaging, integrated circuit chips and magnetic stripsin automatic teller machine cards, holograms on currency, elemental taggants inexplosives, and radioactivity and rare molecules in crude oil. These techniquesare effective but have generally been reverse-engineered and replicated bycounterfeiters, which limits their usefulness as forensic methods forauthentication of the sources of products and other items.
Everyliving organism has a unique DNA code that determines the character andcomposition of its cells. The core technologies of our business allow us to usethe DNA of everyday plants to mark objects in a unique manner that we believecannot be replicated, and then identify these objects by detecting the absenceor presence of the DNA. Our scientific team was able to develop genetic basedassays and protocols to identify DNA markers that are endogenous to a particularplant in order to differentiate between biological strains of cotton and we arenow employing the same methodology in wool, wine and other natural products. Inaddition, in the case of Pima cotton, we have developed proprietary technologiesto differentiate between Pima ( G. barbadense ) and Non-Pima ( G. hirsutum )cotton with absolute certainty. In the process, we were also able to develop anapproach to attach an exogenous DNA marker to a finished textile product. Cottonclassification and the authentication of cotton geographic origin are issues ofglobal significance, important to brand owners and to governments that mustregulate the international cotton trade. The use of DNA to identify the cottonfiber content of finished textiles is a significant opportunity for licenseholders to control their brand and for governments to improve their ability toenforce compliance with trade agreements between nations. In addition to theglobal cotton trade, the markets for BioMaterial Genotyping includebiotherapeutics, nutraceuticals, natural foods, wines and fermented alcohols andother natural textiles.
Theglobal market for specialty raw materials for cosmetics and toiletries, whichincludes BioActive Ingredients, was reported to be $5.9 billion in 2006 with anestimated growth of 5% per year (Freedonia).
OurOfferings
SigNatureDNA
Webelieve our SigNature DNA offering is as broadly applicable, convenient andinexpensive as existing authentication systems, while highly resistant toreverse-engineering or replication, so that it can either be appliedindependently or supplement existing systems in order to allow for a forensiclevel of authentication of the sources of a broad range of items, such asartwork and collectibles, fine wine, consumer products, digital and recordingmedia, pharmaceuticals, financial instruments, identity cards and officialdocuments. Each SigNature DNA Marker is first designed and manufactured to be ahighly customized and encrypted botanical DNA marker. The SigNature DNA Markeris then encapsulated and stabilized so that it is resistant to heat, organicsolvents, chemicals and most importantly, ultraviolet, or UV radiation. Once ithas been encapsulated, our SigNature DNA Embedment system can be used to embedthe SigNature DNA Marker directly onto products or other items or into specialinks, threads and other media, which in turn can be incorporated into packagingor products. Once it is embedded, our SigNature DNA Encryption Detector pen caninstantly test for the presence or absence of any of our SigNature DNA Markers,and our SigNature polymerase chain reaction (PCR) Kits can provide rapidforensic level authentication of specific SigNature DNA Markers.
Webelieve that the key characteristics and benefits of the SigNature DNA offeringare as follows:
WeBelieve Our SigNature DNA Markers Are Virtually Impossible to Copy
Increating unique SigNature DNA Markers, we use DNA segments from one or morebotanical sources, rearrange them into unique encrypted sequences, and thenimplement one or more layers of anti-counterfeit techniques. Because the portionof DNA in a SigNature DNA Marker used to identify the marker is so minute, itcannot be detected unless it is replicated billions of times over, or amplified.This amplification can only be achieved by applying matching strands of DNA, ora primer, and polymerase chain reaction (PCR) techniques to the SigNature DNAMarker. The sequence of the relevant DNA in a SigNature DNA Marker must be knownin order to manufacture the primer for that DNA. As a result, we believe theeffort required to find, amplify, select and clone the relevant DNA in aSigNature DNA Marker would involve such enormous effort and expense thatSigNature DNA Markers are virtually impossible to copy without our proprietarysystems.
Simpleand Rapid Authentication
We offerrapid readers capable of instantly testing for the presence or absence of any ofour SigNature DNA Markers. In addition, when a forensic level of authenticationis necessary, we offer in-field or in-house forensic DNA authentication with ahandheld battery powered PCR-based device that will confirm authenticationsequences in approximately 10 minutes.
LowCost and High Accuracy
The costsassociated with the DNA required to manufacture our SigNature DNA Markers arenot 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). Wemanufacture the identifying segment of DNA to be used in a SigNature DNA Markerby cloning them inside microorganisms such as yeast or bacteria, which arehighly productive and inexpensive to grow. As a result, SigNature DNA Markersare relatively inexpensive when compared to other anti-counterfeiting devicessuch as RFIDs, EPCs, integrated circuit chips, and holograms. The probability ofmistakenly identifying a SigNature DNA Marker is less than 1 in 1 trillion, soour authentication systems are highly accurate, and in fact, our SigNature PCRKits can authenticate to a forensic level.
EasilyIntegrated with Other Anti-Counterfeit Technologies
OurSigNature DNA Markers can be embedded onto RFID devices, banknote threads,labels, serial numbers, holograms, and other marking systems using inks, threadsand other media. We believe that combined with other traditional methods, ourSigNature DNA solution provides a significant deterrent against counterfeiting,product diversion, piracy, fraud and identity theft.
BroadApplicability and Ingestible
OurSigNature DNA Markers can be embedded into almost any consumer product, andvirtually any other item. For instance, the indelible SigNature DNA Ink weproduce is safe to consume and can be used in pharmaceutical drug tablets andcapsules. Use of our SigNature DNA in ingestible products and drugs will requireapproval of the U.S. Food and Drug Administration.
BioMaterialGenotyping
Webelieve our BioMaterial Genotyping solution offers a unique means fordetermining the authenticity of biomaterials, such as cotton, wool, tobacco,fermented beverages, natural drugs and foods. Just as a person’s DNA specifiesall of their unique qualities, biomaterials typically contain genomic DNA orfragments thereof that can be utilized to authenticate originality. We haveinitially developed two proprietary genetic-based assays and protocols toidentify DNA markers that are endogenous (internal) to a particular product inorder to differentiate between biological strains. In a process we callFibertyping™, we are able to differentiate between Pima cotton ( G. barbadense )and upland cotton ( G. hirsutum ). Our FiberTyping offering enables ourcustomers and potential clients to cost-effectively give assurance tomanufacturers, suppliers, distributors, retailers and end-users that theirproducts are authentic, that they are made from the fibers and textiles aslabeled. In a process we call Pimatyping™, we are able to differentiate betweenPima cotton grown in different regions of the world. Cotton classification andthe authentication of cotton geographic origin are issues of globalsignificance, important to brand owners and to governments that must regulateinternational cotton trade. Similar offerings are currently being developed foruse in biomaterials other than cotton. Biomaterials can now be tracked fromfield to final purchase guaranteeing the authenticity of the item. As we aretesting for innate genomic DNA, we believe these assays cannot becounterfeited.
Webelieve our BioMaterial Genotyping allows us to:
| | | |
| | Ÿ | Identify U.S. produced Pima cotton; |
| | Ÿ | Establish an authentication protocol for cotton and other biomaterials; and |
| | Ÿ | Deter counterfeits and protect the integrity of brands. |
Webelieve our two genetic assays accurately distinguish between:
| | | |
| | Ÿ | Pima cotton (G. barbadense) and upland cotton (G. hirsutum) cultivars in mature cotton fibers and in cotton fabrics (Fibertyping); and |
| | Ÿ | American Pima and Extra Long Staple (ELS) Pima cotton (Pimatyping), |
Webelieve that our new DNA extraction protocol and methodologies are moreeffective than existing forensic systems. We believe that the combination of ourSigNature DNA and BioMaterial Genotyping solutions covers the totalauthentication market, is applicable to multiple industry verticals, and canmark physical products on the front end and authenticate forensic DNA sequenceson the back end.
BioActiveIngredients
OurBioActive Ingredients program began in 2007, based on the biofermentationexpertise developed from our experience with the manufacture of DNA for ourSigNature DNA and BioMaterial Genotyping solutions. We initially targetedpotential customers in the personal care products industry, and we developedDermalRx, a range of high performance ingredients used by our customers for skincare applications. We subsequently developed DermalRx HydroSeal, which has beenincorporated into the fabric of a new line of intimate apparel currently beingtest marketed by a global marketer of intimate apparel. In addition, wedeveloped DermalRx SRC, Skin Resurfacing Complex, an ingredient designed topromote smoother more radiant skin by stimulating the skin’s own exfoliationprocess.
OurStrategy
We havebegun to generate revenues principally from sales of our SigNature DNA,BioMaterial Genotyping and BioActive Ingredients offerings. Key aspects of ourstrategy include:
Customizeand Refine our Solutions to Meet Potential Customers’ Needs
We arecontinuously attempting to improve our SigNature DNA solution by testing theincorporation of our SigNature DNA Markers into different media, such as newlyconfigured labels, inks or packing elements, for use in new applications. Eachprospective customer has specific needs and employs varying levels of existingsecurity technologies with which our solution must be integrated. Our goal is todevelop a secure and cost-effective system for each potential customer that canbe incorporated into that potential customer’s products or items themselves ortheir packaging so that they can, for instance, be tracked throughout the entiresupply chain and distribution system.
Continueto Enhance Detection Technologies for Authentication of our SigNature DNAMarkers
We havealso identified and are further examining opportunities to collaborate withcompanies and universities to develop a new line of detection technologies thatwill provide faster and more convenient ways to authenticate our SigNature DNAMarkers.
TargetPotential High-Volume Markets
We willcontinue to focus our efforts on target vertical markets that are characterizedby a high level of vulnerability to counterfeiting, product diversion, piracy,fraud, identity theft, and unauthorized intrusion into physical locations anddatabases. Today our target markets include art and collectibles,cash-in-transit, fine wine, consumer products, digital and recording media,pharmaceuticals, textile and apparel authentication and securedocuments/homeland security. If and when we have significantly penetrated thesemarkets, we intend to expand into additional related high volumemarkets.
PursueStrategic Acquisitions and Alliances
We intendto pursue strategic acquisitions of companies and technologies that strengthenand complement our core technologies, improve our competitive positioning, allowus to penetrate new markets, and grow our customer base. We also intend to workin collaboration with potential strategic partners in order to continue tomarket and sell new product lines derived from, but not limited to, DNAtechnology.
TargetMarkets
We havebegun offering our products and services in Europe and the United States and aretargeting the following principal markets:
Art& Collectibles
The fineart and collectibles markets are particularly vulnerable to counterfeiting,forgeries and fraud. Phony artwork and collectibles are often sold with fake orquestionable signatures or attributions. We believe our SigNature DNA Markerscan safely be embedded directly in, and so can be used to designate and thenauthenticate 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 supportingdocumentation related to the artwork or collectible, the signature of the artistand any other relevant material that would provide provenance, suchas:
| | | |
| | Ÿ | A signed certificate or statement of authenticity from a respected authority or expert on the artist; |
| | Ÿ | An exhibition or gallery sticker attached to the art or collectible; |
| | Ÿ | An original sales receipt; |
| | Ÿ | A film or recording of the artist talking about the art or collectible; |
| | Ÿ | An appraisal from a recognized authority or expert on the art or collectible; and |
| | Ÿ | Letters or papers from recognized experts or authorities discussing the art or collectible. |
Cash-in-Transit
Cash-in-transitbusinesses transport and store bank notes and ATM cassettes. In the U.K. alone,there is an estimated £500 billion being transported each year, or £1.4 billionper day. The nature of this business makes cash-in-transit an attractive targetfor criminals, and as a result the industry invests in excess of £100 millionper year in security equipment and devices. Currently, a system of cashdegradation, using a smoke or liquid dye to permanently mark and essentiallydestroy stolen bank notes, is used. The incidence of cash-in-transit based crimehas increased over 170% in London since 2006, according to the MetropolitanPolice and the UK boasts the highest levels of cash-in-transit crime inEurope.
We areable to incorporate our SigNature DNA Markers in cash degradation ink that isused in the cash-in-transit industry. This solvent-based ink marks bank notes ifthe cash box is compromised and has the ability to penetrate the bank notesrapidly and permanently. We believe our SigNature DNA Markers are more resilientand detectable than other competing products.
FineWine
Vintnersand purveyors of fine wine are also vulnerable to counterfeiting or productdiversion. We believe our SigNature and BioMaterial Genotyping solutions canprovide vintners, purveyors of fine wines and organizations within the winecommunity several benefits:
| | | |
| | Ÿ | Verifed authenticity increases potential customers’ confidence in the product and their purchase decision; |
| | Ÿ | For the vintner, the SigNature and BioMaterial Genotyping solutions can strengthen brand support and recognition, and offers the potential for improved marketability and sales; and |
| | Ÿ | 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; BioMaterial Genotyping allows the identification of wine based on the varietal of grape and the region where it is grown. |
ConsumerProducts
Counterfeititems are a significant and growing problem with all kinds of consumer packagedgoods, especially in the retail and apparel industries. According to the WorldCustoms Organization, up to $12 billion worth of clothing and accessoriesworldwide are fake, and Interpol reported $3 billion worth of fragrances andcosmetics are counterfeit each year. In the United States, $1.29 billion dollarsworth of seizures and losses were incurred resulting from counterfeit of appareland other consumer products. We have developed and are currently marketing anumber of solutions aimed at brand protection and authentication for the retailand apparel industries, including the clothing, accessories, fragrances andcosmetics segments. Our SigNature DNA solution can be used by manufacturers inthese industries to combat counterfeiting and piracy of primary, secondary andtertiary packaging, as well as the product itself, and to track products thathave been lost in transit, whether misplaced or stolen.
Digitaland Recording Media
Thedigital and recording media industry, including the segment that recordscomputer software on compact discs, faces significant threats from piracy andthe counterfeiting and distribution of imitation media or software. In 2008 theBusiness Software Alliance (“BSA”) reported that in 2007, the United Statessoftware industry lost $8.9 billion as a result of software piracy, an increaseof $1.6 billion over the previous year. An independent study conducted by IDCfor the BSA reported that 33 percent of software in the United States isunlicensed. Our SigNature DNA Markers can be embedded onto digital and recordingmedia products, such as CDs, DVDs, videotapes and computer software, as well asthe packaging of these products.
Pharmaceuticals
Thepharmaceutical industry also faces major problems relative to counterfeit,diluted, or falsely labeled drugs that make their way through healthcare systemsworldwide, posing a health threat to patients and a financial threat todrugmakers and distributors. As a result, the pharmaceutical industry andregulators are examining emerging anti-counterfeit technologies, including RFIDtags and EPCs to help stem the wave of counterfeit drugs and better tracklegitimate drugs from manufacturing through the supply chain. Our SigNature DNAMarkers can easily be embedded directly into pharmaceutical packaging or intoRFID tags or EPCs attached to packaging, and since they are ingestible, may beapplied as part of a unit dose. In its 2004 report “Combating CounterfeitDrugs,” the U.S. Food and Drug Administration noted that authenticationtechnologies for pharmaceuticals (such as color-shifting inks, holograms,taggants, or chemical markers embedded in a drug or its label) have beensufficiently perfected that they can now serve as a critical component of alayered approach to control counterfeit drugs. The U.S. Food and DrugAdministration’s 2004 Report acknowledged the importance of using one or moreauthentication technologies for drug products.
SecureDocuments/Homeland Security
Governmentsworldwide are increasingly faced with the problems of counterfeit currencies,official documents, and identity and security cards, as well as terrorism andother security threats. Governments must also enforce the variousanti-counterfeiting and anti-piracy regimes of their respective jurisdictionswhich becomes increasingly difficult with the continued expansion of globaltrade. Our SigNature DNA solution can provide secure, forensic, andcost-effective anti-counterfeiting, anti-piracy and identification solutions tolocal, state, and federal governments as well as the defense contractors and theother companies that do business with them. Our SigNature solution can be usedfor all types of identification and official documents, such as:
| | | |
| | Ÿ | passports; |
| | Ÿ | lawful permanent resident, or “green” cards; |
| | Ÿ | visas; |
| | Ÿ | drivers’ licenses; |
| | Ÿ | Social Security cards; |
| | Ÿ | military identification cards; |
| | Ÿ | national transportation cards; |
| | Ÿ | security cards for access to sensitive physical locations; and |
| | Ÿ | other important identity cards, official documents and security-related cards. |
Textileand Apparel Authentication
Cottonclassification and the authentication of cotton geographic origin are issues ofglobal significance, important to brand owners and to governments that mustregulate international cotton trade. We believe that our SigNature DNA andBioMaterial Genotyping solutions could have significant potential applicationsfor the enforcement of cotton trade quotas in the U.S. and across the globe, andfor legislated quality improvement within the industry. We believe that similarissues face the wool and other natural product industries which is the next areawe plan to target
OurTechnology
Everyliving organism has a unique DNA code that determines the character andcomposition of its cells. The core technologies of our business allow us to usethe DNA of everyday plants to mark objects in a unique manner that we believecan only be replicated at great expense, and then identify these objects bydetecting the absence or presence of the DNA.
SigNatureDNA Encryption
Ourpatent pending encryption system allows us to isolate strands of botanical DNAand then fragment and reconstitute them to form unique “DNA chimers”, orencrypted DNA segments, whose sequences are known only to us.
SigNatureDNA Encapsulation
Ourpatented encapsulation system allows us to apply a protective coating toencrypted DNA chimers, creating a SigNature DNA Marker that is resistant toheat, organic solvents, chemicals and UV radiation, and so can be identified forhundreds of years after being embedded directly, or into media applied orattached to the item to be marked.
SigNatureDNA Embedment
Ourpatented embedment system allows us to incorporate our SigNature DNA Markersinto a broad variety of media, such as petroleum and petroleum derivatives,inks, dyes, laminates, glues, threads, and textiles.
SigNatureDNA Authentication
Ourpatent pending forensic level authentication methods allow us to unlock theencrypted DNA chimers by using PCR techniques and proprietary primers that werespecifically designed by us to detect the DNA sequences we encrypted andembedded into the product or other item. Detection of the DNA chimers unique toa particular item or series of items allows us to authenticate its or theirorigin.
Productsand Services
OurSigNature DNA solution consists of three steps: creating and encapsulating aspecific encrypted DNA segment, applying it to a product or other item, anddetecting the presence or absence of the specific segment. We plan for the firsttwo steps to be controlled exclusively by Applied DNA and its certified agentsto ensure the security of SigNature DNA Markers. Once applied, the presence ofany of our SigNature DNA Markers can be detected by us or a customer in a simplespot test, or a sample taken from the product or other item can be analyzedforensically to obtain definitive proof of the presence or absence of a specifictype of SigNature DNA Marker (e.g., one designed to mark a particularproduct).
Creatinga Customer or Product-Specific SigNature DNA Marker
OurSigNature DNA Markers are botanical DNA segments custom manufactured by us toidentify a particular class of or individual products or items. During thismanufacturing process, we scramble and encrypt a naturally occurring botanicalDNA code segment or segments, and then encapsulate the resulting DNA segmentutilizing our proprietary SigNature DNA Encapsulation system. We then record andstore the sequence of the DNA segment in a secure database in order that we canlater detect it.
Embeddingthe SigNature DNA Marker
OurSigNature DNA Markers may be directly embedded in products or other items, orotherwise attached by embedding them into media that is incorporated in orattached to the product or item. For example, we can embed SigNature DNA Markersdirectly in paper, metal, plastics, stone, ceramic, and other materials. Mediain which we can embed SigNature DNA Markers include:
SigNature DNA Ink: OurSigNature DNA Ink can be applied directly or on a label that is then affixed tothe product or item. SigNature DNA Ink is highly durable and degradationresistant. SigNature DNA Ink can be visible (colored) or invisible. This makesit possible to mark products with a visible, or overt, and/or invisible, orcovert, SigNature DNA Marker on any tangible surface such as a label. Thelocation of covert Signature DNA Markers on a product are recorded and stored ina secure database. Similar media like varnish and paints can also be usedinstead of ink. Sporting event tickets have been prototyped using our SigNatureDNA Ink. In addition, our SigNature DNA Ink is being tested in governmentdocuments, auto parts, luxury goods and consumer products. Other examples ofwhere our SigNature DNA Inks can be used include:
| | | |
| | Ÿ | artwork and collectibles (paintings, artifacts, antiques, stamps, coins, documents, collectibles and memorabilia); |
| | Ÿ | corporate documents: (confidential, date and time dependent documents or security clearance documents); |
| | Ÿ | financial instruments (currency, stock certificates, checks, bonds and debentures); |
| | Ÿ | retail items (event tickets, VIP tickets, clothing labels, luxury products); |
| | Ÿ | pharmaceuticals (tablet, capsule and pill surface printing); and |
| | Ÿ | other miscellaneous items (lottery tickets, inspection stamps, custom seals, passports and visas, etc.). |
We havealso developed a portfolio of SigNature DNA containing thermal transfer ribbons.These products will allow retailers to protect at the point-of-sale by printingprice labels, hang tags, event tickets and even credentials with customizedSigNature markers. We are also able to mark cartridges of laser printers withSigNature DNA.
AzSure™ Security Ink: We havedeveloped AzSure bank note marking ink at the request of our cash-in-transitcustomer. This security ink is being marketed to governments and industry toprotect bank notes and other financial instruments. We believe the uniquevisible and fluorescent blue signature of our highly substantive dye/DNA systemdistinguishes AzSure from all other dyes used within the cash-in-transitindustry.
SigNature DNA Thread: OurSigNature DNA Thread, which can consist of any fabric from cotton to wool, isembedded with SigNature DNA Markers and can be used to mark and authenticateproducts and other items incorporating textiles. For example, SigNature DNAThread can be incorporated in a finished garment, bag, purse, shoe or otherproduct or item. SigNature DNA Thread can help textile vendors, clothing andaccessory manufacturers and governments authenticate thread, yarn and fabric atany stage in the supply chain. We can also embed our SigNature DNA Markers intoraw cotton fiber before manufacture of a finished cotton textile product (e.g.,a t-shirt) and authenticate a finished cotton product. We are currently workingwith the Textile Centre of Excellence consortium of companies (Leeds, UK) todemonstrate how our SigNature DNA can be used to authenticate textiles at allpoints of the supply chain through to the end user. In addition, we are workingto demonstrate the integration of SigNature DNA with existing manufacturingprocesses to produce threads, labels and fabrics manufactured by Yorkshire-basedcompanies.
Other Security Devices: OurSigNature DNA Markers can also be embedded onto printed barcodes, RFID tags,optical memory strips, holograms, tamper proof labels and other security devicesincorporated into products and other items for various security-relatedpurposes.
SigNatureDNA Detection and Product Authentication
We nowoffer a full range of detection options from instant rapid screening to moredetailed forensic level authentication:
Level 1 “Spot Test”Detection: We offer rapid readers capable of instantly testing for thepresence or absence of any of our SigNature DNA Markers.
Level 2 Forensic DNAAuthentication: When a forensic level of authentication is necessary, weoffer in-field or in-house forensic DNA authentication with a handheld batterypowered PCR-based device that will confirm authentication sequences inapproximately 10 minutes.
Salesand Marketing
As ofApril 22, 2009, we had three employees engaged in sales and marketing. We expectto hire additional sales directors and/or consultants to assist us with salesand marketing efforts with respect to our 6 target verticalmarkets.
Researchand Development
Ourresearch and development efforts are primarily focused on the development ofprototypes of new versions of our products using our existing technologies forreview by prospective customers, such as different types of SigNature DNA Inkand SigNature DNA Thread. We are also focused on the identification ofadditional genotyping markers and on the development of new ingredients for thepersonal care products industry. Nonetheless, we believe that our development ofnew and enhanced technologies relating to our business may be important to ourfuture success, and we continue to examine whether investments in the researchand development of such technologies is merited.
Manufacturing
We havethe capability to manufacture SigNature DNA Markers, covert DNA Ink, andSigNature PCR Kits at our laboratories in Stony Brook. We rely upon othercompanies to manufacture our overt color-changing DNA Ink. We also have in-housecapabilities to manufacture all BioActive Ingredients and to complete allBioMaterial Genotyping authentications.
CommercialAgreements and Distribution of our Products
HPT Agreement. On March 19,2007, we entered into a Technology Reseller Agreement (the “HPT Agreement”) withHPT International, LLC (“HPT”). In the HPT Agreement we agreed to supply ourSigNature DNA Markers to HPT to be affixed onto HPT’s holograms, Nylon 6 tagsand other plastic or metal food tags. HPT has been granted exclusive rights toaffix our SigNature DNA Markers onto its tagging products for distribution toits customers in the United States in the poultry and kosher foods markets, andnon-exclusive rights to attach our SigNature DNA Markers onto its taggingproducts for distribution to its customers worldwide. We will receive a fee foreach SigNature DNA Marker that is attached to an HPT product and distributed toa third party, and for each forensic level authentication test that we performat HPT’s request. HPT has been granted exclusive rights in the U.S. poultry andkosher foods markets with respect to new customers through March 18, 2008. Afterthat date, HPT will lose its exclusive rights if it does not realize certainsales goals or does not agree to certain minimum purchases during the subsequentyear of the agreement. Under the HPT Agreement, HPT has the right to permanentexclusivity in the U.S. poultry and kosher foods markets if it realizes itssales goals for the first two years under the HPT Agreement and achieves anadditional milestone to be agreed by us and HPT prior to March 18,2009.
IIMAK Agreement. On April 18,2007, we entered into a Joint Development and Marketing Agreement withInternational Imaging Materials, Inc., or IIMAK. In this agreement with IIMAK,the parties agreed to jointly develop thermal transfer ribbons incorporating ourSigNature DNA Markers to help prevent counterfeiting and product diversion foran initial six (6) month period. Upon the successful development of commerciallyfeasible ribbons incorporating SigNature DNA Markers, we will be paid royaltiesbased on a calculation of net receipts by IIMAK from sales of such products. Wewill receive the exclusive right to supply DNA taggants to IIMAK and IIMAK willreceive the exclusive right to manufacture and sell such products worldwide. InFebruary 2008, we completed the joint development stage of this agreement andinitiated pilot manufacturing of IIMAK thermal transfer ribbons embedded withSigNature DNA.
Printcolor Screen Ltd.Agreement. On May 30, 2007, we entered into a Technology ResellerAgreement with Printcolor Screen Ltd., or Printcolor. Under the terms of theagreement, we have been granted the exclusive right to supply our SigNature DNAMarkers to Printcolor and Printcolor has been granted rights to affix ourSigNature DNA Markers onto Printcolor products for distribution to its customersfor an initial period of three years. This initial period will automaticallyrenew for successive one year periods unless terminated earlier. We will be paidcertain fees based on purchase orders received from Printcolor.
Supima Cotton Agreement. OnJune 27, 2007, we entered into a Feasibility Study Agreement with Supima, anon-profit organization for the promotion of U.S. pima cotton growers. Inconnection with the agreement we undertook a study of the feasibility ofestablishing a method or methods to authenticate and identify U.S. produced pimacotton fibers. We received payments from Supima upon signing of the agreementand in installments beginning on July 6, 2007 through completion of thefeasibility study. The feasibility study was successfully completed in the firstquarter of 2008. We plan to begin a preliminary launch of authenticationservices in 2009 and we may in the future offer authentication services tomember companies of Supima (as well as non-member companies) to confirm theSupima cotton content of textile items such as apparel and home fashionproducts. We are obligated to pay Supima a percentage of any fees that wereceive from such companies for authentication services we provide them. We arealso obligated to pay Supima fifty percent of the aggregate amount of paymentsthat we received from Supima for the feasibility study out of any fees wereceive from providing authentication services. In addition, until the earlierof either (i) five years or (ii) the repayment to Supima of fifty percent of theaggregate amount of payments that we received from Supima for the feasibilitystudy, we are obligated to pay Supima a fee for each authentication service thatwe provide. The agreement may be terminated by us or Supima after sixty (60)days upon fourteen (14) days prior written notice.
Textile Centre of Excellence.On August 11, 2008, we entered into an Agreement with Huddersfield and DistrictTextile Training Company Limited. We have agreed to undertake a study todemonstrate how our SigNature DNA can be used to authenticate textiles at allpoints of the supply chain through to the end user. In addition, this study willdemonstrate the integration of SigNature DNA with existing manufacturingprocesses to produce threads, labels and fabrics manufactured by Yorkshire-basedcompanies. The funding for Phase I of the study, which runs through December2008, totals £50,000. Upon successful completion of Phase I of the study, weanticipate beginning Phase II, which could result in continuedfunding.
Biowell Agreement. In thefirst half of 2005, Biowell Technology, Inc. (“Biowell”) transferredsubstantially all of its intellectual property to Rixflex Holdings Limited, aBritish Virgin Islands company, and on July 12, 2005, Rixflex Holdings Limitedmerged with and into our wholly-owned subsidiary APDN (B.V.L.) Inc., a BritishVirgin Islands company. The shareholders of Rixflex Holdings Limited recieved 36million shares of our common stock in consideration of this merger. Inconnection with the acquisition of this Biowell intellectual property, weterminated our existing license agreement and on July 12, 2005, we entered intoa license agreement with Biowell, under which we granted Biowell an exclusivelicense to sell, market, and sub-license certain of our products in Australia,certain countries in Asia and certain Middle Eastern countries. By letter datedNovember 1, 2007, we terminated Biowell’s rights as license with respect toAustralia, China and certain other countries in Asia because of Biowell’sfailure to pay us certain fees, payments or consideration in connection with thegrant of the license. In addition, we terminated the exclusivity of the licensewith respect to certain Middle Eastern and other Asian countries because ofBiowell’s failure to meet certain minimum annual net sales in each of thevarious countries coverred by the license.
Competition
Theprincipal markets for our offerings are intensely competitive. We compete withmany existing suppliers and new competitors continue to enter the market. Manyof our competitors, both in the United States and elsewhere, are majorpharmaceutical, chemical and biotechnology companies, or have strategicalliances with such companies, and many of them have substantially greatercapital resources, marketing experience, research and development staff, andfacilities than we do. Any of these companies could succeed in developingproducts that are more effective than the products that we have or may developand may be more successful than us in producing and marketing their existingproducts. Some of our competitors that operate in the anti-counterfeiting andfraud prevention markets include: Applied Optical Technologies, Authentix,ChemTAG, Collectors Universe Inc., Collotype, Data Dot Technology, DigimarcCorp., DNA Technologies, Inc., ID Global, Informium AG, Inksure Technologies,Kodak, L-1 Identity Solutions, Manakoa, SmartWater Technology, Inc., SunChemical Corp, Tracetag and Warnex.
Someexamples of competing security products include:
| | | |
| | Ÿ | fingerprint scanner (a system that scans fingerprints before granting access to secure information or facilities); |
| | Ÿ | voice recognition software (software that authenticates users based on individual vocal patterns); |
| | Ÿ | cornea scanner (a scanner that scan the iris of a user’s eye to compare with data in a computer database); |
| | Ÿ | face scanner (a scanning system that use complex algorithms to distinguish one face from another); |
| | Ÿ | 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); |
| | Ÿ | 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); |
| | Ÿ | 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 |
| | Ÿ | radioactivity & rare molecules (radioactive substances or rare molecules which are uncommon and readilydetected). |
We expectcompetition with our products and services to continue and intensify in thefuture. We believe competition in our principal markets is primarily drivenby:
| | | |
| | Ÿ | product performance, features and liability; |
| | Ÿ | price; |
| | Ÿ | timing of product introductions; |
| | Ÿ | ability to develop, maintain and protect proprietary products and technologies; |
| | Ÿ | sales and distribution capabilities; |
| | Ÿ | technical support and service; |
| | Ÿ | brand loyalty; |
| | Ÿ | applications support; and |
| | Ÿ | breadth of product line. |
If acompetitor develops superior technology or cost-effective alternatives to ourproducts, our business, financial condition and results of operations could besignificantly harmed.
ProprietaryRights
Webelieve that our 7 patents, 14 patents pending, 2 registered trademarks, and 2registered trademarks pending, which are described in the table below, and ourtrademarks, trade secrets, copyrights and other intellectual property rights areimportant assets for us.
PatentsIssued:
| | | | | | | | | |
| Patent Name | | Patent No: | | Assignee of Record | | Dated Issued | | Jurisdiction |
| Nucleic Acid as Marker for Product Anticounterfeiting and Identification | | 89108443 | | APDN (B.V.I.) Inc. | | March 17, 2000 | | Taiwan |
| | | | | | | | | |
| Method of using ribonucleic acid as product antifake mark and for verification | | 00107580.2 | | Rixflex Holdings Limited (2) | | February 2, 2005 | | China |
| | | | | | | | | |
| EppenLocker (A Leakage-Prevention Apparatus of Microcentrifuge) | | 89204158 | | APDN (B.V.I.) Inc. | | March 10, 2000 | | Taiwan |
| | | | | | | | | |
| Multiple Tube Structure for Multiple PCR in a Closed Container | | 89210575 | | APDN (B.V.I.) Inc. | | June 20, 2000 | | Taiwan |
| | | | | | | | | |
| A Device for Multiple Polymerase Chain Reactions In a Closed Container and a Method of Using Thereof | | 89111477 | | APDN (B.V.I.) Inc. | | June 12, 2000 | | Taiwan |
| | | | | | | | | |
| Method for Mixing Nucleic Acid in Water Insoluble Media and Application Thereof | | 921221973 | | APDN (B.V.I.) Inc. | | August 11, 2003 | | Taiwan |
| | | | | | | | | |
| A Method of Utilizing Nucleic Acids as Markers for Product Anti-Counterfeit Labeling and Verification | | US 7,115,301 B2 | | Rixflex Holdings Limited (2) | | October 3, 2006 | | United States |
PatentsPending:
| | | | | | | | | |
| Patent Name | | Application No. | | Filed in the Name of | | Dated Filed | | Jurisdiction |
| Method for Mixing Nucleic Acid in Water Insoluble Media and Application Thereof | | 2002-294229 | | Biowell (1) | | August 31, 2002 | | Japan |
| | | 03007023.9 | | Rixflex Holdings Limited (2) | | March 27, 2003 | | EU |
| | | | | | | | | |
| | | 10/645,602 | | Rixflex Holdings Limited (2) | | August 22, 2003 | | United States |
| | | | | | | | | |
| Method of dissolving nucleic acid in water insoluble medium and its application | | 03155949.2 | | APDN (B.V.I.) Inc. | | August 27, 2003 | | China |
| | | | | | | | | |
| Novel nucleic acid based steganography system and application thereof | | 10/909,431 | | Rixflex Holdings Limited (2) | | August 3, 2004 | | United States |
| | | | | | | | | |
| Cryptic method of secret information carried in DNA molecule and its deencryption method | | 921221490 | | APDN (B.V.I.) Inc. | | August 6, 2003 | | Taiwan |
| | | | | | | | | |
| A novel nucleic acid based steganography system and application thereof | | 03127517.6 | | Biowell (1) | | August 6, 2003 | | China |
| | | | | | | | | |
| | | 61387/2004 | | Rixflex Holdings Limited (2) | | August 4, 2004 | | Korea |
| | | | | | | | | |
| Patent Name | | Application No. | | Filed in the Name of | | Dated Filed | | Jurisdiction |
| A novel method for coding based on nucleic acids and utility thereof | | 04018374.1 | | Rixflex Holdings Limited (2) | | August 3, 2004 | | EU |
| | | | | | | | | |
| | | 1-2004-00742 | | Rixflex Holdings Limited (2) | | August 4, 2004 | | Vietnam |
| | | | | | | | | |
| A novel nucleic acid based steganography system and applications thereof | | 092819 | | Rixflex Holdings Limited (2) | | August 4, 2004 | | Thailand |
| | | | | | | | | |
| | | PI20043145 | | Biowell (1) | | August 4, 2004 | | Malaysia |
| | | | | | | | | |
| | | 2004-225987 | | Rixflex Holdings Limited (2) | | August 2, 2004 | | Japan |
| | | | | | | | | |
| | | P-00200400374 | | Rixflex Holdings Limited (2) | | August 4, 2004 | | Indonesia |
| | | | | | | | | |
| | | 764/CHE/2004 | | Rixflex Holdings Limited (2) | | August 4, 2004 | | India |
| | | | | | | | | |
| Method for classifying group ID of shoppers and transferring the shopping discount to group development funds development | | 92119302 | | APDN (B.V.I.) Inc. | | July 15, 2003 | | Taiwan |
| | | | | | | | | |
| Method for transferring feedback foundation capable of identifying multiple objects | | 03150071.4 | | APDN (B.V.I.) Inc. | | July 31, 2003 | | China |
| | | | | | | | | |
| Method of Classifying Group ID of Shoppers and Transferring the Shopping Discount to Group Development Funds | | PI20042889 | | Rixflex Holdings Limited (2) | | August 4, 2004 | | Malaysia |
| | | | | | | | | |
| | | 092217 | | Rixflex Holdings Limited (2) | | July 12, 2004 | | Thailand |
| | | | | | | | | |
| | | 2004-200730 | | Biowell (1) | | July 7, 2004 | | Japan |
| | | | | | | | | |
| System and Method for authenticating multiple components associated with a particular product. | | 11/437,265 PCT/US2006/019660 | | APDN (B.V.I.) Inc. APDN (B.V.I.) Inc. | | May 19, 2005 May 19, 2006 | | US PCT |
| | | | | | | | | |
| System and Method for Marking Textiles with Nucleic Acid | | 10/825,968 | | APDN (B.V.I.) Inc. | | April 15, 2004 | | United States |
| | | | | | | | | |
| System and Method for Marking Textiles with Nucleic Acids | | Publication #20050112610 | | APDN (B.V.I.) Inc | | 4/16/2003 | | United States |
| | | | | | | | | |
| System and Method for Authenticating Multiple Components Associated with a Particular Good | | Publication # 22070048761 | | APDN (B.V.I.) Inc | | 5/20/2005 | | United States |
| | | | | | | | | |
| System and Method for Secure Document Printing and Detection | | Application # 60/874,425 | | APDN (B.V.I.) Inc | | 12/12/2006 | | United States |
| | | | | | | | | |
| System and Method for Authenticating Tablets | | Application #60/877,875 | | APDN (B.V.I.) Inc | | 12/26/2006 | | United States |
| | | | | | | | | |
| System and Method for Authenticating Sports Identification Goods | | Application # 60/877,869 | | APDN (B.V.I.) Inc. | | 12/29/2006 | | United States |
| | | | | | | | | |
| Patent Name | | Application No. | | Filed in the Name of | | Dated Filed | | Jurisdiction |
| Optical Reporter Compositions | | 11/954,030 | | APDN (B.V.I.) Inc. | | 12/11/2007 | | United States |
| | | | | | | | | |
| Methods for Covalent Linking of Optical Reporters | | 11/954,009 | | APDN (B.V.I.) Inc. | | 12/11/2007 | | United States |
| | | | | | | | | |
| Method for Authenticating Articles with Optical Reporters | | 11/954,038 | | APDN (B.V.I.) Inc. | | 12/11/2007 | | United States |
| | | | | | | | | |
| Method for Secure Document Printing and Detection | | 11/954,044 | | APDN (B.V.I.) Inc. | | 12/11/2007 | | United States |
| | | | | | | | | |
| Method for Authenticating Sports Identification Goods | | 11/954,051 | | APDN (B.V.I.) Inc. | | 12/11/2007 | | United States |
| | | | | | | | | |
| Method for Authenticating Tablets | | 11/954,055 | | APDN (B.V.I.) Inc. | | 12/11/2007 | | United States |
(1) Allpatents in the name of and patent applications filed in the name of Biowell havebeen assigned to our wholly-owned subsidiary APDN (B.V.I.) Inc., and we aremaking efforts to ensure APDN (B.V.I.) is the assignee or filer of record, asthe case may be.
(2) Allpatents in the name of and patent applications filed in the name of RixflexHoldings Limited, which merged into APDN (B.V.I.) Inc. on July 12, 2005, havebeen 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.
TrademarksIssued:
| | | | | | | | | |
| Trademark | | Registration No: | | Registered Owner | | Registration Date | | Jurisdiction |
| APPLIED DNA and model molecule design | | 846354 | | Applied DNA Sciences Inc. | | August 13, 2004 | | Mexico |
| | | | | | | | | |
| 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 (1) | | October 17, 2006 | | United States |
| | | | | | | | | |
| BIOWELL and Design | | 2,675,941 | | Rixflex Holdings Limited (1) | | January 21, 2003 | | United States |
| | | | | | | | | |
| BIOWELL and Design | | 2,611,291 | | Rixflex Holdings Limited (1) | | August 27, 2002 | | United States |
| | | | | | | | | |
| BIOWELL and Design | | 4101159010000 | | Biowell (2) | | May 4, 2005 | | South Korea |
| | | | | | | | | |
| BIOWELL and Design | | 4,819,252 | | Rixflex Holdings Limited (1) | | November 19, 2004 | | Japan |
(1) Allregistered trademarks in the name of Rixflex Holdings Limited have been assignedto APDN (B.V.I.) Inc., and we are making efforts to ensure APDN (B.V.I.) Inc. isthe registered owner.
(2) Allregistered 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 registeredowner.
TrademarksPending:
| | | | | | | | | |
| 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 |
| | | | | | | | | |
| FIBERTYPING | | 77/488,647 | | APDN (B.V.I.) Inc. | | June 2, 2008 | | United States |
| | | | | | | | | |
| PIMATYPING | | 77/488,531 | | APDN (B.V.I.) Inc. | | June 2, 2008 | | United States |
However,there are events that are outside of our control that pose a threat to ourintellectual property rights as well as to our products and services. Forexample, effective intellectual property protection may not be available inevery country in which our products and services are distributed. The efforts wehave taken to protect our proprietary rights may not be sufficient or effective.Any significant impairment of our intellectual property rights could harm ourbusiness or our ability to compete. Protecting our intellectual property rightsis costly and time consuming. Any increase in the unauthorized use of ourintellectual property could make it more expensive to do business and harm ouroperating results. Although we seek to obtain patent protection for ourinnovations, it is possible we may not be able to protect some of theseinnovations. Given the costs of obtaining patent protection, we may choose notto protect certain innovations that later turn out to be important. There isalways the possibility that the scope of the protection gained from one of ourissued patents will be insufficient or deemed invalid or unenforceable. We alsoseek to maintain certain intellectual property as trade secrets. This secrecycould be compromised by third parties, or intentionally or accidentally by ouremployees, which would cause us to lose the competitive advantage resulting fromthese trade secrets.
Additionally,litigation regarding patents and other intellectual property rights is extensivein the biotechnology industry. In the event of an intellectual property dispute,we may be forced to litigate. This litigation could involve proceedingsinstituted by the U.S. Patent and Trademark Office or the International TradeCommission, 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 ourbusiness. If a third party claims an intellectual property right to technologywe use, we might need to discontinue an important product or product line, alterour products and processes, pay license fees or cease our affected businessactivities. Although we might under these circumstances attempt to obtain alicense to this intellectual property, we may not be able to do so on favorableterms, or at all.
Purchaseof Intellectual Property and License Agreement with Biowell
In thefirst half of 2005, Biowell Technology, Inc. (“Biowell”) transferredsubstantially all of its intellectual property to Rixflex Holdings Limited, aBritish Virgin Islands company, and on July 12, 2005, Rixflex Holdings Limitedmerged with and into our wholly-owned subsidiary APDN (B.V.I.) Inc., a BritishVirgin Islands company. The shareholders of Rixflex Holdings Limited received 36million shares of our common stock in consideration of this merger. Inconnection with the acquisition of this Biowell intellectual property, weterminated our existing license agreement and, on July 12, 2005, we entered intoa license agreement with Biowell, under which we granted Biowell an exclusivelicense to sell, market, and sub-license certain of our products in Australia,certain countries in Asia and certain Middle Eastern countries. By letter datedNovember 1, 2007, we terminated Biowell’s rights as licensee with respect toAustralia, China and certain other countries in Asia because of Biowell’sfailure to pay us certain fees, payments or consideration in connection with thegrant of the license. In addition, we terminated the exclusivity of the licensewith respect to certain Middle Eastern and other Asian countries because ofBiowell’s failure to meet certain minimum annual net sales in each of thevarious countries covered by the license.
Employees
Wecurrently have 13 full-time employees and two part-time employees, including twoin management, nine in operations, three in sales and marketing and one ininvestor relations. None of our employees are covered by collective bargainingagreements, and we believe our relations with our employees arefavorable.
Descriptionof Properties
Wemaintain our principal office at 25 Health Sciences Drive, Suite 113, StonyBrook, New York 11790. We moved our principal office to the Long Island HighTechnology Incubator, which is located on the campus of Stony Brook University,in December 2005. We believe that our current office space and facilities aresufficient to meet our present needs and do not anticipate any difficultysecuring alternative or additional space, as needed, on terms acceptable tous.
LegalProceedings
From timeto time, we may become involved in various lawsuits and legal proceedings whicharise in the ordinary course of business. However, litigation is subject toinherent uncertainties, and an adverse result in these or other matters mayarise from time to time that may harm our business. Except as described below,we are currently not aware of any such legal proceedings that we believe willhave, individually or in the aggregate, a material adverse affect on ourbusiness, financial condition or operating results.
Intervex,Inc. v. Applied DNA Sciences, Inc. (Supreme Court of the State of New York IndexNo.08-601219):
Intervex,Inc., or Intervex, the plaintiff, filed a complaint on or about April 23, 2008related to a claim for breach of contract. In March 2005, we entered into aconsulting agreement with Intervex, which provided for, among other things, apayment of $6,000 per month for a period of 24 months, or an aggregate of$144,000. In addition, the consulting agreement provided for the issuance by usto Intervex of a five-year warrant to purchase 250,000 shares of our commonstock with an exercise price of $.75. Intervex asserts that we owe it 17payments of $6,000, or an aggregate of $102,000, plus accrued interest thereon,and a warrant to purchase 250,000 shares of our common stock. We havecounterclaimed for compensatory and punitive damages, restitution, attorneys’fees and costs, interest and other relief the court deems proper. This matter isin the early stages of discovery. We intend to vigorously defend against theclaims asserted against us.
AvailableInformation
We aresubject to the informational requirements of the Exchange Act, which requires usto file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K, amendments to such reports and other information with theSecurities and Exchange Commission (“SEC”). This information is available at theSEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.Information on the operation of the Public Reference Room can be obtained bycalling the SEC at 1-800-SEC-0330. Because we file documents electronically withthe SEC, you may also obtain this information by visiting the SEC’s website atwww.sec.gov. Our web site is located at www.adnas.com.
DIRECTORSAND EXECUTIVE OFFICERS
Thefollowing is a list of our directors, executive officers and significantemployees.
| | | | | | | |
| Name | | Age | | Title | | Board of Directors |
| James A. Hayward | | 55 | | Chief Executive Officer, President, and Chairman of the Board | | Director |
| Kurt Jensen | | 51 | | Chief Financial Officer | | |
| Ming-Hwa Benjamin Liang | | 45 | | Secretary and Strategic Technology Development Officer | | |
| Sanford R. Simon | | 65 | | | | Director |
| Yacov Shamash | | 58 | | | | Director |
Directorsare elected to serve until the next annual meeting of stockholders and untiltheir successors are elected and qualified. Currently there are three seats onour board of directors.
Currently,the members of our board of directors do not receive any fees for being adirector or attending meetings. Our directors are reimbursed for out-of-pocketexpenses relating to attendance at meetings. Officers are elected by the Boardof Directors and serve until their successors are appointed by the Board ofDirectors. Biographical resumes of each officer and director are set forthbelow.
JamesA. Hayward - Chief Executive Officer
Dr. JamesA. Hayward has been our Chief Executive Officer since March 17, 2006 and ourPresident and the Chairman of the Board of Directors since June 12, 2007. He waspreviously our acting Chief Executive Officer since October 5, 2005. FromJanuary 2006 until August 2008, Dr. Hayward served as the part-time President ofDr. Suwelack Skin and Healthcare, a private company that manufactures biologicalmatrices for wound care and skin care in Billerbeck, Germany. Since June 2004,Dr. Hayward has been the Chairman of Evotope Biosciences, Inc., a drugdevelopment company based in Stony Brook, New York. Since 2001, Dr. Hayward hasbeen 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, aventure 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, pharmaceuticaland consumer-product industries based in Stony Brook, New York. Dr. Haywardreceived his bachelor’s degree in Biology and Chemistry from the StateUniversity of New York at Oneonta in 1976, his Ph.D. in Molecular Biology fromthe State University of New York at Stony Brook in 1983, and an honorary Doctorof Science from Stony Brook in 2000. Dr. Hayward has served on the boards of theCouncil on Biotechnology, the Long Island Association, the Stony BrookFoundation, The Research Foundation of State University of New York Board ofDirectors, the New York Biotechnology Association, the Long Island Life SciencesInitiative and the Ward Melville Heritage Organization.
KurtJensen - Chief Financial Officer
Kurt H.Jensen, M.Sc.(Cand. Merc.) has been our Chief Financial Officer since December21, 2007, taking over the position from Dr. Hayward. Mr. Jensen has been ourController since February 2006. Prior to that date, for a period of more than 23years, he was employed by Point of Woods Homes, Inc. Mr. Jensen was awarded aM.Sc. in Economics and Business Administration from the Copenhagen BusinessSchool in 1983.
Ming-HwaBenjamin Liang - Secretary and Strategic Technology DevelopmentOfficer
Ming-HwaBenjamin Liang has been our Secretary and Strategic Technology DevelopmentOfficer since October 2005. Between May 1999 and September 2005, Mr. Liang hadbeen 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, hisPh.D. in Plant Science from the University of Missouri at Columbia in 1997 andhis LL.M. in Intellectual Property Law from Shih Hsin University, Taiwan in2004.
YacovShamash - Director
Dr. YacovShamash 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 NewYork at Stony Brook. Since 1992, he has been the Dean of Engineering and AppliedSciences and the Harriman School for Management and Policy at the University,and Founder of the New York State Center for Excellence in Wireless Technologiesat the University. Dr. Shamash developed and directed the NSFIndustry/University Cooperative Research Center for the Design of Analog/DigitalIntegrated Circuits from 1989 to 1992 and also served as Chairman of theElectrical and Computer Engineering Department at Washington State Universityfrom 1985 until 1992. Dr. Shamash also serves on the Board of Directors ofKeytronic Corp., Netsmart Technologies, Inc., American Medical Alert Corp., andSoftheon Corp.
SanfordR. Simon - Director
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 Pathologyat Stony Brook since 1997. He joined the faculty at Stony Brook as an AssistantProfessor 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 from1995 to 2004. From 1967 to 1969 Dr. Simon was a Guest Investigator atRockefeller University. Dr. Simon received a B.A. in Zoology and Chemistry fromColumbia University in 1963, a Ph.D. in Biochemistry from Rockefeller Universityin 1967, and studied as a postdoctoral fellow with Nobel Prize winner Max Perutzin Cambridge, England.
Overview
Wecurrently have three named executive officers, Dr. James A. Hayward, our ChiefExecutive Officer, President and Chairman of the Board of Directors, Mr. Kurt H.Jensen, who was appointed our Chief Financial Officer on December 21, 2007, andDr. Ming-Hwa Ben Liang, our Chief Technology Officer and Secretary.
Our Boardof Directors has not adopted or established a formal policy or procedure fordetermining the amount of compensation paid to our executive officers. Nopre-established, objective performance goals or metrics have been used by theBoard of Directors in determining the compensation of our executive officers.Dr. Hayward is involved in the Board’s deliberations regarding executivecompensation and provides recommendations with respect to his and thecompensation of Mr. Jensen and Dr. Liang based on, among other things, ourfinancial and operating performance and prospects and the contributions made byMr. Jensen and Dr. Liang to the success of the Company.
SummaryCompensation Table
Thefollowing table sets forth the compensation of our principal executive officerand our two other executive officers for the two fiscal years ended September30, 2008. We refer to these executive officers as our “named executiveofficers.”
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position (a)(1) | Year (b) | | Salary ($)(2) (c) | | | Bonus ($) (d) | | | Stock Awards ($) (e) | | | Option Awards ($)(3) (f) | | | Non-Equity Incentive Plan Compensation ($) (g) | | | Non-qualified Deferred Compensation Earnings ($) (h) | | | All Other Compensation ($) (i) | | | Total ($) (j) | |
| James A. Hayward | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Chairman, President and | 2008 | | | — | | | | — | | | | — | | | | 1,666,000 | | | | — | | | | — | | | | — | | | | 1,666,000 | |
| Chief Executive Officer | 2007 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Kurt H. Jensen | 2008 | | | 135,871 | | | | — | | | | — | | | | 490,000 | | | | — | | | | — | | | | — | | | | 625,871 | |
| Chief Financial Officer | 2007 | | | 108,077 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 108,077 | |
| Ming-Hwa Liang | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Chief Technology Officer | 2008 | | | 123,382 | | | | — | | | | — | | | | 686,000 | | | | — | | | | — | | | | — | | | | 809,382 | |
| and Secretary | 2007 | | | 103,027 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 103,027 | |
(1) Wehave no employment agreements with our named executive officers.
(2) Dr.Hayward has elected not to receive cash compensation until there is animprovement in the Company’s financial and operating performance andprospects.
(3) Theamounts in column (f) represent the grant date fair value under SFAS 123R basedon the average of the bid and asked prices of our common stock on the grantdate. The grant date for the stock options was June 17, 2008, and the average ofthe bid and asked prices of our common stock was $0.11. The grant date fairvalue for the stock options was $0.098. The options granted to the namedexecutive officers vested with respect to 25% of the underlying shares on thedate of grant, and the remaining will vest ratably each anniversary thereafteruntil fully vested on the third anniversary of the date of grant. The exerciseof the stock options by the named executive officers was subject to stockholderapproval, which was obtained at the 2008 annual meeting of stockholders held onDecember 16, 2008.
OutstandingEquity Awards at Fiscal Year-End
Thefollowing table shows information concerning outstanding equity awards as ofSeptember 30, 2008 held by the Named Executive Officers.
| | | Option Awards |
| Name (a) | | Number of Securities Underlying Unexercised Options (#) Exercisable (1) | | Number of Securities Underlying Unexercised Options (#) Unexercisable (1) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | Option
Exercise Price ($) (1) | | Option Expiration Date (1) |
| James A. Hayward | | 0 | | 17,000,000 | | | | $0.11 | | 6/17/2013 |
| Kurt H. Jensen | | | | 500,000 | | | | $0.09 | | 9/01/2011 |
| | | 0 | | 5,000,000 | | | | $0.11 | | 6/17/2013 |
| Ming-Hwa Liang | | 0 | | 7,000,000 | | | | $0.11 | | 6/17/2013 |
(1) OnJune 17, 2008, the Board of Directors of the Company granted nonstatutory stockoptions under the 2005 Incentive Stock Plan to certain key employees, includingour named executive officers. The options granted to the named executiveofficers vested with respect to 25% of the underlying shares on the date ofgrant, and the remaining will vest ratably each anniversary thereafter untilfully vested on the third anniversary of the date of grant. The exercise of thestock options by the named executive officers was subject to stockholderapproval, which was obtained at the 2008 annual meeting of stockholders held onDecember 16, 2008.
PensionBenefits
None ofour named executive officers participates in or has account balances inqualified or non-qualified defined benefit plans sponsored by us.
NonqualifiedContribution Plans
None ofour named executive officers participate in or have account balances innon-qualified defined contribution plans maintained by us.
DeferredCompensation
None ofour named executive officers participates in or has account balances in deferredcompensation plans or arrangements maintained by us.
EmploymentAgreements
We haveno employment agreements with our named executive officers.
Paymentof Post-Termination Compensation
We do nothave change-in-control agreements with any of our executive officers, and we arenot obligated to pay severance or other enhanced benefits to executive officersupon termination of their employment.
DirectorCompensation Table for Fiscal 2008
Wecurrently have no policy in effect for providing compensation to our directorsfor their services on our Board of Directors. During the year ended September30, 2008, we did not provide any cash compensation to our directors for theirservice on our Board of Directors.
Thefollowing table sets forth summary information concerning compensation paid oraccrued to the members of our Board of Directors (other than Dr. Hayward,our Chief Executive Officer, who is a named executive officer) for servicesrendered to us in all capacities for the fiscal year ended September 30,2008.
| | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash ($) | | Stock Awards ($) | | Option Awards ($)(1) | | All Other Compensation
($) | | Total ($) | |
| Yacov Shamash | | $ | — | | $ | — | | $ | 49,000 | | $ | — | | $ | 49,000 | |
| Sanford R. Simon | | $ | — | | $ | — | | $ | 49,000 | | $ | — | | $ | 49,000 | |
(1) Theamount reported in column (l) represents the grant date fair value under SFAS123R based on the average of the bid and asked prices of our common stock on thegrant date. The grant date for the stock options was June 17, 2008, and theaverage of the bid and asked prices of our common stock was $0.11. The grantdate fair value for the stock options was $0.098.
SinceSeptember 30, 2007, we issued and sold an aggregate principal amount of $650,000in secured convertible promissory notes bearing interest at 10% per annum andwarrants to purchase an aggregate of 1,300,000 shares of our common stockto James A. Hayward, our President, Chairman and Chief ExecutiveOfficer.
OnOctober 21, 2008, we issued and sold to James A. Hayward a $500,000 principalamount secured promissory note (“October Note”) bearing interest at a rate of10% per annum and a warrant (“October Warrant”) to purchase 1,000,000 shares ofour common stock. The October Note and accrued but unpaid interest thereon isconvertible into shares of our common stock at a price of $0.50 per share by theholder at any time from October 21, 2008, through October 20, 2009, and shallautomatically convert on October 21, 2009 at a conversion price of $0.026171520per share, which is equal to a 30% discount to the average volume, weightedaverage price of our common stock for the ten trading days prior to issuance. Atany time prior to conversion, we have the right to prepay the October Note andaccrued but unpaid interest thereon upon 3 days prior written notice (duringwhich period the holder can elect to convert the note). The October Warrant isexercisable for a four-year period commencing on October 21, 2009, and expiringon October 20, 2013, at a price of $0.50 per share. The October Warrant may beredeemed at our option at a redemption price of $0.01 upon the earlier of (i)October 20, 2011, and(ii) the date our common stock has traded on The Over theCounter Bulletin Board at or above $1.00 per share for 20 consecutive tradingdays.
Untilthe principal and interest under the October Note is paid in full, or convertedinto our common stock, the October Note will be secured by a security interestin all of our assets.
OnJanuary 29, 2009, we issued and sold to James A. Hayward a $150,000 principalamount secured promissory note (“January Note”) bearing interest at a rate of10% per annum and a warrant (“January Warrant”) to purchase 300,000 shares ofour common stock. The January Note and accrued but unpaid interestthereon shall automatically convert on January 29, 2010 at a conversionprice of $0.033337264 per share, which is equal to a 20% discount to the averagevolume, weighted average price of our common stock for the ten trading daysprior to issuance, and are convertible into shares of our common stock at theoption of the noteholder at any time prior to such automatic conversion at aprice equal to the greater of (i) 50% of the average price of our common stockfor the ten trading days prior to the date of the notice of conversion and (ii)the automatic conversion price. In addition, any time prior toconversion, we have the irrevocable right to repay the unpaid principal andaccrued but unpaid interest under the January Note on three days written notice(during which period the holder can elect to convert the note). The JanuaryNote bears interest at the rate of 10% per annum and is due and payable in fullon January 29, 2010. Until the principal and accrued but unpaid interestunder the January Note are paid in full, or converted into our common stock, theJanuary Note will be secured by a security interest in all of our assets. TheJanuary Warrant is exercisable for a four-year period commencing on January 29,2010, and expiring on January 28, 2014, at a price of $0.50 pershare. The January Warrant may be redeemed at our option at aredemption price of $0.01 upon the earlier of (i) January 29, 2012, and (ii) thedate our common stock has been quoted on The Over the Counter Bulletin Board ator above $1.00 per share for 20 consecutive trading days.
OnFebruary 27, 2009, we issued and sold a $200,000 principal amount securedpromissory note (“February Note”) bearing interest at a rate of 10% per annum toJames A. Hayward, our Chairman, President and Chief ExecutiveOfficer. The February Note and accrued but unpaid interest thereonshall automatically convert into shares of our common stock on February 27, 2010at a conversion price of $0.046892438 per share, which is equal to a 20%discount to the average volume, weighted average price of our common stock forthe ten trading days prior to issuance, and is convertible into shares of ourcommon stock at the option of the noteholder at any time prior to such automaticconversion at a price equal to the greater of (i) 50% of the average price ofour common stock for the ten trading days prior to the date of the notice ofconversion and (ii) the automatic conversion price. In addition, anytime prior to conversion, we have the irrevocable right to repay the unpaidprincipal and accrued but unpaid interest under the February Note on three dayswritten notice (during which period the holder can elect to convert the FebruaryNote). The February Note bears interest at the rate of 10% per annumand is due and payable in full on February 27, 2010. Until theprincipal and accrued but unpaid interest under the February Note are paid infull, or converted into shares of our common stock, the February Note will besecured by a security interest in all of our assets.
On March30, 2009, we issued and sold a $250,000 principal amount secured promissory note(“March Note”) bearing interest at a rate of 10% per annum to James A. Hayward,our Chairman, President and Chief Executive Officer. The March Noteand accrued but unpaid interest thereon shall automatically convert into sharesof our common stock on March 30, 2010 at a conversion price of $0.043239467 pershare, which is equal to a 20% discount to the average volume, weighted averageprice of our common stock for the ten trading days prior to issuance, and isconvertible into shares of our common stock at the option of the noteholder atany time prior to such automatic conversion at a price equal to the greater of(i) 50% of the average price of our common stock for the ten trading days priorto the date of the notice of conversion and (ii) the automatic conversionprice. In addition, any time prior to conversion, we have theirrevocable right to repay the unpaid principal and accrued but unpaid interestunder the March Note on three days written notice (during which period theholder can elect to convert the March Note). The March Note bearsinterest at the rate of 10% per annum and is due and payable in full on March30, 2010. Until the principal and accrued but unpaid interest underthe March Note are paid in full, or converted into shares of our common stock,the March Note will be secured by a security interest in all of ourassets.
DirectorIndependence
Althoughour securities are not currently listed on a national securities exchange or inan inter-dealer quotation system, which would subject us to the listingstandards pertaining to director independence, the Board of Directors hasdetermined that Drs. Shamash and Simon, representing two of our three directors,are “independent” as defined by the listing standards of the Nasdaq StockMarket, constituting a majority of independent directors of our Board ofDirectors as required by the rules of the Nasdaq Stock Market. The Board ofDirectors considers in its evaluation of independence whether any director has arelationship with us that could interfere with the exercise of independentjudgment in carrying out his responsibilities of a director.
Wecurrently have no policy regarding entering into transactions with affiliatedparties.
Thefollowing table sets forth certain information regarding the shares of ourcommon stock beneficially owned as of April 22, 2009, (i) by each person who isknown 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 “ExecutiveCompensation” and by each of our directors, and (iii) by all officers anddirectors as a group.
| | | | | | | | | |
| NAME AND ADDRESS OF BENEFICIAL OWNER | | TITLE OF CLASS | | NUMBER OF SHARES OWNED (1)(2) | | PERCENTAGE OF CLASS (3) |
| | | | | | | | | |
| James A. Hayward 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 | | Common Stock | | | 25,989,840 | (4) | 9.44 | % |
| | | | | | | | | |
| Yacov Shamash 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 | | Common Stock | | | 375,000 | (5) | * | |
| | | | | | | | | |
| Kurt Jensen 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 | | Common Stock | | | 1,830,000 | (6) | * | |
| | | | | | | | | |
| Ben Liang 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 | | Common Stock | | | 2,105,392 | (7) | * | |
| | | | | | | | | |
| Sanford R. Simon 25 Health Sciences Drive, Suite 113 Stony Brook, New York 11790 | | Common Stock | | | 375,000 | (5) | * | |
| | | | | | | | | |
| All directors and officers as a group (5 persons) | | Common Stock | | | 30,675,232 | (8) | 10.97 | % |
| * | indicates less than one percent |
| (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) | Does not include unvested shares subject to options granted on June 17, 2008 pursuant to the 2005 Incentive Stock Plan, which vested with respect to 25% of the underlying shares on the date of grant and will vest with respect to the remaining shares ratably on each anniversary thereafter until fully vested on the third anniversary of the date of grant, including 12,750,000 to James A. Hayward, 375,000 to Yacov Shamash, 3,750,000 to Kurt H. Jensen, 5,250,000 to Ben Liang and 375,000 to Sanford R. Simon. |
| | |
| (3) | Based upon 260,511,148 shares of common stock outstanding as of April 22, 2009. |
| | |
| (4) | Includes 14,750,000 shares underlying currently exercisable warrants. |
| | |
| (5) | Includes 375,000 shares underlying a currently exercisable warrant. |
| | |
| (6) | Includes 40,000 shares held by a spouse and 1,750,000 immediately exercisable options. |
| | |
| (7) | Includes 275,392 shares held by spouse and 1,750,000 immediately exercisable options. |
| | |
| (8) | Includes 19,000,000 shares underlying currently exercisable options and warrants. |
Ourcurrent authorized capital stock consists of 410,000,000 shares of common stock,par value $0.001 per share, of which 260,511,148 shares were issued andoutstanding as of April 22, 2009, and 10,000,000 shares of preferred stock, parvalue $0.001 per share, none of which were issued and outstanding as of the samedate.
COMMONSTOCK
Theholders of common stock are entitled to one vote for each share held of recordon all matters to be voted on by the stockholders. The holders of common stockare entitled to receive dividends ratably when, as and if declared by the boardof directors out of funds legally available therefore. In the event of ourliquidation, dissolution or winding up, the holders of common stock are entitledto share equally and ratably in all assets remaining available for distributionafter payment of liabilities and after provision is made for each class ofstock, if any, having preference over the common stock. Holders of common stockhave no preemptive, subscription, redemption or conversion rights. Theoutstanding shares of common stock are validly issued, fully paid andnon-assessable.
We haveengaged American Stock Transfer & Trust Company, located in Brooklyn, NewYork, as independent transfer agent or registrar.
PREFERREDSTOCK
Under ourCertificate of Incorporation, the Board of Directors is authorized, subject toany limitations prescribed by the laws of the State of Delaware, but without anyfurther action by our stockholders, to provide for the issuance of up to10,000,000 shares of preferred stock in one or more series, to establish fromtime to time the number of shares to be included in such series, to fix thedesignations, powers, preferences and rights of the shares of each such seriesand any qualifications, limitations or restrictions thereof, and to increase ordecrease the number of shares of any such series (but not below the number ofshares of such series then outstanding) without any further vote or action bythe stockholders. The board of directors may authorize and issue preferred stockwith voting or conversion rights that could adversely affect the voting power orother rights of the holders of common stock.
OPTIONS
There arecurrently options outstanding that have been issued to our officers, directorsand employees to purchase 44,330,000 shares of our common stock pursuant to our2005 Incentive Stock Plan. In addition, in connection with an amendment to the2005 Incentive Stock Plan adopted by the Board of Directors on June 17, 2008,which will increase the total number of shares of common stock issuable pursuantto the 2005 Incentive Stock Plan from a total of 20,000,000 shares to a total of100,000,000 shares, options to purchase a total of 37,750,000 shares weregranted under the 2005 Incentive Stock Plan to certain key employees andnon-employee directors. The effectiveness of the share increase amendment andthe exercise of these stock options by the key employees was subject tostockholder approval, which was obtained at the 2008 annual meeting ofstockholders held on December 16, 2008.
WARRANTS
These areoutstanding (i) warrants to purchase 2,000,000 shares of common stock at $0.06per share, (ii) warrants to purchase 200,000 shares of common stock at $0.07 pershare, (iii) warrants to purchase 16,400,000 shares of common stock at $0.09 pershare, (iv) warrants to purchase 1,605,464 shares of common stock at $0.10 pershare, (v) warrants to purchase 27,150,000 shares of common stock at $0.50 pershare, (vi) warrants to purchase 6,623,500 shares of common stock at $0.60 pershare, and (vii) warrants to purchase 14,797,000 shares of common stock at $0.75per share.
REGISTRATIONRIGHTS
Pursuantto the terms of a registration rights agreement with respect to common stockunderlying convertible notes and warrants we issued in private placements inNovember and December, 2003, December, 2004, and January and February, 2005, ifwe did not have a registration statement registering the shares underlying theseconvertible notes and warrants declared effective on or before June 15, 2005, weare obligated to pay liquidated damages in the amount of 3.5% per month of theface amount of the notes, which equals $367,885, until the registrationstatement is declared effective. At our option, these liquidated damages can bepaid in cash or unregistered shares of our common stock. To date we have decidedto pay certain of these liquidated damages in common stock, although any futurepayments of liquidated damages may, at our option, be made in cash. If we decideto pay such liquidated damages in cash, we would be required to use our limitedworking capital and potentially raise additional funds. If we decide to pay theliquidated damages in shares of common stock, the number of shares issued woulddepend on our stock price at the time that payment is due. Based on the closingmarket prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our commonstock 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 of3,807,375 shares of common stock in liquidated damages from August, 2005 toJanuary, 2006 to persons who invested in the January and February, 2005 privateplacements. The issuanceof shares upon any payment by us of further liquidated damages will have theeffect of further diluting the proportionate equity interest and voting power ofholders of our common stock, including investors in this offering.
We paidliquidated 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 andFebruary, 2005 private placements. We believe that we have no enforceableobligation to pay liquidated damages to holders of any shares we agreed toregister under the registration rights agreement for periods after the firstanniversary of the date of issuance of such shares, since they were eligible forresale under Rule 144 of the Securities Act during such periods, and suchliquidated damages are grossly inconsistent with actual damages to such persons.Nonetheless, as of February 18, 2008 we have accrued approximately $12.0 millionin penalties representing further liquidated damages associated with our failureto have the registration statement declared effective by the deadline, and haveincluded this amount in accounts payable and accrued expenses. On July 24, 2008,the SEC declared effective our registration statement with respect to commonstock underlying convertible notes and warrants we issued in private placementsin November and December, 2003, December, 2004, and January and February, 2005.On July 24, 2008, the SEC declared effective our registration statement withrespect to common stock underlying convertible notes and warrants we issued inprivate placements in November and December, 2003, December, 2004, and Januaryand February, 2005.
In June2005, we issued to Trilogy Capital Partners, Inc. a warrant to purchase7,500,000 shares of our common stock at a price of $0.55 per share and JoffPollon (“Pollon”) a warrant to purchase 1,500,000 shares of our common stock ata price of $0.55 per share. In connection with the issuance of those warrants wealso agreed to file a registration statement with the SEC with respect to theshares underlying such warrants no later than the earlier to occur of: (i) 15days following the effectiveness of this Registration Statement, or (ii)September 15, 2005. As of the date hereof we have not filed a registrationstatement with respect to the shares of our common stock underlying the warrantswe issued to Trilogy and Pollon.
OnNovember 3, 2005, we issued and sold a promissory note in the principal amountof $550,000 to Allied International Fund, Inc. (“Allied”). Allied in turnfinanced a portion of its making of this loan by borrowing $450,000 from certainpersons, including $100,000 from James A. Hayward, our President, Chairman andChief Executive Officer. The terms of the promissory note provided that we issueupon the funding of the note warrants to purchase 5,000,000 shares of our commonstock at an exercise price of $0.50 per share to certain persons designated byAllied. On November 9, 2005, we issued nine warrants to Allied and eight otherpersons to purchase an aggregate of 5,500,000 shares of our common stock at anexercise price of $0.50 per share. These warrants included a warrant to purchase1,100,000 shares that was issued to James A. Hayward, our President andChairman, Chief Executive Officer. Each such warrant provides its holder thebroadest possible unlimited piggyback registration rights with respect to anyregistration statement filed by the Company.
Inconnection with the private placement that we completed on March 8, 2006, wehave 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 exerciseof the warrants within 30 days of the registration statement , which wasdeclared effective by the SEC on July 24, 2008. We have agreed to use ourreasonable best efforts to cause the registration statement of which thisprospectus is a part being to be declared effective no later than 180 days afterthe date of the initial filing. If we fail to file a registration statement withthe SEC on or before July 22, 2008, the holders will be entitled to liquidateddamages from Applied DNA Operations Management, Inc. in an amount equal to 2%per month for each month that we are delinquent in filing the registrationstatement.
As partof the Offshore Offering we have offered to enter into, and with respect to theclosing of the first and second tranches of the Offshore Offering on May 2, 2006and June 15, 2006 have entered into, a registration rights agreement withpurchasers of notes and warrants in that offering that provides that we willprepare and file a registration statement with the SEC covering the common stockunderlying the notes and the warrants sold in the Offshore Offering within 30days of the registration statement of which this prospectus is a part beingdeclared effective by the SEC, and use our reasonable best efforts to have theregistration statement declared effective by the SEC by no later than 180 daysafter filing. These obligations to file and have the registration statementdeclared effective would terminate as to any holder of the units upon theearlier of the date: (a) when all of such holder’s common stock underlying thenotes and the warrants may be sold during a single three month period under Rule144 of the Securities Act; and (b) when all of such holder’s common stockunderlying the notes and the warrants may be transferred under Rule 144(k) ofthe Securities Act, unless such holder later becomes our affiliate (as definedin Rule 144 of the Securities Act) in which case our obligation shall be reviveduntil such holder’s rights otherwise terminate under clause (a)above.
OnSeptember 1, 2006, we issued warrants to purchase an aggregate of 18,900,000shares of the our common stock, including to James A. Hayward, our President,Chairman and Chief Executive Officer, Timpix International Limited, a BritishVirgin Islands corporation, entities affiliated with Arjent, our placementagent, and Sanford R. Simon and Yacov Shamash, each of whom is one of ourdirectors. Each of these warrants provides its holders unlimited piggybackregistration rights with respect to any registration statement filed by theCompany in the future.
OurCertificate of Incorporation provides to the fullest extent permitted byDelaware law that our directors or officers shall not be personally liable to usor our stockholders for damages for breach of such director’s or officer’sfiduciary duty. The effect of this provision of our Certificate of Incorporationis to eliminate our rights and our stockholders (through stockholders’derivative suits on behalf of our company) to recover damages against a directoror 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 theindemnification provisions in our Certificate of Incorporation are necessary toattract and retain qualified persons as directors and officers.
Insofaras indemnification for liabilities arising under the Securities Act, may bepermitted to directors, officers or persons controlling us pursuant to theforegoing provisions, or otherwise, we have been advised that in the opinion ofthe SEC, such indemnification is against public policy as expressed in theSecurities Act and is, therefore, unenforceable.
Theselling stockholder and any of his respective pledgees, donees, assigneesand other successors-in-interest may, from time to time, sell any or all oftheir shares of common stock on any stock exchange, market or trading facilityon which the shares are traded or in private transactions. These sales may be atfixed or negotiated prices. The selling stockholder may use any one or more ofthe following methods when selling shares:
| | | |
| | • | ordinary brokerage transactions and transactions in which the broker-dealer solicits the purchaser; |
| | • | 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; |
| | • | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| | • | an exchange distribution in accordance with the rules of the applicable exchange; |
| | • | privately-negotiated transactions; |
| | • | short sales that are not violations of the laws and regulations of any state or the United States; |
| | • | broker-dealers may agree with the selling stockholder to sell a specified number of such shares at a stipulated price per share; |
| | • | through the writing of options on the shares; |
| | • | a combination of any such methods of sale; and |
| | • | any other method permitted pursuant to applicable law. |
Theselling stockholder may also sell shares under Rule 144 under the SecuritiesAct, if available, rather than under this prospectus. The selling stockholdershall have the sole and absolute discretion not to accept any purchase offer ormake any sale of shares if he deems the purchase price to be unsatisfactory atany particular time.
Theselling stockholder may also engage in short sales against the box, puts andcalls and other transactions in our securities or derivatives of our securitiesand may sell or deliver shares in connection with these trades.
Theselling stockholder or his pledgees, donees, transferees or other successors ininterest, may also sell the shares directly to market makers acting asprincipals and/or broker-dealers acting as agents for themselves or theircustomers. Such broker-dealers may receive compensation in the form ofdiscounts, concessions or commissions from the selling stockholder and/or thepurchasers of shares for whom such broker-dealers may act as agents or to whomthey sell as principal or both, which compensation as to a particularbroker-dealer might be in excess of customary commissions. Market makers andblock purchasers purchasing the shares will do so for their own account and attheir own risk. It is possible that the selling stockholder will attempt tosell shares of common stock in block transactions to market makers or otherpurchasers at a price per share which may be below the then market price. Theselling stockholder cannot assure that all or any of the shares offered in thisprospectus will be sold by the selling stockholder. The sellingstockholder and any brokers, dealers or agents, upon effecting the sale ofany of the shares offered in this prospectus, may be deemed to be“underwriters.” In such event, any commissions received by such broker-dealersor agents and any profit on the resale of the shares purchased by them may bedeemed to be underwriting commissions or discounts under the SecuritiesAct.
We arerequired to pay all fees and expenses incident to the registration of theshares, including fees and disbursements of counsel to the selling stockholder,if any, but excluding brokerage commissions or underwriterdiscounts.
Theselling stockholder, alternatively, may sell all or any part of the sharesoffered in this prospectus through an underwriter. The selling stockholder hasnot entered into any agreement with a prospective underwriter and there is noassurance that any such agreement will be entered into.
Theselling stockholder may pledge his shares to brokers under the marginprovisions of customer agreements. If the selling stockholder defaults on amargin loan, the broker may, from time to time, offer and sell the pledgedshares. The selling stockholder and any other persons participating in the saleor distribution of the shares will be subject to applicable provisions of theSecurities Exchange Act of 1934, as amended, and the rules and regulations undersuch act, including, without limitation, Regulation M. These provisions mayrestrict certain activities of, and limit the timing of purchases and sales ofany of the shares by, the selling stockholder or any other such person. In theevent that the selling stockholder is deemed an affiliated purchaser ora distribution participant within the meaning of Regulation M, then theselling stockholder will not be permitted to engage in short sales of commonstock. Furthermore, under Regulation M, persons engaged in a distribution ofsecurities are prohibited from simultaneously engaging in market making andcertain other activities with respect to such securities for a specified periodof time prior to the commencement of such distributions, subject to specifiedexceptions or exemptions. In regards to short sells, the selling stockholder canonly cover his short position with the securities he receives from us.In addition, if such short sale is deemed to be a stabilizing activity, then theselling stockholder will not be permitted to engage in a short sale of ourcommon stock. All of these limitations may affect the marketability of theshares.
If theselling stockholder notifies us that he has a material arrangement with abroker-dealer for the resale of the common stock, then we would be required toamend the registration statement of which this prospectus is a part, and file aprospectus supplement to describe the agreements between the selling stockholderand the broker-dealer.
The SEChas adopted Rule 15g-9 which establishes the definition of a “penny stock,” forthe purposes relevant to us, as any equity security that has a market price ofless than $5.00 per share or with an exercise price of less than $5.00 pershare, subject to certain exceptions. For any transaction involving a pennystock, unless exempt, the rules require:
| | | |
| | • | that a broker or dealer approve a person’s account for transactions in penny stocks; and |
| | • | 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 orderto approve a person’s account for transactions in penny stocks, the broker ordealer must
| | | |
| | • | obtain financial information and investment experience objectives of the person; and |
| | • | 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. |
Thebroker or dealer must also deliver, prior to any transaction in a penny stock, adisclosure schedule prescribed by the SEC relating to the penny stock market,which, in highlight form:
| | | |
| | • | sets forth the basis on which the broker or dealer made the suitability determination; and |
| | • | that the broker or dealer received a signed, written agreement from the investor prior to thetransaction. |
Disclosurealso has to be made about the risks of investing in penny stocks in both publicofferings and in secondary trading and about the commissions payable to both thebroker-dealer and the registered representative, current quotations for thesecurities and the rights and remedies available to an investor in cases offraud in penny stock transactions. Finally, monthly statements have to be sentdisclosing recent price information for the penny stock held in the account andinformation on the limited market in penny stocks.
SELLINGSTOCKHOLDER
We haveprepared this prospectus to allow the selling stockholder we have identifiedherein, including his transferees, pledgees, donees and successors in interest,to offer for resale up to 3,000,000 shares of our common stock. Weare filing the registration statement, of which this prospectus is a part,pursuant to the provisions of the settlement agreement and mutual generalrelease we entered into with the selling stockholder.
On March27, 2009, we entered into a settlement agreement and mutual general release withMr. Douglas Falkner, one of our former employees and consultants, to settle alawsuit in California for alleged breach of contract under his employment andconsulting agreements and wrongful discharge in violation of public policy and alawsuit in North Carolina for a worker’s compensation claim. Inexchange for the dismissal of all claims against us, we agreed to issue to Mr.Falkner 3,000,000 restricted shares of our common stock and a warrant topurchase 1,500,000 shares of our common stock with an exercise price of $.10exercisable for a period of three years beginning on the first anniversary ofissuance. As of the date of the settlement agreement, the closingsales price for our common stock on the OTC Bulletin Board was $0.06 pershare. Under the settlement agreement, we are obligated to registerthe shares issued to Mr. Falkner, subject to certain conditions, and we arefiling the registration statement, of which this prospectus is a part, pursuantto the provisions of the settlement agreement.
Theselling stockholder may from time to time offer and sell pursuant to thisprospectus any or all of the shares that he acquired under the settlementagreement and mutual general release. The number of shares of commonstock that may actually be sold by the selling stockholder will be determined bythe selling stockholder. Because the selling stockholder may sellall, some or none of the shares of common stock covered by this prospectus, andbecause the offering contemplated by this prospectus is not being underwritten,no estimate can be given as to the number of shares of common stock that will beheld by the selling stockholder upon termination of the offering. Theshares of common stock may be sold from time to time by the selling stockholderor by his transferees, pledgees, donees or other successors ininterest. The selling stockholder may also loan or pledge the sharesregistered hereunder to broker-dealers and/or others, and those persons may sellthe shares so loaned or upon a default may effect the sales of the pledgedshares pursuant to this prospectus.
We willnot receive any proceeds from the resale of the common stock by the sellingstockholder. Assuming all the shares registered below are sold by the sellingstockholder, the selling stockholder will not continue to own any shares of ourcommon stock.
Thefollowing table sets forth the name of the selling stockholder, the number ofshares of common stock beneficially owned by the selling stockholder, the numberof shares of common stock that may be sold in this offering and the number ofshares of common stock the selling stockholder will own after the offering,assuming he sells all of the shares offered.
| | Beneficial Ownership | | | Beneficial Ownership |
| Prior to Offering (1) | | After Offering (1) |
| Name of Selling Security Holder | Shares | Percentage (2) | Shares Offered | | Shares | Percentage (2) |
| Douglas Falkner | 3,000,000 | * | 3,000,000 | | — | * |
* Lessthan 1%
(1) Beneficial Ownership is determined in accordance with the rules of the SEC andgenerally includes voting or investment power with respect to securities. Sharesof common stock subject to options or warrants currently exercisable orconvertible, or exercisable or convertible within 60 days of April 22, 2009 aredeemed outstanding for computing the percentage of the person holding suchoption or warrant but are not deemed outstanding for computing the percentage ofany other person.
(2) Percentage prior to offering is based on 260,511,148 shares of common stockoutstanding; percentage after offering is based on 260,511,148 shares of commonstock outstanding.
MaterialRelationships with Selling Stockholder
To ourknowledge, neither the selling stockholder nor any of his affiliates has heldany position or office, been employed by, or otherwise had any other materialrelationship with us or any of our affiliates during the three years prior tothe date of this prospectus, other than as a result of the ownership of oursecurities issued to him on March 27, 2009.
Thevalidity of the issuance of the securities offered hereby will be passed uponfor us by Fulbright & Jaworski L.L.P., New York, NewYork.
RBSM LLP,independent registered public accounting firm, have audited, as set forth intheir report thereon appearing elsewhere herein, our financial statements atSeptember 30, 2008 and 2007 and for the years then ended that appear in theprospectus. The financial statements referred to above are included in thisprospectus with reliance upon the independent registered public accountingfirm’s opinion based on their expertise in accounting and auditing.
We havefiled a registration statement on Form S-1 under the Securities Act, as amended,relating to the shares of common stock being offered by this prospectus, andreference is made to such registration statement. This prospectus constitutesthe prospectus of Applied DNA Sciences, Inc., filed as part of the registrationstatement, and it does not contain all information in the registrationstatement, as certain portions have been omitted in accordance with the rulesand regulations of the SEC.
We aresubject to the informational requirements of the Securities Exchange Act of1934, as amended, which requires us to file reports and other information withthe SEC. Such reports and other information may be inspected at public referencefacilities of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies ofsuch material can be obtained from the Public Reference Section of the SEC at100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. Because we filedocuments electronically with the SEC, you may also obtain this information byvisiting the SEC’s website at www.sec.gov.
To theBoard of Directors
AppliedDNA Sciences, Inc.
StonyBrook, New York
We haveaudited the accompanying consolidated balance sheets ofApplied DNA Sciences, Inc. (the “Company”) as of September30, 2008 and 2007 and the related consolidated statements of losses, deficiencyin stockholders’ equity, and cash flows for each of the two years in the periodended September 30, 2008. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based upon our audits.
Weconducted our audits in accordance with standards of the Public CompanyAccounting Oversight Board (United States of America). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatements. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly we express no such opinion. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe our audits provide areasonable basis for our opinion.
In ouropinion, the consolidated financial statements referred to above present fairly,in all material respects, the consolidated financial position of the Company asof September 30, 2008 and 2007, and the results of its operations and its cashflows for each of the two years in the period ended September 30, 2008 inconformity with accounting principles generally accepted in the United States ofAmerica.
Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note K, the Company isexperiencing difficulty in generating sufficient cash flow to meet itsobligations and sustain its operations, which raises substantial doubt about itsability to continue as a going concern. Management’s plans in regard to thismatter are described in Note K. The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.
New York,New York
December15, 2008
| |
| APPLIED DNA SCIENCES, INC. |
| |
| | | September 30, | |
| | | 2008 | | | 2007 | |
| ASSETS | |
| Current assets: | | | | | | |
| Cash | | $ | 136,405 | | | $ | 25,185 | |
| Accounts Receivable | | | 75,150 | | | | — | |
| Prepaid expenses | | | 83,333 | | | | 101,000 | |
| Restricted cash | | | — | | | | 399,920 | |
| Total current assets | | | 294,888 | | | | 526,105 | |
| | | | | | | | | |
| Property, plant and equipment-net of accumulated depreciation of $147,132 and $82,825, respectively | | | 63,730 | | | | 105,537 | |
| | | | | | | | | |
| Other assets: | | | | | | | | |
| Deposits | | | 8,322 | | | | 13,822 | |
| Capitalized finance costs-net of accumulated amortization of $464,274 and $7,997, respectively | | | 113,226 | | | | 29,503 | |
| | | | | | | | | |
| Intangible assets: | | | | | | | | |
| Patents, net of accumulated amortization of $31,762 and $25,445, respectively (Note B) | | | 2,494 | | | | 8,812 | |
| Intellectual property, net of accumulated amortization and write off of $8,066,682 and $7,702,891, respectively (Note B) | | | 1,364,217 | | | | 1,728,009 | |
| Total Assets | | $ | 1,846,877 | | | $ | 2,411,788 | |
| | | | | | | | | |
| LIABILITIES AND DEFICIENCY IN STOCKHOLDERS’ EQUITY | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 12,821,171 | | | $ | 13,215,975 | |
| Convertible notes payable, net of unamortized discount of $486,726 and $359,595, respectively (Note D) | | | 3,063,274 | | | | 740,405 | |
| Other current liabilities | | | — | | | | 399,920 | |
| Total current liabilities | | | 15,884,445 | | | | 14,356,300 | |
| | | | | | | | | |
| Commitments and contingencies (Note J) | | | | | | | | |
| | | | | | | | | |
| Deficiency in Stockholders’ Equity- (Note F) | | | | | | | | |
| Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- and 60,000 issued and outstanding as of September 30, 2008 and 2007 | | | — | | | | 6 | |
| Common stock, par value $0.001 per share; 410,000,000 shares authorized; 205,359,605 and 180,281,661 issued and outstanding as of September 30, 2008 and 2007, respectively | | | 205,359 | | | | 180,281 | |
| Additional paid in capital | | | 133,133,354 | | | | 128,448,584 | |
| Accumulated deficit | | | (147,376,281 | ) | | | (140,573,383 | ) |
| Total deficiency in stockholders’ equity | | | (14,037,568 | ) | | | (11,944,512 | ) |
| Total Liabilities and Deficiency in Stockholders’ Equity | | $ | 1,846,877 | | | $ | 2,411,788 | |
See theaccompanying notes to the consolidated financial statements
| |
| APPLIED DNA SCIENCES, INC. |
| |
| YEARS ENDED SEPTEMBER 30, 2008 AND 2007 |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Sales | | $ | 873,010 | | | $ | 121,920 | |
| Cost of sales | | | 171,332 | | | | 23,073 | |
| Gross Profit | | | 701,678 | | | | 98,847 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Selling, general and administrative | | | 4,277,013 | | | | 12,096,444 | |
| Research and development | | | 145,832 | | | | 110,845 | |
| Depreciation and amortization | | | 434,416 | | | | 432,582 | |
| | | | | | | | | |
| Total operating expenses | | | 4,857,261 | | | | 12,639,871 | |
| | | | | | | | | |
| NET LOSS FROM OPERATIONS | | | (4,155,583 | ) | | | (12,541,024 | ) |
| | | | | | | | | |
| Net gain in revaluation of debt derivative and warrant liabilities | | | — | | | | 1,387,932 | |
| Other income | | | — | | | | 977 | |
| Interest expense | | | (2,647,315 | ) | | | (2,152,718 | ) |
| | | | | | | | | |
| Net loss before provision for income taxes | | | (6,802,898 | ) | | | (13,304,833 | ) |
| | | | | | | | | |
| Income taxes (benefit) | | | — | | | | — | |
| | | | | | | | | |
| NET LOSS | | $ | (6,802,898 | ) | | $ | (13,304,833 | ) |
| | | | | | | | | |
| Net loss per share-basic and fully diluted | | $ | (0.04 | ) | | $ | (0.10 | ) |
| | | | | | | | | |
| Weighted average shares outstanding- | | | | | | | | |
| Basic and fully diluted | | | 191,488,042 | | | | 135,229,885 | |
See theaccompanying notes to the consolidated financial statements
| |
| APPLIED DNA SCIENCES, INC. |
| |
| TWO YEARS ENDED SEPTEMBER 30, 2008 |
| | | Preferred Shares | | | Preferred Stock Amount | | | Common Shares | | | Common Stock Amount | | | Additional Paid in Capital | | | Accumulated Deficit | | | Total | |
| Balance, October 1, 2006 | | | 60,000 | | | $ | 6 | | | | 120,982,385 | | | $ | 120,982 | | | $ | 82,627,606 | | | $ | (92,334,791 | ) | | $ | (9,586,197 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in December 2006 in settlement of related party debt at $2.28 per share | | | — | | | | — | | | | 180,000 | | | | 180 | | | | 410,249 | | | | — | | | | 410,429 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in May 2007 in settlement of convertible debentures at $0.11 per share | | | — | | | | — | | | | 9,645,752 | | | | 9,646 | | | | 1,090,354 | | | | — | | | | 1,100,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in June 2007 in settlement of convertible debentures at $0.11 per share | | | — | | | | — | | | | 29,691,412 | | | | 29,691 | | | | 3,215,309 | | | | — | | | | 3,245,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beneficial conversion feature relating to convertible debentures | | | — | | | | — | | | | — | | | | — | | | | 319,606 | | | | — | | | | 319,606 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in September 2007 in settlement of convertible debentures at $0.087 per share | | | — | | | | — | | | | 19,782,112 | | | | 19,782 | | | | 1,705,218 | | | | — | | | | 1,725,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effect of application of EITF 00-19-2 in classification of fair value of warrants | | | — | | | | — | | | | — | | | | — | | | | 39,080,242 | | | | (34,933,759 | ) | | | 4,146,483 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (13,304,833 | ) | | | (13,304,833 | ) |
| Balance, September 30, 2007 | | | 60,000 | | | | 6 | | | | 180,281,661 | | | | 180,281 | | | | 128,448,584 | | | | (140,573,383 | ) | | | (11,944,512 | ) |
See theaccompanying notes to the consolidated financial statements
APPLIEDDNA SCIENCES, INC.
CONSOLIDATEDSTATEMENT OF DEFICIENCY IN STOCKHOLDERS’ EQUITY
TWOYEARS ENDED SEPTEMBER 30, 2008
| | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Shares | | | Preferred Stock Amount | | | Common Shares | | | Common Stock Amount | | | Additional Paid in Capital | | | Accumulated Deficit | | | Total | |
| Balance, September 30, 2007 | | | 60,000 | | | $ | 6 | | | | 180,281,661 | | | $ | 180,281 | | | $ | 128,448,584 | | | $ | (140,573,383 | ) | | $ | (11,944,512 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in November 2007 in settlement of convertible debentures at $0.105 per share | | | — | | | | — | | | | 479,942 | | | | 480 | | | | 49,794 | | | | — | | | | 50,274 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in November 2007 in exchange for services rendered at $0.14 per share | | | — | | | | — | | | | 1,000,000 | | | | 1,000 | | | | 139,000 | | | | — | | | | 140,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in December 2007 in exchange for services rendered at $0.10 per share | | | — | | | | — | | | | 9,000,000 | | | | 9,000 | | | | 891,000 | | | | — | | | | 900,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in February 2008 in exchange for warrant exercise on a cashless basis | | | — | | | | — | | | | 1,375,000 | | | | 1,375 | | | | (1,375 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beneficial conversion feature relating to issuance of convertible debentures | | | — | | | | — | | | | — | | | | — | | | | 2,409,568 | | | | — | | | | 2,409,568 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in April 2008 in settlement of related party convertible debentures at $0.15 per share | | | — | | | | — | | | | 733,334 | | | | 733 | | | | 109,267 | | | | — | | | | 110,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in June 2008 in settlement of convertible debentures at $0.15 per share | | | — | | | | — | | | | 1,100,000 | | | | 1,100 | | | | 163,900 | | | | — | | | | 165,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in June 2008 in settlement of related party convertible debentures at $0.088 per share | | | — | | | | — | | | | 3,134,543 | | | | 3,135 | | | | 271,865 | | | | — | | | | 275,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in July 2008 in settlement of related party convertible debentures at $0.103 per share | | | — | | | | — | | | | 2,144,917 | | | | 2,145 | | | | 217,855 | | | | — | | | | 220,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in August 2008 in settlement of convertible debentures at $0.096 per share | | | — | | | | — | | | | 1,142,562 | | | | 1,143 | | | | 108,857 | | | | — | | | | 110,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued in September 2008 in related party settlement of convertible debentures at $0.066 per share | | | — | | | | — | | | | 4,967,646 | | | | 4,967 | | | | 325,033 | | | | — | | | | 330,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cancellation of previously issued preferred stock | | | (60,000 | ) | | | (6 | ) | | | — | | | | — | | | | 6 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,802,898 | ) | | | (6,802,898 | ) |
| Balance, September 30, 2008 | | | — | | | $ | — | | | | 205,359,605 | | | $ | 205,359 | | | $ | 133,133,354 | | | $ | (147,376,281 | ) | | $ | (14,037,568 | ) |
See theaccompanying notes to the consolidated financial statements
APPLIEDDNA SCIENCES, INC.
YEARSENDED SEPTEMBER 30, 2008 AND 2007
| | | | | | | |
| | | 2008 | | | 2007 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (6,802,898 | ) | | $ | (13,304,833 | ) |
| Adjustments to reconcile net loss to net used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 434,417 | | | | 432,582 | |
| Fair value of options and warrants issued in exchange for services rendered | | | | | | | 900,000 | |
| Income attributable to repricing of warrants and debt derivatives | | | — | | | | (1,387,932 | ) |
| Amortization of capitalized financing costs | | | 456,277 | | | | 1,057,084 | |
| Amortization of debt discount attributable to convertible debentures | | | 2,282,437 | | | | 1,751,860 | |
| Common stock issued in exchange for services rendered | | | 1,040,000 | | | | — | |
| Change in assets and liabilities: | | | | | | | | |
| Decrease (increase) in accounts receivable | | | (75,150 | ) | | | 9,631 | |
| Decrease in prepaid expenses and deposits | | | 17,667 | | | | 5,667 | |
| Decrease in other assets | | | 5,500 | | | | 8,419 | |
| Increase (decrease) in accounts payable and accrued liabilities | | | (284,530 | ) | | | 8,275,942 | |
| Net cash used in operating activities | | | (2,926,280 | ) | | | (2,251,580 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Decrease (increase) in restricted cash held in escrow | | | 399,920 | | | | (399,920 | ) |
| Acquisition of property and equipment, net | | | (22,500 | ) | | | (11,039 | ) |
| Net cash provided by (used in) investing activities | | | 377,420 | | | | (410,959 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Proceeds from convertible debentures held in escrow | | | — | | | | 399,920 | |
| Net proceeds from issuance of convertible notes | | | 2,660,080 | | | | 1,062,500 | |
| Net cash provided by financing activities | | | 2,660,080 | | | | 1,462,420 | |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 111,220 | | | | (1,200,119 | ) |
| Cash and cash equivalents at beginning of year | | | 25,185 | | | | 1,225,304 | |
| Cash and cash equivalents at end of year | | $ | 136,405 | | | $ | 25,185 | |
| | | | | | | | | |
| 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 | | | 1,040,000 | | | | — | |
| Common stock issued in exchange for repayment of debt and accrued interest | | | 1,260,274 | | | | 6,799,429 | |
| Fair value of options and warrants issued to consultants for services | | | | | | | 900,000 | |
See theaccompanying notes to the consolidated financial statements
APPLIEDDNA SCIENCES, INC.
SEPTEMBER30, 2008
NOTEA — SUMMARY OF ACCOUNTING POLICIES
A summaryof the significant accounting policies applied in the preparation of theaccompanying financial statements follows.
Business and Basis ofPresentation
OnSeptember 16, 2002, Applied DNA Sciences, Inc. (the “Company”) was incorporatedunder the laws of the State of Nevada. During the year ended September 30, 2007,the Company transitioned from a development stage enterprise to an operatingcompany. The Company is principally devoted to developing DNA embeddedbiotechnology security solutions in the United States. To date, the Company hasgenerated minimum sales revenues from its services and products; it has incurredexpenses and has sustained losses. Consequently, its operations are subject toall the risks inherent in the establishment of a new business enterprise. Forthe period from inception through September 30, 2008, the Company hasaccumulated losses of $147,376,281.
Theconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiary, Applied DNA Operations Management, Inc. All significantintercompany balances and transactions have been eliminated inconsolidation.
Estimates
Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect certain reported amounts and disclosures. Accordingly, actual resultscould differ from those estimates.
RevenueRecognition
Revenuesare derived from research, development, qualification and production testing forcertain commercial products. Revenue from fixed price testing contracts isgenerally recorded upon completion of the contracts, which are generallyshort-term, or upon completion of identifiable contractual tasks. At the timethe Company enters into a contract that includes multiple tasks, the Companyestimates the amount of actual labor and other costs that will be required tocomplete each task based on historical experience. Revenues are recognized whichprovide for a profit margin relative to the testing performed. Revenue relativeto each task and from contracts which are time and materials based is recordedas effort is expended. Billings in excess of amounts earned are deferred. Anyanticipated losses on contracts are charged to income when identified. To theextent management does not accurately forecast the level of effort required tocomplete a contract, or individual tasks within a contract, and the Company isunable to negotiate additional billings with a customer for cost over-runs, theCompany may incur losses on individual contracts. All selling, general andadministrative costs are treated as period costs and expensed asincurred.
Forrevenue from product sales, the Company recognizes revenue in accordance withStaff Accounting Bulletin No. 104, REVENUE RECOGNITION (“SAB104”), and StaffAccounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS(“SAB101”). SAB 101 requires that four basic criteria must be met before revenuecan be recognized: (1) persuasive evidence of an arrangement exists; (2)delivery has occurred; (3) the selling price is fixed and determinable; and (4)collectability is reasonably assured. Determination of criteria (3) and (4) arebased on management’s judgments regarding the fixed nature of the selling pricesof the products delivered and the collectability of those amounts. Provisionsfor discounts and rebates to customers, estimated returns and allowances, andother adjustments are provided for in the same period the related sales arerecorded. The Company defers any revenue for which the product has not beendelivered or is subject to refund until such time that the Company and thecustomer jointly determine that the product has been delivered or no refund willbe required. At September 30, 2008 and 2007 the Company’s deferred revenue was$-0-.
SAB 104incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”), MULTIPLEDELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting forarrangements that may involve the delivery or performance of multiple products,services and/or rights to use assets. The effect of implementing EITF 00-21 onthe Company’s financial position and results of operations was notsignificant.
APPLIEDDNA SCIENCES, INC.
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEA — SUMMARY OF ACCOUNTING POLICIES (continued)
CashEquivalents
For thepurpose of the accompanying consolidated financial statements, all highly liquidinvestments with a maturity of three months or less are considered to be cashequivalents.
AccountsReceivable
TheCompany provides an allowance for doubtful accounts equal to the estimateduncollectible amounts. The Company’s estimate is based on historical collectionexperience and a review of the current status of trade accounts receivable. Itis reasonably possible that the Company’s estimate of the allowance for doubtfulaccounts will change. At September 30, 2008, the Company has deemed that noallowance for doubtful accounts was necessary.
IncomeTaxes
TheCompany has adopted Financial Accounting Standard No. 109 (SFAS 109) whichrequires the recognition of deferred tax liabilities and assets for the expectedfuture tax consequences of events that have been included in the financialstatement or tax returns. Under this method, deferred tax liabilities and assetsare determined based on the difference between financial statements and taxbasis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse. Temporary differences betweentaxable income reported for financial reporting purposes and income tax purposesare insignificant.
In June2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”). FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, treatment of interest and penalties, anddisclosure of such positions. Effective October 1, 2007, the Company adopted theprovisions of FIN 48, as required. As a result of implementing FIN 48, there hasbeen no adjustment to the Company’s consolidated financial statements and theadoption of FIN 48 did not have a material effect on the Company’s consolidatedfinancial statements for the year ended September 30, 2008.
Propertyand Equipment
Propertyand equipment are stated at cost and depreciated over their estimated usefullives of 3 to 5 years using the straight line method. At September 30, 2008 and2007 property and equipment consist of:
| | | | | | | |
| | | September 30, 2008 | | | September 30, 2007 | |
| Computer equipment | | $ | 27,404 | | | $ | 27,404 | |
| Lab equipment | | | 77,473 | | | | 54,973 | |
| Furniture | | | 105,985 | | | | 105,985 | |
| | | | 210,862 | | | | 188,362 | |
| Accumulated Depreciation | | | (147,132 | ) | | | (82,825 | ) |
| Net | | $ | 63,730 | | | $ | 105,537 | |
APPLIEDDNA SCIENCES, INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEA — SUMMARY OF ACCOUNTING POLICIES (continued)
Impairmentof Long-Lived Assets
TheCompany has adopted Statement of Financial Accounting Standards No. 144 (SFASNo. 144). The Statement requires that long-lived assets and certain identifiableintangibles held and used by the Company be reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of an assetmay not be recoverable. Events relating to recoverability may includesignificant unfavorable changes in business conditions, recurring losses, or aforecasted inability to achieve break-even operating results over an extendedperiod. The Company evaluates the recoverability of long-lived assets based uponforecasted undiscounted cash flows. Should impairment in value be indicated, thecarrying value of intangible assets will be adjusted, based on estimates offuture discounted cash flows resulting from the use and ultimate disposition ofthe asset. SFAS No. 144 also requires assets to be disposed of be reported atthe lower of the carrying amount or the fair value less costs tosell.
ComprehensiveIncome
TheCompany does not have any items of comprehensive income in any of the yearspresented.
SegmentInformation
TheCompany adopted Statement of Financial Accounting Standards No. 131, Disclosuresabout Segments of an Enterprise and Related Information (“SFAS No. 131”). SFASNo. 131 establishes standards for reporting information regarding operatingsegments in annual financial statements and requires selected information forthose segments to be presented in interim financial reports issued tostockholders. SFAS No. 131 also establishes standards for related disclosuresabout products and services and geographic areas. Operating segments areidentified as components of an enterprise about which separate discretefinancial information is available for evaluation by the chief operatingdecision maker, or decision- making group, in making decisions how to allocateresources and assess performance. The information disclosed herein, materiallyrepresents all of the financial information related to the Company’s singleprincipal operating segment.
Net LossPer Share
TheCompany has adopted Statement of Financial Accounting Standard No. 128,“Earnings Per Share,” specifying the computation, presentation and disclosurerequirements of earnings per share information. Basic earnings per share hasbeen calculated based upon the weighted average number of common sharesoutstanding. Stock options and warrants have been excluded as common stockequivalents in the diluted earnings per share because they are eitherantidilutive, or their effect is not material. There were 69,640,964 and88,094,464 common share equivalents at September 30, 2008 and 2007. For theyears ended September 30, 2008 and 2007, these potential shares were excludedfrom the shares used to calculate diluted earnings per share as their inclusionwould reduce net loss per share.
StockBased Compensation
InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure-an amendment of SFAS No. 123.” Thisstatement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this statement amends the disclosure requirements of SFAS No. 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. The Company has chosen tocontinue to account for stock-based compensation using the intrinsic valuemethod 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 grantover the exercise price of the related option. The Company has adopted theannual disclosure provisions of SFAS No. 148 in its financial reports for theyear ended September 30, 2006 and for the subsequent periods. The Company issuedemployee unvested employee options as stock-based compensation during the yearended September 30, 2006 and therefore has no unrecognized stock compensationrelated liabilities as of September 30, 2006. For the year ended September 30,2007, the Company did not issue any stock based compensation.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEA — SUMMARY OF ACCOUNTING POLICIES (continued)
OnJanuary 1, 2006, we adopted the fair value recognition provisions of FinancialAccounting Standards Board (“FASB”) Statement of Financial Accounting Standards(“SFAS”) No. 123(R), Accounting for Stock Based Compensation, to account forcompensation costs under our stock option plans. We previously utilized theintrinsic value method under Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees (as amended) (“APB 25”). Under theintrinsic value method prescribed by APB 25, no compensation costs wererecognized for our employee stock options because the option exercise priceequaled the market price on the date of the grant. Prior to January 1, 2006 weonly disclosed the pro forma effects on net income and earnings per share as ifthe fair value recognition provisions of SFAS No. 123(R) had beenutilized.
Inadopting SFAS No. 123(R), the Company elected to use the modified prospectivemethod to account for the transition from the intrinsic value method to the fairvalue recognition method. Under the modified prospective method, compensationcost is recognized from the adoption date forward for all new stock optionsgranted and for any outstanding unvested awards as if the fair value method hadbeen applied to those awards as of the date of the grant.
Liquidity
As shownin the accompanying consolidated financial statements, the Company incurred anet loss of $6,802,898 for the year ended September 30, 2008. The Company’scurrent liabilities exceeded its current assets by $15,589,557 as of September30, 2008.
Concentrations
Financialinstruments and related items, which potentially subject the Company toconcentrations of credit risk, consist primarily of cash, cash equivalents andtrade receivables. The Company places its cash and temporary cash investmentswith high credit quality institutions. At times, such investments may be inexcess of the FDIC insurance limit.
TheCompany’s revenues earned from sale of products and services for the year endedSeptember 30, 2008 included an aggregate of 83% from four customers and for theyear ended September 30, 2007, two customers accounted for the Company’s totalrevenues. Two customers accounted for the Company’s total accounts receivable atSeptember 30, 2008.
Researchand Development
TheCompany accounts for research and development costs in accordance with theFinancial Accounting Standards Board’s Statement of Financial AccountingStandards No. 2 (“SFAS No. 2”), “Accounting for Research and Development Costs.Under SFAS No. 2, all research and development costs must be charged to expenseas incurred. Accordingly, internal research and development costs are expensedas incurred. Third-party research and development costs are expensed when thecontracted work has been performed or as milestone results have been achieved.Company-sponsored research and development costs related to both present andfuture products are expensed in the period incurred. The Company incurredresearch and development expenses of $145,832 and $110,845 for the years endedSeptember 30, 2008 and 2007, respectively.
Reclassifications
Certainreclassifications have been made in prior year’s financial statements to conformto classifications used in the current year.
Advertising
TheCompany follows the policy of charging the costs of advertising to expense asincurred. The Company charged to operations $36,364 and $12,923 as advertisingcosts for the years ended September 30, 2008 and 2007,respectively.
IntangibleAssets
TheCompany amortized its intangible assets using the straight-line method overtheir estimated period of benefit. The estimated useful life for patents is fiveyears while intellectual property uses a seven year useful life. We periodicallyevaluate the recoverability of intangible assets and take into account events orcircumstances that warrant revised estimates of useful lives or that indicatethat impairment exists. All of our intangible assets are subject toamortization.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEA — SUMMARY OF ACCOUNTING POLICIES (continued)
Restrictedcash / other current liabilities
Restrictedcash is comprised of funds deposited into an escrow account pending consummationof the placement of convertible debt as of September 30, 2007 (see Note D). Therelated obligation is recorded as other current liabilities until consummation.In conjunction with the private placement of the convertible debt during theyear ended September 30, 2008, the escrow account was released and the relatedliability was settled.
DerivativeFinancial Instruments
TheCompany’s derivative financial instruments consisted of embedded derivativesrelated to the 10% secured convertible promissory notes issued in 2006. Theseembedded derivatives included certain conversion features, variable interestfeatures, call options and default provisions. The accounting treatment ofderivative financial instruments required that the Company record thederivatives and related warrants at their fair values as of the inception dateof the note (estimated at $2,419,719) and at fair value as of each subsequentbalance sheet date. In addition, under the provisions of EITF Issue No. 00-19,“Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock,” as a result of entering into the notes, theCompany was required to classify all other non-employee stock options andwarrants as derivative liabilities and mark them to market at each reportingdate. Any change in fair value was recorded as non-operating, non-cash income orexpense at each reporting date. If the fair value of the derivatives is higherat the subsequent balance sheet date, the Company recorded a non-operating,non-cash charge. If the fair value of the derivatives is lower at the subsequentbalance sheet date, the Company recorded non-operating, non-cash income.Conversion-related derivatives were valued using the Binomial Option PricingModel with the following assumptions: dividend yield of 0%; annual volatility of111% to 112%; and risk free interest rate of 4.96% to 5.15% as well asprobability analysis related to trading volume restrictions. The remainingderivatives were valued using discounted cash flows and probability analysis.The derivatives were classified as long-term liabilities.
InSeptember 2007, the Company exchanged common stock for the remaining SecuredConvertible Promissory Notes that contained embedded derivatives such as certainconversion features, variable interest features, call options and defaultprovisions as described above. As a result, the Company reclassified the warrantliabilities recorded in conjunction with the convertible promissory notes toequity as of the conversion date of the related debt. Additionally, the Companyhas an accumulative accrual of $12,023,888 in liquidating damages inrelationship to the previously outstanding convertible promissory notes andrelated warrants.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEA — SUMMARY OF ACCOUNTING POLICIES (continued)
NewAccounting Pronouncements
InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities - Including an Amendment of FASB Statement No.115 “ (“SFAS No. 159”). SFAS No. 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value. Mostof the provisions of SFAS No. 159 apply only to entities that elect the fairvalue option. However, the amendment to SFAS No. 115 “ Accounting for Certain Investmentsin Debt and Equity Securities” applies to all entities withavailable-for-sale and trading securities. SFAS No. 159 is effective as of thebeginning of an entity’s first fiscal year beginning after November 15, 2007.Early adoption is permitted as of the beginning of a fiscal year that begins onor before November 15, 2007, provided the entity also elects to apply theprovision of SFAS No. 157, “Fair Value Measurements”. The adoption of SFAS No. 159 did not have amaterial impact on our consolidated financial position, results of operations orcash flows.
InDecember 2007, the FASB issued SFAS No. 141(R), “Business Combinations”(“SFAS No. 141(R)”), which establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any noncontrolling interest in anacquiree, including the recognition and measurement of goodwill acquired in abusiness combination. SFAS No. 141R is effective as of the beginning of thefirst fiscal year beginning on or after December 15, 2008. Earlier adoption isprohibited and the Company is currently evaluating the effect, if any, that theadoption will have on its consolidated financial position, results of operationsor cash flows.
InDecember 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest inConsolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No.160”), which will change the accounting and reporting for minority interests,which will be recharacterized as noncontrolling interests and classified as acomponent of equity within the consolidated balance sheets. SFAS No. 160 iseffective as of the beginning of the first fiscal year beginning on or afterDecember 15, 2008. Earlier adoption is prohibited and the Company is currentlyevaluating the effect, if any that the adoption will have on its consolidatedfinancial position, results of operations or cash flows.
In June2007, the FASB ratified the consensus in EITF Issue No. 07-3, “Accounting forNonrefundable Advance Payments for Goods or Services to be Used in FutureResearch and Development Activities” (EITF 07-3), which requires thatnonrefundable advance payments for goods or services that will be used orrendered for future research and development (R&D) activities be deferredand amortized over the period that the goods are delivered or the relatedservices are performed, subject to an assessment of recoverability. EITF 07-3will be effective for fiscal years beginning after December 15, 2007. TheCompany does not expect that the adoption of EITF 07-3 will have a materialimpact on our consolidated financial position, results of operations or cashflows.
In March2008, the FASB issued SFAS No. 161, “Disclosures about DerivativeInstruments and Hedging Activities - an amendment to FASB Statement No.133” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial standards for derivativeinstruments and hedging activities by requiring enhanced disclosures to enableinvestors to better understand their effects on an entity’s financial position,financial performance, and cash flows. Entities are required to provide enhanceddisclosures about: (a) how and why an entity uses derivative instruments; (b)how derivative instruments and related hedged items are accounted for under SFASNo. 133 and its related interpretations; and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows. It is effective for financial statements issued forfiscal years beginning after November 15, 2008, with early adoption encouraged.The Company is currently evaluating the impact, if any, that SFAS No. 161 willhave on our consolidated financial position, results of operations or cashflows.
In April2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Lifeof Intangible Assets”. This FSP amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other IntangibleAssets”. The Company is required to adopt FSP 142-3 on September 1, 2009;earlier adoption is prohibited. The guidance in FSP 142-3 for determining theuseful life of a recognized intangible asset shall be applied prospectively tointangible assets acquired after adoption, and the disclosure requirements shallbe applied prospectively to all intangible assets recognized as of, andsubsequent to, adoption. The Company is currently evaluating the impact of FSP142-3 on our consolidated financial position, results of operations or cashflows.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEA — SUMMARY OF ACCOUNTING POLICIES (continued)
In May2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally AcceptedAccounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements of nongovernmental entities thatare presented in conformity with generally accepted accounting principles (theGAAP hierarchy). SFAS No. 162 will become effective 60 days following the SEC’sapproval of the Public Company Accounting Oversight Board amendments to AUSection 411, “The Meaning of Present Fairly in Conformity With GenerallyAccepted Accounting Principles.” The Company does not expect the adoption ofSFAS No. 162 to have a material effect on our consolidated financial position,results of operations or cash flows.
In May2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting for Convertible DebtInstruments That May Be Settled in Cash upon Conversion (Including Partial CashSettlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the issuer ofcertain convertible debt instruments that may be settled in cash (or otherassets) on conversion to separately account for the liability (debt) and equity(conversion option) components of the instrument in a manner that reflects theissuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective forfiscal years beginning after December 15, 2008 on a retroactive basis. TheCompany is currently evaluating the potential impact, if any, of the adoption ofFSP APB 14-1 on our consolidated financial position, results of operations orcash flows.
Otherrecent accounting pronouncements issued by the FASB (including its EmergingIssues Task Force), the AICPA, and the SEC did not, or are not believed bymanagement to, have a material impact on the Company’s present or futureconsolidated financial statements.
NOTEB - ACQUISITION OF INTANGIBLE ASSETS
Theidentifiable intangible assets acquired and their carrying values at September30, 2008 and 2007 are as follows:
| | | | | | | |
| | | 2008 | | | 2007 | |
| Trade secrets and developed technologies (Weighted average life of 7 years) | | $ | 9,430,900 | | | $ | 9,430,900 | |
| Patents (Weighted average life of 5 years) | | | 34,257 | | | | 34,257 | |
| Total Amortized identifiable intangible assets-Gross carrying value: | | $ | 9,465,157 | | | | 9,465,157 | |
| Less: | | | | | | | | |
| Accumulated Amortization | | | (2,443,435 | ) | | | (2,073,325 | ) |
| Impairment (See below) | | | (5,655,011 | ) | | | (5,655,011 | ) |
| Net: | | $ | 1,366,711 | | | | 1,736,821 | |
| Residual value: | | $ | 0 | | | | 0 | |
Duringthe year ended September 30, 2006 the Company management performed an evaluationof its intangible assets (intellectual property) for purposes of determining theimplied fair value of the assets at September 30, 2006. The test indicated thatthe recorded remaining book value of its intellectual property exceeded its fairvalue for the year ended September 30, 2006, as determined by discounted futurecash flows. As a result, upon completion of the assessment, management recordeda non-cash impairment charge of $5,655,011, net of tax, or $0.05 per shareduring the year ended September 30, 2006 to reduce the carrying value of thepatents to $2,091,800. Considerable management judgment is necessary to estimatethe fair value. Accordingly, actual results could vary significantly frommanagement’s estimates.
Totalamortization expense charged to operations for the years ended September 30,2008 and 2007 were $370,110 and $370,644, respectively.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEB — ACQUISITION OF INTANGIBLE ASSETS (continued)
Estimatedamortization expense as of September 30, 2008 is as follows:
| | | | | |
| 2009 | | $ | 366,286 | |
| 2010 | | | 363,792 | |
| 2011 | | | 363,792 | |
| 2012 | | | 272,841 | |
| 2013 and thereafter | | | -0- | |
| Total | | $ | 1,366,711 | |
NOTEC – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accountspayable and accrued liabilities at September 30, 2008 and 2007 are asfollows:
| | | | | | | |
| | | 2008 | | | 2007 | |
| Accounts payable | | $ | 413,454 | | | $ | 1,234,449 | |
| Accrued consulting fees | | | 102,500 | | | | 20,000 | |
| Accrued interest payable | | | 281,329 | | | | 19,603 | |
| Accrued penalties relating to registration rights liquidating damages | | | 12,023,888 | | | | 11,750,941 | |
| Other accrued expenses | | | — | | | | 190,982 | |
| Total | | | 12,821,171 | | | $ | 13,215,975 | |
Restrictedcash/other current liabilities
Asdescribed in Note D below, the Company issued 10% Secured Promissory Notessubsequent to September 30, 2007. At September 30, 2007, the Company received$399,920 held in escrow relating to the placement of Convertible Notes pendingacceptance and completion of the placement of the Notes (See Note D). Inconjunction with the private placement of the convertible debt during the yearended September 30, 2008, the escrow account was released and the relatedliability was settled.
RegistrationRights Liquidated Damages
Inprivate placements in November and December, 2003, December, 2004, and Januaryand February, 2005, the Company issued secured convertible promissory notes andwarrants to purchase the Company’s common stock. Pursuant to the terms of aregistration rights agreement, the Company agreed to file a registrationstatement to be declared effective by the SEC for the common stock underlyingthe notes and warrants in order to permit public resale thereof. Theregistration rights agreement provided for the payment of liquidated damages ifthe stipulated registration deadlines were not met. The liquidated damages areequal to 3.5% per month of the face amount of the notes, which equals $367,885,with no limitations. During the year ended September 30, 2008, the SEC declaredeffective the Company’s registration statement with respect to the common stockunderlying the notes and warrants. The Company has accrued $12,023,888 as ofSeptember 30, 2008 to account for late effectiveness of the registrationstatement.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED – PRIVATE PLACEMENT OF CONVERTIBLE NOTES
Convertiblenotes payable as of September 30, 2008 and 2007 are as follows:
| | | | | | | |
| | | 2008 | | | 2007 | |
| 10% Secured Convertible Notes payable, related party, dated April 23, 2007, net of unamortized debt discount of $30,426 (see below) | | $ | -0- | | | $ | 69,574 | |
| 10% Secured Convertible Notes payable, dated June 27, 2007 (see below) | | | -0- | | | | 100,000 | |
| 10% Secured Convertible Notes payable, dated June 27, 2007 (see below) | | | -0- | | | | 50,000 | |
| 10% Secured Convertible Notes payable, related party, dated June 30, 2007, net of unamortized debt discount of $76,555 (see below) | | | -0- | | | | 173,445 | |
| 10% Secured Convertible Notes payable, related party, dated July 30, 2007, net of unamortized debt discount of $41,570 (see below) | | | -0- | | | | 158,430 | |
| 10% Secured Convertible Notes payable, dated August 8, 2007, net of unamortized debt discount of $27,869 (see below) | | | -0- | | | | 72,131 | |
| 10% Secured Convertible Notes payable, related party, dated September 28, 2007, net of unamortized debt discount of $183,175 (see below) | | | -0- | | | | 116,825 | |
| 10% Secured Convertible Notes payable, dated October 4, 2007, net of unamortized debt discount of $2,847 (see below) | | | 547,153 | | | | -0- | |
| 10% Secured Convertible Notes payable, dated October 30, 2007, net of unamortized debt discount of $35,373 (see below) | | | 564,627 | | | | -0- | |
| 10% Secured Convertible Notes payable, dated November 29, 2007, net of unamortized debt discount of $104,801 (see below) | | | 895,199 | | | | -0- | |
| 10% Secured Convertible Notes payable dated December 20, 2007, net of unamortized debt discount of $52,868 (see below) | | | 397,132 | | | | -0- | |
| 10% Secured Convertible Notes payable dated January 17, 2008, net of unamortized debt discount of $73,759 (see below) | | | 376,241 | | | | -0- | |
| 10% Secured Convertible Notes payable dated March 4, 2008, net of unamortized debt discount of $85,829 (see below) | | | 164,171 | | | | -0- | |
| 10% Secured Convertible Note payable dated May 7, 2008, net of unamortized debt discount of $35,532 (see below) | | | 64,468 | | | | -0- | |
| 10% Secured Convertible Note payable dated July 31, 2008, net of unamortized debt discount of $95,717 (see below) | | | 54,283 | | | | -0- | |
| | | | 3,063,274 | | | | 740,405 | |
| Less: current portion | | | (3,063,274 | ) | | | (740,405 | ) |
| | | $ | — | | | $ | — | |
10%Secured Convertible Promissory Note dated April 23, 2007
On April23, 2007, the Company issued a $100,000 related party convertible promissorynote due April 23, 2008 with interest at 10% per annum due upon maturity. Thenote is convertible at any time prior to maturity, at the holder’s option, at$0.50 per share. At maturity, the note, including any accrued and unpaidinterest, is convertible at $0.15 per share. The Company has granted thenoteholder a security interest in all the Company’s assets.
Inconjunction with the issuance of the notes, the Company issued 200,000 warrantsto purchase the Company’s common stock at $0.50 per share over a five yearterm.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the Convertible Note. The Companyallocated a portion of the proceeds equal to the intrinsic value of that featureto additional paid-in capital. The Company recognized and measured an aggregateof $13,333 of the proceeds, which is equal to the intrinsic value of theembedded beneficial conversion feature, to additional paid-in capital and adiscount against the Convertible Note. The debt discount attributed to thebeneficial conversion feature is amortized over the Convertible Note’s maturityperiod (one year) as interest expense.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
Inconnection with the placement of the Convertible Notes the Company issuednon-detachable warrants granting the holders the right to acquire 200,000 sharesof the Company’s common stock at $0.50 per share. The warrants expire five yearsfrom the issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $40,840 to warrant liabilities (See note A above) and a discountagainst the Convertible Note. The Company valued the warrants in accordance withEITF 00-27 using the Black-Scholes pricing model and the following assumptions:contractual terms of 5 years, an average risk free interest rate of 4.55%, adividend yield of 0%, and volatility of 207.45%. The debt discount attributed tothe value of the warrants issued is amortized over the Convertible Note’smaturity period (one year) as interest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($13,333) and warrants ($40,840) to debt discount, aggregating $54,173,which will be amortized to interest expense over the term of the Notes.Amortization of $30,426 and $23,747 was recorded for the years ended September30, 2008 and 2007, respectively.
On April23, 2008, the note and accrued interest of $10,000 was converted into 733,334shares of the Company’s common stock.
10%Secured Convertible Promissory Notes dated June 27, 2007
On June27, 2007, the Company issued $150,000 convertible promissory notes due June 27,2007 with interest at 10% per annum due upon maturity. The note is convertibleat any time prior to maturity, at the holder’s option, at $0.50 per share. Atmaturity, the note, including any accrued and unpaid interest, is convertible at$0.15 per share. The Company has granted the noteholder a security interest inall the Company’s assets.
Inconjunction with the issuance of the notes, the Company issued 300,000 warrantsto purchase the Company’s common stock at $0.50 per share over a five year term.The Company valued the warrants using the Black-Scholes pricing model and thefollowing assumptions: contractual terms of 5 years, an average risk freeinterest rate of 4.55%, a dividend yield of 0%, and volatility of 207.45% as acharge against current operations.
On June27, 2008, the notes and accrued interest of $15,000 converted into 1,100,000shares of the Company’s common stock.
10%Secured Convertible Promissory Note dated June 30, 2007
On June30, 2007, the Company issued a $250,000 related party convertible promissorynote due June 30, 2008 with interest at 10% per annum due upon maturity. Thenote is convertible at any time prior to maturity, at the holder’s option, at$0.50 per share. At maturity, the note, including any accrued and unpaidinterest, is convertible at $0.0877 per share. The Company has granted thenoteholder a security interest in all the Company’s assets.
Inconjunction with the issuance of the notes, the Company issued 500,000 warrantsto purchase the Company’s common stock at $0.50 per share over a five yearterm.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the Convertible Note. The Companyallocated a portion of the proceeds equal to the intrinsic value of that featureto additional paid-in capital. The Company recognized and measured an aggregateof $97,117 of the proceeds, which is equal to the intrinsic value of theembedded beneficial conversion feature, to additional paid-in capital and adiscount against the Convertible Note. The debt discount attributed to thebeneficial conversion feature is amortized over the Convertible Note’s maturityperiod (one year) as interest expense.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
Inconnection with the placement of the Convertible Notes the Company issuednon-detachable warrants granting the holders the right to acquire 500,000 sharesof the Company’s common stock at $0.50 per share. The warrants expire five yearsfrom the issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $33,662 to warrant liabilities (See note A above) and a discountagainst the Convertible Note. The Company valued the warrants in accordance withEITF 00-27 using the Black-Scholes pricing model and the following assumptions:contractual terms of 5 years, an average risk free interest rate of 4.92%, adividend yield of 0%, and volatility of 123.8%. The debt discount attributed tothe value of the warrants issued is amortized over the Convertible Note’smaturity period (one year) as interest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($97,117) and warrants ($33,662) to debt discount, aggregating $103,354,which will be amortized to interest expense over the term of the Notes.Amortization of $104,980 and $25,799 was recorded for the years ended September30, 2008 and 2007, respectively.
On June30, 2008, the note and accrued interest of $25,000 was converted into 3,134,543shares of the Company’s common stock.
10%Secured Convertible Promissory Note dated July 30, 2007
On July30, 2007, the Company issued a $200,000 related party convertible promissorynote due July 30, 2008 with interest at 10% per annum due upon maturity. Thenote is convertible at any time prior to maturity, at the holder’s option, at$0.50 per share. At maturity, the note, including any accrued and unpaidinterest, is convertible at $0.10257 per share. The Company has granted thenoteholder a security interest in all the Company’s assets.
Inconjunction with the issuance of the notes, the Company issued 400,000 warrantsto purchase the Company’s common stock at $0.50 per share over a five yearterm.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the Convertible Note. The Companyallocated a portion of the proceeds equal to the intrinsic value of that featureto additional paid-in capital. The Company recognized and measured an aggregateof $48,737 of the proceeds, which is equal to the intrinsic value of theembedded beneficial conversion feature, to additional paid-in capital and adiscount against the Convertible Note. The debt discount attributed to thebeneficial conversion feature is amortized over the Convertible Note’s maturityperiod (one year) as interest expense.
Inconnection with the placement of the Convertible Notes the Company issuednon-detachable warrants granting the holders the right to acquire 400,000 sharesof the Company’s common stock at $0.50 per share. The warrants expire five yearsfrom the issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $14,746 to warrant liabilities (See note A above) and a discountagainst the Convertible Note. The Company valued the warrants in accordance withEITF 00-27 using the Black-Scholes pricing model and the following assumptions:contractual terms of 5 years, an average risk free interest rate of 4.64%, adividend yield of 0%, and volatility of 72.84%. The debt discount attributed tothe value of the warrants issued is amortized over the Convertible Note’smaturity period (one year) as interest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($48,737) and warrants ($14,746) to debt discount, aggregating $63,483,which will be amortized to interest expense over the term of the Notes.Amortization of $55,142 and $8,341 was recorded for the years ended September30, 2008 and 2007, respectively.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
On July30, 2008, the note and accrued interest of $20,000 was converted into 2,144,917shares of the Company’s common stock.
10%Secured Convertible Promissory Note dated August 8, 2007
On August8, 2007, the Company issued a $100,000 convertible promissory note due August 8,2008 with interest at 10% per annum due upon maturity. The note is convertibleat any time prior to maturity, at the holder’s option, at $0.50 per share. Atmaturity, the note, including any accrued and unpaid interest, is convertible at$0.09627 per share. The Company has granted the noteholder a security interestin all the Company’s assets.
Inconjunction with the issuance of the notes, the Company issued 200,000 warrantsto purchase the Company’s common stock at $0.50 per share over a five yearterm.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the Convertible Note. The Companyallocated a portion of the proceeds equal to the intrinsic value of that featureto additional paid-in capital. The Company recognized and measured an aggregateof $32,016 of the proceeds, which is equal to the intrinsic value of theembedded beneficial conversion feature, to additional paid-in capital and adiscount against the Convertible Note. The debt discount attributed to thebeneficial conversion feature is amortized over the Convertible Note’s maturityperiod (one year) as interest expense.
Inconnection with the placement of the Convertible Notes the Company issuednon-detachable warrants granting the holders the right to acquire 200,000 sharesof the Company’s common stock at $0.50 per share. The warrants expire five yearsfrom the issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $7,373 to warrant liabilities (See note A above) and a discountagainst the Convertible Note. The Company valued the warrants in accordance withEITF 00-27 using the Black-Scholes pricing model and the following assumptions:contractual terms of 5 years, an average risk free interest rate of 4.69%, adividend yield of 0%, and volatility of 92.71%. The debt discount attributed tothe value of the warrants issued is amortized over the Convertible Note’smaturity period (one year) as interest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($32,016) and warrants ($7,373) to debt discount, aggregating $39,389,which will be amortized to interest expense over the term of the Notes.Amortization of $34,655 and $4,734 was recorded for the years ended September30, 2008 and 2007, respectively.
On August8, 2008, the note and accrued interest of $10,000 was converted into 1,142,562shares of the Company’s common stock
10%Secured Convertible Promissory Note dated September 28, 2007
OnSeptember 8, 2007, the Company issued a $300,000 related party convertiblepromissory note due September 28, 2008 with interest at 10% per annum due uponmaturity. The note is convertible at any time prior to maturity, at the holder’soption, at $0.50 per share. At maturity, the note, including any accrued andunpaid interest, is convertible at $0.06643 per share. The Company has grantedthe noteholder a security interest in all the Company’s assets.
Inconjunction with the issuance of the notes, the Company issued 600,000 warrantsto purchase the Company’s common stock at $0.50 per share over a five yearterm.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the Convertible Note. The Companyallocated a portion of the proceeds equal to the intrinsic value of that featureto additional paid-in capital. The Company recognized and measured an aggregateof $180,993 of the proceeds, which is equal to the intrinsic value of theembedded beneficial conversion feature, to additional paid-in capital and adiscount against the Convertible Note. The debt discount attributed to thebeneficial conversion feature is amortized over the Convertible Note’s maturityperiod (one year) as interest expense.
Inconnection with the placement of the Convertible Notes the Company issuednon-detachable warrants granting the holders the right to acquire 600,000 sharesof the Company’s common stock at $0.50 per share. The warrants expire five yearsfrom the issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $29,388 to warrant liabilities (See note A above) and a discountagainst the Convertible Note. The Company valued the warrants in accordance withEITF 00-27 using the Black-Scholes pricing model and the following assumptions:contractual terms of 5 years, an average risk free interest rate of 4.23%, adividend yield of 0%, and volatility of 102.39%. The debt discount attributed tothe value of the warrants issued is amortized over the Convertible Note’smaturity period (one year) as interest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($180,993) and warrants ($29,388) to debt discount, aggregating$210,381, which will be amortized to interest expense over the term of theNotes. Amortization of $209,372 and $1,009 was recorded for the years endedSeptember 30, 2008 and 2007, respectively.
OnSeptember 28, 2008, the note and accrued interest of $30,000 was converted into4,967,646 shares of the Company’s common stock
10%Secured Convertible Promissory Notes dated October 4, 2007
OnOctober 4, 2007, the Company issued $500,000 principal amount convertiblepromissory notes due October 4, 2008 with interest at 10% per annum due uponmaturity. The notes are convertible at any time prior to maturity, at the optionof the holders, into shares of our common stock at a price equal to the greaterof (i) 50% of the average price of our common stock for the ten trading daysprior to the date of the notice of conversion or (ii) at $0.069328632 per share,which is equal to a 30% discount to the average volume, weighted average priceof our common stock for the ten trading days prior to issuance. At maturity, thenotes, including any accrued and unpaid interest, are convertible at$0.069328632 per share.
Inaddition, on October 4, 2007, the Company issued a $50,000 principal amountconvertible promissory note due October 4, 2008 with interest at 10% per annumdue upon maturity. The note is convertible at any time prior to maturity, at theholder’s option, into shares of our common stock at a price equal to the greaterof (i) 50% of the average price of our common stock for the ten trading daysprior to the date of the notice of conversion or (ii) at $0.079232722 per share,which is equal to a 20% discount to the average volume, weighted average priceof our common stock for the ten trading days prior to issuance. At maturity, thenote, including any accrued and unpaid interest, is convertible at $0.079232722per share. The Company has granted the noteholder a security interest in all theCompany’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the notes. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$292,416 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the notes. The debt discount attributed to the beneficial conversionfeature is amortized over the notes’ maturity period (one year) as interestexpense.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
Inconnection with the issuance of the notes, the Company issued non-detachablewarrants granting the holders the right to acquire 1,100,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire five years fromthe issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $53,968 to additional paid in capital and a discount against thenotes. The Company valued the warrants in accordance with EITF 00-27 using theBlack-Scholes pricing model and the following assumptions: contractual terms of5 years, an average risk free interest rate of 4.22%, a dividend yield of 0%,and volatility of 103.81%. The debt discount attributed to the value of thewarrants issued is amortized over the notes’ maturity period (one year) asinterest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($292,416) and warrants ($53,968) to debt discount, aggregating$346,384, which will be amortized to interest expense over the term of thenotes. Amortization of $343,537 was recorded for the year ended September 30,2008.
10%Secured Convertible Promissory Notes dated October 30, 2007
OnOctober 30, 2007, the Company issued $550,000 principal amount convertiblepromissory notes due October 30, 2008 with interest at 10% per annum due uponmaturity. The notes are convertible at any time prior to maturity, at the optionof the holders, into shares of our common stock at a price equal to the greaterof (i) 50% of the average price of our common stock for the ten trading daysprior to the date of the notice of conversion or (ii) at $0.104750019 per share,which is equal to a 30% discount to the average volume, weighted average priceof our common stock for the ten trading days prior to issuance. At maturity, thenotes, including any accrued and unpaid interest, are convertible at$0.104750019 per share.
Inaddition, on October 30, 2007, the Company issued two $50,000 principal amountconvertible promissory notes due October 30, 2008 with interest at 10% per annumdue upon maturity. The notes are convertible at any time prior to maturity, atthe option of the holder, into shares of our common stock at a price equal tothe greater of (i) 50% of the average price of our common stock for the tentrading days prior to the date of the notice of conversion or (ii) at$0.119714308 per share, which is equal to a 20% discount to the average volume,weighted average price of our common stock for the ten trading days prior toissuance. At maturity, the notes, including any accrued and unpaid interest, areconvertible at $0.119714308 per share. The Company has granted the noteholders asecurity interest in all the Company’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the notes. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$368,499 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the notes. The debt discount attributed to the beneficial conversionfeature is amortized over the notes’ maturity period (one year) as interestexpense.
Inconnection with the issuance of the notes, the Company issued non-detachablewarrants granting the holders the right to acquire 1,300,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire five years fromthe issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $105,611 to additional paid in capital and a discount against thenotes. The Company valued the warrants in accordance with EITF 00-27 using theBlack-Scholes pricing model and the following assumptions: contractual terms of5 years, an average risk free interest rate of 3.85%, a dividend yield of 0%,and volatility of 108.66%. The debt discount attributed to the value of thewarrants issued is amortized over the notes’ maturity period (one year) asinterest expense.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
OnNovember 19, 2007, a noteholder elected to convert a $50,000 principal amountpromissory note and accrued interest of $274 into 479,942 shares of theCompany’s common stock.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($368,499) and warrants ($105,611) to debt discount, aggregating$474,110, which will be amortized to interest expense over the term of thenotes. Amortization of $438,737 for the year ended September 30, 2008 inclusiveof the write off of the unamortized debt discount relating to the converted notedescribed above.
10%Secured Convertible Promissory Notes dated November 29, 2007
OnNovember 29, 2007, the Company issued $1,000,000 principal amount convertiblepromissory notes due November 29, 2008 with interest at 10% per annum due uponmaturity. The notes are convertible at any time prior to maturity, at the optionof the holders, into shares of our common stock at a price equal to the greaterof (i) 50% of the average price of our common stock for the ten trading daysprior to the date of the notice of conversion or (ii) at $0.094431519, which isequal to a 30% discount to the average volume, weighted average price of ourcommon stock for the ten trading days prior to issuance per share. At maturity,the notes, including any accrued and unpaid interest, are convertible at$0.094431519 per share. The Company has granted the noteholders a securityinterest in all the Company’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the notes. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$512,504 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the notes. The debt discount attributed to the beneficial conversionfeature is amortized over the notes’ maturity period (one year) as interestexpense.
Inconnection with the issuance of the notes the Company issued non-detachablewarrants granting the holders the right to acquire 2,000,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire five years fromthe issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $135,845 to additional paid in capital and a discount against thenotes. The Company valued the warrants in accordance with EITF 00-27 using theBlack-Scholes pricing model and the following assumptions: contractual terms of5 years, an average risk free interest rate of 3.42%, a dividend yield of 0%,and volatility of 106.15%. The debt discount attributed to the value of thewarrants issued is amortized over the notes’ maturity period (one year) asinterest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($512,504) and warrants ($135,845) to debt discount, aggregating$648,349, which will be amortized to interest expense over the term of thenotes. Amortization of $543,548 was recorded for the year ended September 30,2008.
10%Secured Convertible Promissory Notes dated December 20, 2007
OnDecember 20, 2007, the Company issued $450,000 principal amount convertiblepromissory notes due December 20, 2008 with interest at 10% per annum due uponmaturity. The notes are convertible at any time prior to maturity, at the optionof the holders, into shares of our common stock at a price equal to the greaterof (i) 50% of the average price of our common stock for the ten trading daysprior to the date of the notice of conversion or (ii) at $0.074766323 per share,which is equal to a 30% discount to the average volume, weighted average priceof our common stock for the ten trading days prior to issuance. At maturity, thenotes, including any accrued and unpaid interest, are convertible at$0.074766323 per share. The Company has granted the noteholders a securityinterest in all the Company’s assets.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the notes. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$196,543 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the notes. The debt discount attributed to the beneficial conversionfeature is amortized over the notes’ maturity period (one year) as interestexpense.
Inconnection with the issuance of the notes, the Company issued non-detachablewarrants granting the holders the right to acquire 900,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire five years fromthe issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $44,668 to additional paid in capital and a discount against thenotes. The Company valued the warrants in accordance with EITF 00-27 using theBlack-Scholes pricing model and the following assumptions: contractual terms of5 years, an average risk free interest rate of 3.45%, a dividend yield of 0%,and volatility of 104.51%. The debt discount attributed to the value of thewarrants issued is amortized over the notes’ maturity period (one year) asinterest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($196,543) and warrants ($44,668) to debt discount, aggregating$241,211, which will be amortized to interest expense over the term of thenotes. Amortization of $188,343 was recorded for the year ended September 30,2008.
10%Secured Convertible Promissory Notes dated January 17, 2008
OnJanuary 17, 2008, the Company issued $450,000 principal amount convertiblepromissory notes due January 17, 2009 with interest at 10% per annum due uponmaturity. The note is convertible at any time prior to maturity, at the holder’soption, into shares of our common stock at a price equal to the greater of (i)50% of the average price of our common stock for the ten trading days prior tothe date of the notice of conversion or (ii) at $0.073512803 per share, which isequal to a 30% discount to the average volume, weighted average price of ourcommon stock for the ten trading days prior to issuance. At maturity, the note,including any accrued and unpaid interest, is convertible at $0.073512803 pershare. The Company has granted the noteholders a security interest in all theCompany’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the notes. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$205,708 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the notes. The debt discount attributed to the beneficial conversionfeature is amortized over the notes’ maturity period (one year) as interestexpense.
Inconnection with the placement of the notes the Company issued non-detachablewarrants granting the holders the right to acquire 900,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire five years fromthe issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $43,569 to additional paid in capital and a discount against thenotes. The Company valued the warrants in accordance with EITF 00-27 using theBlack-Scholes pricing model and the following assumptions: contractual terms of5 years, an average risk free interest rate of 2.90%, a dividend yield of 0%,and volatility of 102.72%. The debt discount attributed to the value of thewarrants issued is amortized over the notes’ maturity period (one year) asinterest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($205,708) and warrants ($43,569) to debt discount, aggregating$249,277, which will be amortized to interest expense over the term of thenotes. Amortization of $175,518 was recorded for the year ended September 30,2008.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
10%Secured Convertible Promissory Notes dated March 4, 2008
On March4, 2008, the Company issued $250,000 principal amount convertible promissorynotes due March 4, 2009 with interest at 10% per annum due upon maturity. Thenotes are convertible at any time prior to maturity, at the holder option of theholders, into shares of our common stock at a price equal to the greater of (i)50% of the average price of our common stock for the ten trading days prior tothe date of the notice of conversion or (ii) at $0.125875423 per share, which isequal to a 30% discount to the average volume, weighted average price of ourcommon stock for the ten trading days prior to issuance. At maturity, the notes,including any accrued and unpaid interest, are convertible at $0.125875423 pershare. The Company has granted the noteholders a security interest in all theCompany’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the notes. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$154,805 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the notes. The debt discount attributed to the beneficial conversionfeature is amortized over the notes’ maturity period (one year) as interestexpense.
Inconnection with the placement of the notes the Company issued non-detachablewarrants granting the holders the right to acquire 500,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire five years fromthe issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $47,308 to additional paid in capital and a discount against thenotes. The Company valued the warrants in accordance with EITF 00-27 using theBlack-Scholes pricing model and the following assumptions: contractual terms of5 years, an average risk free interest rate of 2.53%, a dividend yield of 0%,and volatility of 106.37%. The debt discount attributed to the value of thewarrants issued is amortized over the notes’ maturity period (one year) asinterest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($154,805) and warrants ($47,308) to debt discount, aggregating$202,113, which will be amortized to interest expense over the term of thenotes. Amortization of $116,284 was recorded for the year ended September 30,2008.
10%Secured Convertible Promissory Note dated May 7, 2008
On May 7,2008, the Company issued a $100,000 convertible promissory note due May 7, 2009with interest at 10% per annum due upon maturity. The note is convertible at anytime prior to maturity, at the holder’s option, into shares of our common stockat a price equal to the greater of (i) 50% of the average price of our commonstock for the ten trading days prior to the date of the notice of conversion or(ii) at $0.079849085 per share, which is equal to a 30% discount to the averagevolume, weighted average price of our common stock for the ten trading daysprior to issuance. At maturity, the note, including any accrued and unpaidinterest, is convertible at $0.079849085 per share. The Company has granted thenoteholder a security interest in all the Company’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the note. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$48,490 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the note. The debt discount attributed to the beneficial conversionfeature is amortized over the note’s maturity period (one year) as interestexpense.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTED — PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
Inconnection with the placement of the note the Company issued non-detachablewarrants granting the holders the right to acquire 200,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire five years fromthe issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $10,730 to additional paid in capital and a discount against the note.The Company valued the warrants in accordance with EITF 00-27 using theBlack-Scholes pricing model and the following assumptions: contractual terms of5 years, an average risk free interest rate of 3.09%, a dividend yield of 0%,and volatility of 101.74%. The debt discount attributed to the value of thewarrants issued is amortized over the note’s maturity period (one year) asinterest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($48,490) and warrants ($10,730) to debt discount, aggregating $59,220,which will be amortized to interest expense over the term of the Notes.Amortization of $23,688 was recorded for the year ended September 30,2008.
10%Secured Convertible Promissory Note dated July 31, 2008
On May 7,2008, the Company issued a $150,000 convertible promissory note due July 31,2009 with interest at 10% per annum due upon maturity. The note is convertibleat any time prior to maturity, at the holder’s option, into shares of our commonstock at a price equal to the greater of (i) 50% of the average price of ourcommon stock for the ten trading days prior to the date of the notice ofconversion or (ii) at $0.0549483 per share, which is equal to a 30% discount tothe average volume, weighted average price of our common stock for the tentrading days prior to issuance. At maturity, the note, including any accrued andunpaid interest, is convertible at $0.0549483 per share. The Company has grantedthe noteholder a security interest in all the Company’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the note. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$91,655 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the note. The debt discount attributed to the beneficial conversionfeature is amortized over the note’s maturity period (one year) as interestexpense.
Inconnection with the placement of the note the Company issued non-detachablewarrants granting the holders the right to acquire 300,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire five years fromthe issuance. In accordance with Emerging Issues Task Force Issue 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF –0027”), the Company recognized the value attributable to the warrants in theamount of $23,268 to additional paid in capital and a discount against the note.The Company valued the warrants in accordance with EITF 00-27 using theBlack-Scholes pricing model and the following assumptions: contractual terms of5 years, an average risk free interest rate of 3.259%, a dividend yield of 0%,and volatility of 152.00%. The debt discount attributed to the value of thewarrants issued is amortized over the note’s maturity period (one year) asinterest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($91,655) and warrants ($23,268) to debt discount, aggregating $114,923,which will be amortized to interest expense over the term of the Notes.Amortization of $19,206 was recorded for the year ended September 30,2008.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEE - RELATED PARTY TRANSACTIONS
TheCompany’s current and former officers and shareholders have advanced funds tothe Company for travel related and working capital purposes. No formal repaymentterms or arrangements existed. There were no advances due at September 30, 2008and 2007.
Duringthe years ended September 30, 2008 and 2007, the Company’s Chief ExecutiveOfficer, or entities controlled by the Company’s Chief Executive Officer, hadadvanced funds to the Company in the form of convertible promissory notes forworking capital purposes (see Note D).
Duringthe years ended September 30, 2008 and 2007, the Company had total sales of$405, 061 and $0 (or 46.4% and 0.0% of total sales), respectively, to Dr.Suwelack Skin & Health Care AG, (“Dr. Suwelack”) and BioCogent of whichthe Company’s Chief Executive Officer is the President and sole stockholder,respectively.
NOTEF - CAPITAL STOCK
TheCompany is authorized to issue 410,000,000 shares of common stock, with a $0.001par value per share as the result of a shareholder meeting conducted on May 16,2007. Prior to the May 16, 2007 share increase, the Company was authorized toissue 250,000,000 shares of common stock with a $0.001 par value per share. Inaddition, the Company is authorized to issue 10,000,000 shares of preferredstock with a $0.001 par value per share. The preferred stock is convertible atthe 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 theholder.
Preferredand Common Stock Transactions During the Year Ended September 30,2007:
InDecember 2006, the Company issued 180,000 shares of common stock in settlementof a previously incurred related party debt of $410,429. The Company valued theshares issued at approximately $0.09 per share for a total of $16,200, whichrepresents the fair value of the shares at the date of issuance. The Companyrecorded the balance of the debt, or $394,229 from the extinguishment of arelated party debt as additional paid in capital.
In May2007, the Company issued 9,645,752 shares of common stock in exchange forsecured convertible promissory notes of $1,000,000 and related accruedinterest.
In June2007, the Company issued 29,691,412 shares of common stock in exchange forsecured convertible promissory notes of $2,950,000 and related accruedinterest.
InSeptember 2007, the Company issued 19,782,112 shares of common stock in exchangefor secured convertible promissory notes of $1,500,000 and related accruedinterest.
Preferredand Common Stock Transactions During the Year Ended September 30,2008:
InNovember 2007, the Company issued 1,000,000 shares of common stock in exchangefor consulting services. The Company valued the shares at $0.14 per share for atotal of $140,000, which represents the fair value of the services receivedwhich did not differ materially from the value of the stock issued.
InNovember 2007, the Company issued 479,942 shares of common stock in exchange forsecured convertible promissory notes of $50,000 and related accruedinterest.
InDecember 2007, the Company issued 9,000,000 shares of common stock in exchangefor consulting services. The Company valued the shares at $0.10 per share for atotal of $900,000, which represents the fair value of the services receivedwhich did not differ materially from the value of the stockissued.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEF — CAPITAL STOCK (continued)
InFebruary 2008, the Company issued 1,375,000 shares of common stock inconjunction with the exercise of warrants.
In April2008, the Company issued 733,334 shares of common stock in exchange for securedpromissory notes of $100,000 and related accrued interest.
In June2008, the Company issued an aggregate of 4,234,543 shares of common stock inexchange for secured promissory notes of $400,000 and related accruedinterest.
In July2008, the Company issued 2,144,917 shares of common stock in exchange forsecured promissory notes of $200,000 and related accrued interest.
In August2008, the Company issued 1,142,562 shares of common stock in exchange forsecured promissory notes of $100,000 and related accrued interest.
InSeptember 2008, the Company issued 4,967,646 shares of common stock in exchangefor secured promissory notes of $300,000 and related accruedinterest.
NOTEG - STOCK OPTIONS AND WARRANTS
Warrants
Thefollowing table summarizes the changes in warrants outstanding and the relatedprices for the shares of the Company’s common stock issued to non-employees ofthe Company. These warrants were granted in lieu of cash compensation forservices performed or financing expenses in connection with the issuance ofconvertible debt and the sale of the Company’s common stock.
| | | | | | | | | | | | | | | | | |
| Exercise Prices | | | Number Outstanding | | | Warrants Outstanding Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Weighted Average Exercisable | | | Exercisable Weighted Average Exercise Price | |
| $ | 0.09 | | | | 16,400,000 | | | | 2.92 | | | $ | 0.09 | | | | 16,400,000 | | | $ | 0.09 | |
| $ | 0.10 | | | | 105,464 | | | | 0.79 | | | $ | 0.10 | | | | 105,464 | | | $ | 0.10 | |
| $ | 0.20 | | | | 5,000 | | | | 0.13 | | | $ | 0.20 | | | | 5,000 | | | $ | 0.20 | |
| $ | 0.50 | | | | 25,850,000 | | | | 3.01 | | | $ | 0.50 | | | | 25,850,000 | | | $ | 0.50 | |
| $ | 0.60 | | | | 6,623,500 | | | | 0.95 | | | $ | 0.60 | | | | 6,623,500 | | | $ | 0.60 | |
| $ | 0.70 | | | | 200,000 | | | | 0.28 | | | $ | 0.70 | | | | 200,000 | | | $ | 0.70 | |
| $ | 0.75 | | | | 14,797,000 | | | | 1.35 | | | $ | 0.75 | | | | 14,797,000 | | | $ | 0.75 | |
| | | | | | 63,980,964 | | | | | | | | | | | | 63,980,964 | | | | | |
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEG — STOCK OPTIONS AND WARRANTS (continued)
Transactionsinvolving warrants are summarized as follows:
| | | | | | | |
| | | Number of Shares | | | Weighted Average Price Per Share | |
| Balance, September 30, 2006 | | | 72,369,464 | | | $ | 0.48 | |
| Granted | | | 11,200,000 | | | | 0.18 | |
| Exercised | | | — | | | | — | |
| Canceled or expired | | | (1,135,000 | ) | | | (0.70 | ) |
| Outstanding at September 30, 2007 | | | 82,434,464 | | | $ | 0.43 | |
| Granted | | | 7,200,000 | | | | 0.50 | |
| Exercised | | | (2,500,000 | ) | | | (0.09 | ) |
| Canceled or expired | | | (23,153,500 | ) | | | (0.41 | ) |
| | | | | | | | | |
| Balance, September 30, 2008 | | | 63,980,964 | | | $ | 0.46 | |
EmployeeStock Options
Thefollowing table summarizes the changes in options outstanding and the relatedprices for the shares of the Company’s common stock issued to employees of theCompany under a non-qualified employee stock option plan:
| | | | | | | | | | | | | | | | | |
| Options Outstanding | | | Options Exercisable | |
| Exercise Prices | | | Number Outstanding | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Number Exercisable | | | Weighted Average Exercise Price | |
| $ | 0.68 | | | | 3,660,000 | | | | 3.25 | | | $ | 0.68 | | | | 3,660,000 | | | $ | 0.68 | |
| | 0.09 | | | | 2,000,000 | | | | 3.41 | | | | 0.09 | | | | 2,000,000 | | | | 0.09 | |
| | | | | | 5,660,000 | | | | | | | | | | | | 5,660,000 | | | $ | 0.47 | |
Transactionsinvolving stock options issued to employees are summarized asfollows:
| | | | | | | |
| | | Number of Shares | | | Weighted Average Exercise Price Per Share | |
| | | | | | | |
| Outstanding at October 1, 2006 | | | 5,660,000 | | | $ | 0.47 | |
| Granted | | | — | | | | — | |
| Exercised | | | — | | | | — | |
| Cancelled or expired | | | — | | | | — | |
| Outstanding at September 30, 2007 | | | 5,660,000 | | | $ | 0.47 | |
| Granted | | | — | | | | — | |
| Exercised | | | — | | | | — | |
| Canceled or expired | | | — | | | | — | |
| Outstanding at September 30, 2008 | | | 5,660,000 | | | $ | 0.47 | |
TheCompany did not grant any employee options during the year ended September 30,2007.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEG — STOCK OPTIONS AND WARRANTS (continued)
Amendmentto the 2005 Incentive Stock Plan and Recent Equity Award Grants
On June17, 2008, the Board of Directors adopted an amendment to the 2005 IncentiveStock Plan that will increase the total number of shares of common stockissuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000shares to a total of 100,000,000 shares, which is subject to approval by ourstockholders at the 2008 annual meeting of stockholders. In connection with theshare increase amendment, the Board of Directors approved the issuance ofoptions to purchase a total of 37,750,000 shares to certain key employees andnon-employee directors under the 2005 Incentive Stock Plan, including17,000,000, 5,000,000 and 7,000,000 to James A. Hayward, Kurt H. Jensen andMing-Hwa Liang, respectively, and 500,000 to each of Yacov Shamash and SanfordR. Simon. The options approved to be issued by the Board of Directors to our keyemployees and non-employee directors will vest with respect to 25% of theunderlying shares on the date of grant and the remaining will vest ratably eachanniversary thereafter until fully vested on the third anniversary of the dateof grant.
Theeffectiveness of the share increase amendment and the approval of the grant ofthese stock options issued to the key employees and non-employee directors aresubject to approval by our stockholders at the 2008 annual meeting ofstockholders.
Aggregateintrinsic value of options outstanding and options exercisable at September 30,2008 was $0. Aggregate intrinsic value represents the difference between thecompany’s closing stock price on the last trading day of the fiscal period,which was $0.05 as of September 30, 2008, and the exercise price multiplied bythe number of options outstanding. As of September 30, 2008, total unrecognizedstock-based compensation expense related to non-vested stock options was$0.
NOTEH – INCOME TAXES
TheCompany has adopted Financial Accounting Standard No. 109 which requires therecognition of deferred tax liabilities and assets for the expected future taxconsequences of events that have been included in the financial statement or taxreturns. Under this method, deferred tax liabilities and assets are determinedbased on the difference between financial statements and tax bases of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. Temporary differences between taxableincome reported for financial reporting purposes and income tax purposes areinsignificant.
AtSeptember 30, 2008, the Company has available for federal income tax purposes anet operating loss carryforward of approximately $147,000,000, expiring in theyear 2027, that may be used to offset future taxable income. The Company hasprovided a valuation reserve against the full amount of the net operating lossbenefit, since in the opinion of management based upon the earnings history ofthe Company; it is more likely than not that the benefits will not be realized.Due to significant changes in the Company’s ownership, as well as non compliancewith filing requirements of corporate tax returns for past several years, thefuture use of its existing net operating losses may be limited. Components ofdeferred tax assets as of September 30, 2008 are as follows:
| | | | | |
| Non current: | | | | |
| Net operating loss | | | | |
| carryforward | | $ | 51,500,000 | |
| Valuation allowance | | | (51,500,000 | ) |
| Net deferred tax asset | | $ | — | |
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEI-LOSS PER SHARE
Thefollowing table presents the computation of basic and diluted losses pershare:
| | | | | | | |
| | | For the Year Ended September 30, 2008 | | | For the Year Ended September 30, 2007 | |
| Loss available for common shareholders | | $ | (6,802,898 | ) | | $ | (13,304,833 | ) |
| Basic and fully diluted loss per share | | $ | (0.04 | ) | | $ | (0.10 | ) |
| Weighted average common shares outstanding | | | 191,488,042 | | | | 135,229,885 | |
Duringthe years ended September 30, 2008 and 2007, common stock equivalents are notconsidered in the calculation of the weighted average number of common sharesoutstanding because they would be anti-dilutive, thereby decreasing the net lossper common share.
NOTEJ- COMMITMENTS AND CONTINGENCIES
TheCompany leases office space under operating lease in Stony Brook, New York forits corporate use from an entity controlled by significant former shareholder,expiring in October 2009. In November 2005, the Company vacated the Los Angelesfacility to relocated to the new Stony Brook New York address Total lease rentalexpenses for the years ended on September 30, 2008 and 2007, was $76,446 and$49,000, respectively.
Commitmentsfor minimum rentals under non-cancelable lease at September 30, 2008 are asfollows:
| | | | | |
| Year ended September 30, | | | | |
| 2009 | | $ | 80,467 | |
| 2010 | | | 6,758 | |
| 2011 | | | — | |
| 2012 | | | — | |
| 2013 and thereafter | | | — | |
| | | $ | 87,225 | |
Employmentand Consulting Agreements
TheCompany has consulting agreements with outside contractors, certain of whom arealso Company stockholders. The Agreements are generally month tomonth.
Litigation
InJanuary 2006, a former employee of the Company filed a complaint allegingwrongful termination against the Company. The former employee is seeking$230,000 in damages. The Company believes that it has meritorious defenses tothe plaintiff’s claims and intends to vigorously defend itself against thePlaintiff’s claims. Management believes the ultimate outcome of this matter willnot have a material adverse effect on the Company’s consolidated financialposition or results of operations or liquidity. On June 19, 2008, the SuperiorCourt of California issued a summary dismissal. A written agreement settingforth the final resolution of this matter was also executed and signed by boththe employee and the Company on August 21, 2008.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEJ — COMMITMENTS AND CONTINGENCIES (continued)
On April23, 2008, a consultant filed a complaint related to a claim for breach ofcontract. In March 2005, the Company entered into a consulting agreement whichprovided for, among other things, a payment of $6,000 per month for a period of24 months, or an aggregate of $144,000. In addition, the consulting agreementprovided for the issuance of a five-year warrant to purchase 250,000 shares ofthe Company’s common stock with an exercise price of $.75. The consultantasserts that the Company owes it 17 payments of $6,000, or an aggregate of$102,000, plus accrued interest thereon, and a warrant to purchase 250,000shares of our common stock. This matter is in the early stages. We intend tovigorously defend against the claims asserted against us. Management believesthe ultimate outcome of this matter will not have a material adverse effect onthe Company’s consolidated financial position, results of operations orliquidity.
TheCompany is subject to other legal proceedings and claims, which arise in theordinary course of its business. Although occasional adverse decisions orsettlements may occur, the Company believes that the final disposition of suchmatters should not have a material adverse effect on its financial position,results of operations or liquidity.
Registrationof Company’s Shares of Common Stock
Inconnection with the private placement of our convertible promissory notes andwarrants to certain investors during the fiscal quarters ended December 31,2003, December 31, 2004, March 31, 2005, March 31, 2006 and June 30, 2006,pursuant to a registration rights agreement the Company agreed to file aregistration statement to register the common stock issuable upon the conversionof the promissory notes and the exercise of the warrants and to have theregistration statement declared effective by the SEC. The registration rightsagreement provided for the payment of liquidated damages if a registrationstatement was not declared effective by the SEC within 120 days of the privateplacement of the convertible promissory notes. The liquidated damages are equalto 3.5% per month of the aggregate proceeds, with no limitations. The liquidateddamages may be paid in cash or our common stock, at our option. Although thepromissory notes and warrants do not provide for net-cash settlement, theexistence of liquidated damages provides for a defacto net-cash settlementoption. Therefore, the common stock issuable upon the conversion of thepromissory notes and the exercise of the warrants subject to the liquidateddamages provisions of the registration rights agreement does not meet the testsrequired for shareholders’ equity classification in the past, and accordinglyhas been reflected between liabilities and equity in our previous consolidatedbalance sheet.
As ofSeptember 30, 2007, the Company did not have a registration statement declaredeffective relating to the common stock issuable upon the conversion of thepromissory notes and the exercise of the warrants. In accordance with EITF00-19-2, the Company evaluated the likelihood of having the registrationstatement declared effective by the SEC. As of September 30, 2007, the Companydetermined it was probable that it will be required to remit payments to theseinvestors because of our failure to have the registration statement declaredeffective and the Company estimated that the obligation to make additionalpayments would continue for nine months from September 30, 2007, at which timethe Company estimated that the registration statement would have been declaredeffective. Although the Company was unable to estimate the exact amount of timeneeded to have the registration statement declared effective, it believed thatan additional nine months would be required to complete the SEC’s comment andreview process and have the registration statement declared effective. Inaccordance with SFAS No. 5, Accounting For Contingencies, the Company recordedan aggregate liability of $11,750,941 as of September 30, 2007 and an increaseof $7,725,585 as compared to September 30, 2006, in order to account for thepotential liquidated damages accruing until the registration statement isdeclared effective by the SEC. This increase, which was charged to operations asa selling, general and administrative expense, in fiscal 2007, is comprised of$8,439,976 of current and prior years’ stipulated contractual obligations, plusthe additional accrual of $3,310,965 described previously to account for thepotential liquidated damages until the expected effectiveness of theregistration statement is achieved.
AtSeptember 30, 2008, the Company has an accumulative accrual of $12,023,888 ofliquidated damages in connection with certain previously outstanding convertiblepromissory notes and related warrants, which is included in accounts payable andaccrued liabilities. Any increases to the accrued liabilities will be charged tooperations as a selling, general and administrative expense. Any decreases willbe included in other income (expenses). During the year ended September 30,2008, the SEC declared effective the Company’s registration statement (see NoteC).
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEJ — COMMITMENTS AND CONTINGENCIES (continued)
Indeveloping the best estimate for the accrual of additional liquidating damages,the Company took into account a number of factors and information, including,but not limited to, the following:
| | | |
| | • | advice of legal counsel and other advisors; |
| | • | its experience in addressing comments raised by the SEC in past registration statements; |
| | • | the limited number of matters needed to be addressed by the Company to achieve effectiveness; |
| | • | its limited resources in connection with responding to SEC comments; and |
| | • | the intent to achieve effectiveness of the registration statement as soon as practicable. |
Estimatesof potential future damages are based on our assumptions and projections andactual results and outcomes could differ significantly.
InSeptember 2007, the Company issued common stock upon conversion of the finalconvertible promissory note that contained embedded derivatives, such as certainconversion features, variable interest features, call options and defaultprovisions.
MattersVoluntarily Reported to the SEC and Securities Act Violations
Wepreviously disclosed that we were investigating the circumstances surroundingcertain issuances of 8,550,000 shares to employees and consultants in July 2005,and engaged outside counsel to conduct this investigation. We have voluntarilyreported our current findings from the investigation to the SEC, and we haveagreed to provide the SEC with further information arising from theinvestigation. We believe that the issuance of 8,000,000 shares to employees inJuly 2005 was effectuated by both our former President and our former ChiefFinancial Officer/Chief Operating Officer without approval of the Board ofDirectors. 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 wellas an additional 550,000 shares issued to employees and consultants in March,May and August 2005, were improperly issued without a restrictive legend statingthat the shares could not be resold legally except in compliance with theSecurities Act of 1933, as amended. The members of our management whoeffectuated the stock issuances that are being examined in the investigation nolonger work for us. In the event that any of the exemptions from registrationwith respect to the issuance of the Company’s common stock under federal andapplicable state securities laws were not available, the Company may be subjectto 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 suitresulting from a violation of federal or applicable state securities laws, theCompany could be liable to return the amount paid for such securities withinterest thereon, less the amount of any income received thereon, upon tender ofsuch 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 anyalleged specific violation or the likelihood of any claim. There can be noassurance that litigation asserting such claims will not be initiated, or thatthe Company would prevail in any such litigation.
TheCompany is unable to predict the extent of its ultimate liability with respectto any and all future securities matters. The costs and other effects of anyfuture litigation, government investigations, legal and administrative cases andproceedings, settlements, judgments and investigations, claims and changes inthis matter could have a material adverse effect on the Company’s financialcondition and operating results
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEK - GOING CONCERN
Theaccompanying financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction of liabilitiesin the normal course of business. As shown in the accompanying consolidatedfinancial statements during year ended September 30, 2008, the Company incurreda loss of $6,802,898. These factors among others may indicate that the Companywill be unable to continue as a going concern for a reasonable period oftime.
TheCompany’s existence is dependent upon management’s ability to develop profitableoperations. Management is devoting substantially all of its efforts todeveloping DNA embedded biotechnology security solutions in the United Statesand there can be no assurance that the Company’s efforts will be successful.Although the planned principal operations have commenced, no assurance can begiven that management’s actions will result in profitable operations or theresolution of its liquidity problems. The accompanying consolidated financialstatements do not include any adjustments that might result should the Companybe unable to continue as a going concern.
In orderto improve the Company’s liquidity, the Company’s management is activelypursuing additional equity financing through discussions with investment bankersand private investors. There can be no assurance the Company will be successfulin its effort to secure additional equity financing.
APPLIEDDNA SCIENCES, INC
NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER30, 2008
NOTEL – SUBSEQUENT EVENTS
10%Secured Convertible Promissory Note dated October 21, 2008
OnOctober 21, 2008, the Company issued a $500,000 convertible promissory note to arelated party due October 21, 2009 with interest at 10% per annum due uponmaturity. The note is convertible at any time prior to maturity, at the holder’soption, into shares of our common stock at a price equal to the greater of (i)50% of the average price of our common stock for the ten trading days prior tothe date of the notice of conversion or (ii) at $0.026171520 per share, which isequal to a 30% discount to the average volume, weighted average price of ourcommon stock for the ten trading days prior to issuance. At maturity, the note,including any accrued and unpaid interest, is convertible at $0.02617150 pershare. The Company has granted the noteholder a security interest in all theCompany’s assets.
Inconjunction with the issuance of the notes, the Company issued 1,000,000warrants to purchase the Company’s common stock at $0.50 per share over a fiveyear term.
Issuanceof Common Stock
InOctober 2008, the Company issued an aggregate of 14,862,472 shares of commonstock in exchange for $1,265,000 convertible promissory notes and relatedaccrued interest.
InNovember 2008, the Company issued an aggregate of 11,648,654 shares of commonstock in exchange for $1,100,000 convertible promissory notes and relatedaccrued interest.
APPLIEDDNA SCIENCES, INC
UNAUDITEDFINANCIAL STATEMENTS
DECEMBER31, 2008
| APPLIED DNA SCIENCES, INC. | |
| | |
| (unaudited) | |
| | | | | | | |
| | | December 31, | | | September 30, | |
| | | 2008 | | | 2008 | |
| | | (unaudited) | | | | |
| ASSETS | |
| Current assets: | | | | | | |
| Cash | | $ | 51,146 | | | $ | 136,405 | |
| Accounts Receivable | | | 70,999 | | | | 75,150 | |
| Prepaid expenses | | | 52,083 | | | | 83,333 | |
| Total current assets | | | 174,228 | | | | 294,888 | |
| | | | | | | | | |
| Property, plant and equipment-net of accumulated depreciation of $164,150 and $147,132, respectively | | | 46,712 | | | | 63,730 | |
| | | | | | | | | |
| Other assets: | | | | | | | | |
| Deposits | | | 8,322 | | | | 8,322 | |
| Capitalized finance costs-net of accumulated amortization of $548,058 and $464,274, respectively | | | 29,442 | | | | 113,226 | |
| | | | | | | | | |
| Intangible assets: | | | | | | | | |
| Patents, net of accumulated amortization of $32,781 and $31,762, respectively (Note B) | | | 1,476 | | | | 2,494 | |
| Intellectual property, net of accumulated amortization and write off of $8,157,631 and $8,066,682, respectively (Note B) | | | 1,273,270 | | | | 1,364,217 | |
| | | | | | | | | |
| Total Assets | | $ | 1,533,450 | | | $ | 1,846,877 | |
| | | | | | | | | |
| LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY | |
| | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 12,795,577 | | | $ | 12,821,171 | |
| Convertible notes payable, net of unamortized discount or $382,085 and $486,726, respectively (Note D) | | | 1,067,915 | | | | 3,063,274 | |
| Total current liabilities | | | 13,863,492 | | | | 15,884,445 | |
| | | | | | | | | |
| Commitments and contingencies (Note H) | | | | | | | | |
| | | | | | | | | |
| Deficiency in Stockholders' Equity- (Note F) | | | | | | | | |
| Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0 shares issued and outstanding | | | - | | | | - | |
| Common stock, par value $0.001 per share; 410,000,000 shares authorized; 238,491,359 and 205,359,605 issued and outstanding as of December 31, 2008 and September 30, 2008, respectively | | | 238,491 | | | | 205,359 | |
| Additional paid in capital | | | 138,123,762 | | | | 133,133,354 | |
| Accumulated deficit | | | (150,692,295 | ) | | | (147,376,281 | ) |
| Total deficiency in stockholders' equity | | | (12,330,042 | ) | | | (14,037,568 | ) |
| | | | | | | | | |
| Total Liabilities and Deficiency in Stockholders' Equity | | $ | 1,533,450 | | | $ | 1,846,877 | |
| | | | | | | | | |
| See the accompanying notes to the unaudited condensed consolidated financial statements | |
| APPLIED DNA SCIENCES, INC. | |
| | |
| (unaudited) | |
| | | | | | | |
| | | Three Months Ended December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Sales | | $ | 146,575 | | | $ | 123,167 | |
| Cost of sales | | | 43,741 | | | | 27,890 | |
| Gross Profit | | | 102,834 | | | | 95,277 | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Selling, general and administrative | | | 2,764,009 | | | | 1,698,269 | |
| Research and development | | | 62,529 | | | | 36,326 | |
| Depreciation and amortization | | | 108,984 | | | | 107,804 | |
| | | | | | | | | |
| Total operating expenses | | | 2,935,522 | | | | 1,842,399 | |
| | | | | | | | | |
| NET LOSS FROM OPERATIONS | | | (2,832,688 | ) | | | (1,747,122 | ) |
| | | | | | | | | |
| Interest expense | | | (482,829 | ) | | | (385,622 | ) |
| | | | | | | | | |
| Net loss before provision for income taxes | | | (3,315,517 | ) | | | (2,132,744 | ) |
| | | | | | | | | |
| Income taxes | | | 497 | | | | - | |
| | | | | | | | | |
| NET LOSS | | $ | (3,316,014 | ) | | $ | (2,132,744 | ) |
| | | | | | | | | |
| Net loss per share-basic | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | | |
| Weighted average shares outstanding- | | | | | | | | |
| Basic and fully diluted | | | 222,657,096 | | | | 182,131,200 | |
| | | | | | | | | |
| See the accompanying notes to the unaudited condensed consolidated financial statements | |
| APPLIED DNA SCIENCES, INC | |
| | |
| (unaudited) | |
| | | | | | | |
| | | Three months ended December 31, | |
| | | 2008 | | | 2007 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (3,316,014 | ) | | $ | (2,132,744 | ) |
| Adjustments to reconcile net loss to net used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 108,984 | | | | 107,804 | |
| Fair value of vested options issued to officers, directors and employees | | | 1,850,247 | | | | - | |
| Amortization of capitalized financing costs | | | 83,784 | | | | 60,592 | |
| Amortization of debt discount attributable to convertible debentures | | | 417,934 | | | | 324,047 | |
| Common stock issued in exchange for services rendered | | | - | | | | 1,040,000 | |
| Change in assets and liabilities: | | | | | | | | |
| Decrease (increase) in accounts receivable | | | 4,151 | | | | (14,007 | ) |
| Decrease in prepaid expenses and deposits | | | 31,250 | | | | 37,875 | |
| Decrease in other assets | | | - | | | | 5,500 | |
| Increase (decrease) in accounts payable and accrued liabilities | | | 234,405 | | | | (855,608 | ) |
| Net cash used in operating activities | | | (585,259 | ) | | | (1,426,541 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Decrease in restricted cash held in escrow | | | - | | | | 100,000 | |
| Acquisition (disposal) of property and equipment, net | | | - | | | | (5,492 | ) |
| Net cash provided by investing activities | | | - | | | | 94,508 | |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Net proceeds from issuance of convertible notes | | | 500,000 | | | | 2,152,500 | |
| Net cash provided by financing activities | | | 500,000 | | | | 2,152,500 | |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (85,259 | ) | | | 820,467 | |
| Cash and cash equivalents at beginning of period | | | 136,405 | | | | 25,185 | |
| Cash and cash equivalents at end of period | | $ | 51,146 | | | $ | 845,652 | |
| | | | | | | | | |
| Supplemental Disclosures of Cash Flow Information: | | | | | | | | |
| Cash paid during period for interest | | $ | - | | | $ | - | |
| Cash paid during period for taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| Non-cash transactions: | | | | | | | | |
| Fair value of vested options issued to officers, directors and employees | | $ | 1,850,247 | | | $ | - | |
| Common stock issued for services | | $ | - | | | $ | 1,040,000 | |
| Common stock issued in exchange for previously incurred debt and accrued interest | | $ | 2,860,000 | | | $ | 50,275 | |
| | | | | | | | | |
| See the accompanying notes to the unaudited condensed consolidated financial statements | | | | | |
APPLIEDDNA SCIENCES, INC.
DECEMBER31, 2008
(unaudited)
NOTEA — SUMMARY OF ACCOUNTING POLICIES
General
Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with the instructions to Form 10-Q, and therefore, do notinclude all the information necessary for a fair presentation of financialposition, results of operations and cash flows in conformity with generallyaccepted accounting principles.
In theopinion of management, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the three month period ended December 31, 2008 are not necessarilyindicative of the results that may be expected for the fiscal year endingSeptember 30, 2009. The unaudited condensed consolidated financial statementsshould be read in conjunction with the consolidated September 30, 2008 financialstatements and footnotes thereto included in the Company's SEC Form10-K.
Businessand Basis of Presentation
OnSeptember 16, 2002, Applied DNA Sciences, Inc. (the "Company") was incorporatedunder the laws of the State of Nevada. Effective December 17, 2008, theCompany reincorporated from the State of Nevada to the State ofDelaware. During the year ended September 30, 2007, the Companytransitioned from a development stage enterprise to an operating company. TheCompany is principally devoted to developing DNA embedded biotechnology securitysolutions in the United States. To date, the Company has generated minimum salesrevenues from its services and products; it has incurred expenses and hassustained losses. Consequently, its operations are subject to all therisks inherent in the establishment of a new business enterprise. Forthe period from inception through December 31, 2008, the Company has accumulatedlosses of $150,692,295.
Theconsolidated financial statements include the accounts of the Company, and itswholly-owned subsidiaries Applied DNA Operations Management, Inc., APDN(B.V.I.), Inc. and Applied DNA Sciences Europe Limited. Significantinter-company transactions have been eliminated in consolidation.
Estimates
Thepreparation of the financial statement in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect certain reported amounts and disclosures. Accordingly, actualresults could differ from those estimates.
RevenueRecognition
Revenuesare derived from research, development, qualification and production testing forcertain commercial products. Revenue from fixed price testing contracts isgenerally recorded upon completion of the contracts, which are generallyshort-term, or upon completion of identifiable contractual tasks. At the timethe Company enters into a contract that includes multiple tasks, the Companyestimates the amount of actual labor and other costs that will be required tocomplete each task based on historical experience. Revenues are recognized whichprovide for a profit margin relative to the testing performed. Revenue relativeto each task and from contracts which are time and materials based is recordedas effort is expended. Billings in excess of amounts earned are deferred. Anyanticipated losses on contracts are charged to income when identified. To theextent management does not accurately forecast the level of effort required tocomplete a contract, or individual tasks within a contract, and the Company isunable to negotiate additional billings with a customer for cost over-runs, theCompany may incur losses on individual contracts. All selling, general andadministrative costs are treated as period costs and expensed asincurred.
Forrevenue from product sales, the Company recognizes revenue in accordance withStaff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), whichsuperseded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIALSTATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be metbefore revenue can be recognized: (1) persuasive evidence of an arrangementexists; (2) delivery has occurred; (3) the selling price is fixed anddeterminable; and (4) collectability is reasonably assured. Determination ofcriteria (3) and (4) are based on management's judgments regarding the fixednature of the selling prices of the products delivered and the collectability ofthose amounts. Provisions for discounts and rebates to customers, estimatedreturns and allowances, and other adjustments are provided for in the sameperiod the related sales are recorded. The Company defers any revenue for whichthe product has not been delivered or is subject to refund until such time thatthe Company and the customer jointly determine that the product has beendelivered or no refund will be required. At December 31, 2008 theCompany‘s deferred revenue was $-0-.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
SAB 104incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”), MULTIPLEDELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting forarrangements that may involve the delivery or performance of multiple products,services and/or rights to use assets. The effect of implementing EITF00-21 on the Company’s financial position and results of operations was notsignificant.
CashEquivalents
For thepurpose of the accompanying financial statements, all highly liquid investmentswith a maturity of three months or less are considered to be cashequivalents.
AccountsReceivable
TheCompany provides an allowance for doubtful accounts equal to the estimateduncollectible amounts. The Company’s estimate is based on historical collectionexperience and a review of the current status of trade accounts receivable. Itis reasonably possible that the Company’s estimate of the allowance for doubtfulaccounts will change. At December 31, 2008, the Company has deemed that noallowance for doubtful accounts was necessary.
IncomeTaxes
TheCompany has adopted Financial Accounting Standard No. 109 (SFAS 109) whichrequires the recognition of deferred tax liabilities and assets for the expectedfuture tax consequences of events that have been included in the financialstatement or tax returns. Under this method, deferred tax liabilities and assetsare determined based on the difference between financial statements and taxbasis of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse. Temporarydifferences between taxable income reported for financial reporting purposes andincome tax purposes are insignificant.
In June2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes-an interpretation of FASB Statement No. 109 ("FIN 48").FIN 48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, treatment of interest and penalties, anddisclosure of such positions. Effective October 1, 2007, the Company adopted theprovisions of FIN 48, as required. As a result of implementing FIN 48, there hasbeen no adjustment to the Company’s consolidated financial statements and theadoption of FIN 48 did not have a material effect on the Company’s consolidatedfinancial statements for the three month period ended December 31,2008.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
Propertyand Equipment
Propertyand equipment are stated at cost and depreciated over their estimated usefullives of 3 to 5 years using the straight line method. At December 31,2008 and September 30, 2008 property and equipment consist of:
| | | December 31, 2008 (unaudited) | | | September 30, 2008 | |
| Computer equipment | | $ | 27,404 | | | $ | 27,404 | |
| Lab equipment | | | 77,473 | | | | 77,473 | |
| Furniture | | | 105,985 | | | | 105,985 | |
| | | | 210,862 | | | | 210,862 | |
| Accumulated Depreciation | | | (164,150 | ) | | | (147,132 | ) |
| Net | | $ | 46,712 | | | $ | 63,730 | |
Impairmentof Long-Lived Assets
TheCompany has adopted Statement of Financial Accounting Standards No. 144 (SFASNo. 144). The Statement requires that long-lived assets and certainidentifiable intangibles held and used by the Company be reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amount ofan asset may not be recoverable. Events relating to recoverabilitymay include significant unfavorable changes in business conditions, recurringlosses, or a forecasted inability to achieve break-even operating results overan extended period. The Company evaluates the recoverability of long-livedassets based upon forecasted undiscounted cash flows. Should impairment in valuebe indicated, the carrying value of intangible assets will be adjusted, based onestimates of future discounted cash flows resulting from the use and ultimatedisposition of the asset. SFAS No. 144 also requires assets to bedisposed of be reported at the lower of the carrying amount or the fair valueless costs to sell.
ComprehensiveIncome
TheCompany does not have any items of comprehensive income in any of the periodspresented.
SegmentInformation
TheCompany adopted Statement of Financial Accounting Standards No. 131, Disclosuresabout Segments of an Enterprise and Related Information ("SFAS No. 131"). SFASNo. 131 establishes standards for reporting information regarding operatingsegments in annual financial statements and requires selected information forthose segments to be presented in interim financial reports issued tostockholders. SFAS No. 131 also establishes standards for related disclosuresabout products and services and geographic areas. Operating segments areidentified as components of an enterprise about which separate discretefinancial information is available for evaluation by the chief operatingdecision maker, or decision- making group, in making decisions how to allocateresources and assess performance. The information disclosed herein,materially represents all of the financial information related to the Company'ssingle principal operating segment.
Netloss per share
Inaccordance with SFAS No. 128, “Earnings per Share”, thebasic loss per share is computed by dividing loss available to commonshareholders by the weighted average number of common shares outstanding.Diluted loss per share is computed similar to basic loss per share except thatthe denominator is increased to include the number of additional common sharesthat would have been outstanding as if the potential common shares had beenissued and if the additional common shares were dilutive. Common equivalentshares are excluded from the computation of the diluted loss per share as theireffect would be anti-dilutive. Fully diluted shares outstanding were 253,851,073and 245,277,349 for the three months ended December 31, 2008 and 2007,respectively.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
StockBased Compensation
OnDecember 16, 2004, the FASB issued SFAS No. 123(R) (revised 2004), “Share-Based Payment” which isa revision of SFAS No. 123, “Accounting for Stock-BasedCompensation”. SFAS No. 123(R) supersedes APB opinion No. 25, “Accounting for Stock Issued toEmployees”, and amends SFAS No. 95, “Statement of Cash Flows”.Generally, the approach in SFAS No. 123(R) is similar to the approach describedin SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro-forma disclosure is no longeran alternative. The effective date for our application of SFAS No. 123(R) isSeptember 1, 2006. Management elected to apply SFAS No. 123(R) commencing onthat date.
As morefully described in Note G below, the Company granted 37,670,000 and -0- stockoptions during the three month periods ended December 31, 2008 and 2007,respectively to employees and directors of the Company under a non-qualifiedemployee stock option plan.
As ofDecember 31, 2008, 43,330,000 employee stock options were outstanding with15,077,500 shares vested and exercisable.
Concentrationsof Credit Risk
Financialinstruments and related items, which potentially subject the Company toconcentrations of credit risk, consist primarily of cash, cash equivalents andtrade receivables. The Company places its cash and temporary cashinvestments with high credit quality institutions. At times, suchinvestments may be in excess of the FDIC insurance limit. The Companyperiodically reviews its trade receivables in determining its allowance fordoubtful accounts. At December 31, 2008, allowance for doubtfulreceivable was $0.
Researchand Development
TheCompany accounts for research and development costs in accordance with theFinancial Accounting Standards Board's Statement of Financial AccountingStandards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs.Under SFAS 2, all research and development costs must be charged to expense asincurred. Accordingly, internal research and development costs are expensed asincurred. Third-party research and development costs are expensedwhen the contracted work has been performed or as milestone results have beenachieved. Company-sponsored research and development costs related to bothpresent and future products are expensed in the period incurred. TheCompany incurred research and development expenses of $62,529 and $36,326 forthe three month periods ended December 31, 2008 and 2007,respectively.
Reclassifications
Certainreclassifications have been made in prior year's financial statements to conformto classifications used in the current year.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
Advertising
TheCompany follows the policy of charging the costs of advertising to expense asincurred. The Company charged tooperations $14,337 and $2,246 for the three month periods ended December 31,2008 and 2007, respectively.
IntangibleAssets
TheCompany amortized its intangible assets using the straight-line method overtheir estimated period of benefit. The estimated useful life forpatents is five years while intellectual property uses a seven year usefullife.
Weperiodically evaluate the recoverability of intangible assets and take intoaccount events or circumstances that warrant revised estimates of useful livesor that indicate that impairment exists. All of our intangible assetsare subject to amortization.
Recentaccounting pronouncements
InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements”. The objective of SFAS No. 157 is to increaseconsistency and comparability in fair value measurements and to expanddisclosures about fair value measurements. SFAS No. 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements and does notrequire any new fair value measurements. The provisions of SFAS No.157 are effective for fair value measurements made in fiscal years beginningafter November 15, 2007. In February 2008, the FASB issuedFASB Staff Position (“FSP”) 157-2,“Effective Date of FASB StatementNo. 157” (“FSP 157-2”), which delayed theeffective date of SFAS No. 157 for all non-financial assets and liabilities,except those that are recognized or disclosed at fair value in the financialstatements on a recurring basis, until fiscal years beginning after November 15,2008. The Company has not yet determined the impact that theimplementation of FSP 157-2 will have on our non-financial assets andliabilities which are not recognized on a recurring basis; however, we do notanticipate the adoption of this standard will have a material impact on itsconsolidated financial position, results of operations or cashflows.
InDecember 2007, the FASB issued SFAS No. 141(R), “Business Combinations”(“SFAS No. 141(R)”), which establishes principles and requirements for howan acquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any noncontrolling interest in anacquiree, including the recognition and measurement of goodwill acquired in abusiness combination. SFAS No. 141(R) is effective as of the beginning of thefirst fiscal year beginning on or after December 15, 2008, which will bethe Company’s fiscal year 2009. Earlier adoption is prohibited and the Companyis currently evaluating the effect, if any that the adoption will have on itsconsolidated financial position, results of operations or cashflows.
InDecember 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest inConsolidated Financial Statements, an amendment of ARB No. 51”(“SFAS No. 160”), which will change the accounting and reporting forminority interests, which will be recharacterized as noncontrolling interestsand classified as a component of equity within the consolidated balance sheets.SFAS No. 160 is effective as of the beginning of the first fiscal year beginningon or after December 15, 2008, which will be the Company’s fiscal year2009. Earlier adoption is prohibited and the Company is currently evaluating theeffect, if any that the adoption will have on its consolidated financialposition, results of operations or cash flows.
InJune 2007, the Accounting Standards Executive Committee issued Statement ofPosition 07-1, “Clarification of the Scope of the Audit and Accounting GuideInvestment Companies and Accounting by Parent Companies and Equity MethodInvestors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1provides guidance for determining whether an entity is within the scope of theAICPA Audit and Accounting Guide Investment Companies (the “Audit Guide”). SOP07-1 was originally determined to be effective for fiscal years beginning on orafter December 15, 2007, however, on February 6, 2008, FASB issued afinal Staff Position indefinitely deferring the effective date and prohibitingearly adoption of SOP 07-1 while addressing implementation issues.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
In June2007, the FASB ratified the consensus in EITF Issue No. 07-3, “Accountingfor Nonrefundable Advance Payments for Goods or Services to be Used in FutureResearch and Development Activities” (EITF 07-3), which requiresthat nonrefundable advance payments for goods or services that will be used orrendered for future research and development (R&D) activities be deferredand amortized over the period that the goods are delivered or the relatedservices are performed, subject to an assessment of recoverability.EITF 07-3 will be effective for fiscal years beginning afterDecember 15, 2007. The Company does not expect that the adoption ofEITF 07-3 will have a material impact on its consolidated financialposition, results of operations or cash flows.
InDecember 2007, the FASB ratified the consensus in EITF Issue No. 07-1,“Accounting for Collaborative Arrangements” (EITF 07-1). EITF 07-1defines collaborative arrangements and requires collaborators to present theresult of activities for which they act as the principal on a gross basis andreport any payments received from (made to) the other collaborators based onother applicable authoritative accounting literature, and in the absence ofother applicable authoritative literature, on a reasonable, rational andconsistent accounting policy is to be elected. EITF 07-1 also provides fordisclosures regarding the nature and purpose of the arrangement, the entity’srights and obligations, the accounting policy for the arrangement and the incomestatement classification and amounts arising from the agreement. EITF 07-1will be effective for fiscal years beginning after December 15, 2008, whichwill be the Company’s fiscal year 2009, and will be applied as a change inaccounting principle retrospectively for all collaborative arrangements existingas of the effective date. The Company has not yet evaluated the potential impactof adopting EITF 07-1 on its consolidated financial position, results ofoperations or cash flows.
In March2008, the FASB issued SFAS No. 161, “Disclosures about DerivativeInstruments and Hedging Activities – an amendment to FASB Statement No.133” (“SFAS No. 161”). SFAS No. 161 isintended to improve financial standards for derivative instruments and hedgingactivities by requiring enhanced disclosures to enable investors to betterunderstand their effects on an entity’s financial position, financialperformance, and cash flows. Entities are required to provideenhanced disclosures about: (a) how and why an entity uses derivativeinstruments; (b) how derivative instruments and related hedged items areaccounted for under SFAS No. 133 and its related interpretations; and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. It is effective forfinancial statements issued for fiscal years beginning after November 15, 2008,with early adoption encouraged. The Company is currently evaluatingthe impact of SFAS No. 161, if any, will have on its consolidated financialposition, results of operations or cash flows.
In April2008, the FASB issued FSP No. SFAS No. 142-3,“Determination of the Useful Life ofIntangible Assets”. This FSP amends the factors that should be consideredin developing renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under SFAS No. 142,“Goodwill and Other IntangibleAssets”. The Company is required to adopt FSP 142-3 onSeptember 1, 2009, earlier adoption is prohibited. The guidance inFSP 142-3 for determining the useful life of a recognized intangible asset shallbe applied prospectively to intangible assets acquired after adoption, and thedisclosure requirements shall be applied prospectively to all intangible assetsrecognized as of, and subsequent to, adoption. The Company iscurrently evaluating the impact of FSP 142-3 on its consolidated financialposition, results of operations or cash flows.
In May2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally AcceptedAccounting Principles" ("SFAS No. 162"). SFAS No.162 identifies the sources of accounting principles and the framework forselecting the principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (the GAAP hierarchy). SFAS No.162 will become effective 60 days following the SEC's approval of thePublic Company Accounting Oversight Board amendments toAU Section 411, "The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles." The Company does notexpect the adoption of SFAS No. 162 to have a material effect on itsconsolidated financial position, results of operations or cashflows.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
In May2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1, "Accounting for Convertible DebtInstruments That May Be Settled in Cash upon Conversion (Including Partial CashSettlement)" ("FSP APB 14-1"). FSP APB 14-1requires the issuer of certain convertible debt instruments that may be settledin cash (or other assets) on conversion to separately account for the liability(debt) and equity (conversion option) components of the instrument in a mannerthat reflects the issuer's non-convertible debt borrowing rate. FSPAPB 14-1 is effective for fiscal years beginning after December 15,2008 on a retroactive basis. The Company is currently evaluating thepotential impact, if any, of the adoption of FSP APB 14-1 on itsconsolidated financial position, results of operations or cashflows.
InJune 2008, the FASB issued FSP Emerging Issues Task Force(EITF) No. 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are ParticipatingSecurities.” Under the FSP, unvested share-based payment awards thatcontain rights to receive nonforfeitable dividends (whether paid or unpaid) areparticipating securities, and should be included in the two-class method ofcomputing EPS. The FSP is effective for fiscal years beginning afterDecember 15, 2008, and interim periods within those years. The Company doesnot expect the adoption of FSP EITF No. 03-6-1 to have a material effect onits consolidated financial position, results of operations or cashflows.
Otherrecent accounting pronouncements issued by the FASB (including its EmergingIssues Task Force), the AICPA, and the SEC did not, or are not believed bymanagement to, have a material impact on the Company’s present or futureconsolidated financial statements.
NOTEB - ACQUISITION OF INTANGIBLE ASSETS
TheCompany has adopted SFAS No. 142, Goodwill and Other Intangible Assets, wherebythe Company periodically tests its intangible assets forimpairment. On an annual basis, and when there is reason to suspectthat their values have been diminished or impaired, these assets are tested forimpairment, and write-downs will be included in results fromoperations.
Theidentifiable intangible assets acquired and their carrying value at December 31,2008 is:
| Trade secrets and developed technologies (Weighted average life of 7 years) | $ | 9,430,900 | |
| Patents (Weighted average life of 5 years ) | | | 34,257 | |
| Total Amortized identifiable intangible assets-Gross carrying value: | | $ | 9,465,157 | |
| Less: | | | | |
| Accumulated Amortization | | | (2,535,400 | ) |
| Impairment (See below) | | | (5,655,011 | ) |
| Net: | | $ | 1,274,746 | |
| Residual value: | | $ | 0 | |
Duringthe year ended September 30, 2006 the Company management performed an evaluationof its intangible assets (intellectual property) for purposes of determining theimplied fair value of the assets at September 30, 2006. The test indicated thatthe recorded remaining book value of its intellectual property exceeded its fairvalue for the year ended September 30, 2006, as determined by discounted cashflows. As a result, upon completion of the assessment, managementrecorded a non-cash impairment charge of $5,655,011, net of tax, or $0.05 pershare during the year ended September 30, 2006 to reduce the carrying value ofthe patents to $2,091,800. Considerable management judgment is necessary toestimate the fair value. Accordingly, actual results could varysignificantly from management’s estimates.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
Totalamortization expense charged to operations for the three month periods endedDecember 31, 2008 and 2007 was $91,966 and $92,661, respectively.
NOTEC – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accountspayable and accrued liabilities at December 31, 2008 are asfollows:
| Accounts payable | | $ | 582,942 | |
| Accrued consulting fees | | | 102,500 | |
| Accrued interest payable | | | 86,247 | |
| Accrued penalties relating to registration rights liquidating damages | | 12,023,888 | |
| Total | | $ | 12,795,577 | |
RegistrationRights Liquidated Damages
Inprivate placements in November and December, 2003, December, 2004, and Januaryand February, 2005, the Company issued secured convertible promissory notes andwarrants to purchase the Company’s common stock. Pursuant to theterms of a registration rights agreement, the Company agreed to file aregistration statement to be declared effective by the SEC for the common stockunderlying the notes and warrants in order to permit public resalethereof. The registration rights agreement provided for the paymentof liquidated damages if the stipulated registration deadlines were notmet. The liquidated damages are equal to 3.5% per month of the faceamount of the notes, which equals $367,885, with nolimitations. During the year ended September 30, 2008, the SECdeclared effective the Company’s registration statement with respect to thecommon stock underlying the notes and warrants. The Company hasaccrued $12,023,888 as of December 31, 2008 to account for late effectiveness ofthe registration statement.
NOTED – PRIVATE PLACEMENT OF CONVERTIBLE NOTES
Convertiblenotes payable as of December 31, 2008 are as follows:
| 10% Secured Convertible Notes Payable dated January 17, 2008, net of unamortized debt discount of $10,927 (see below) | | $ | 439,073 | |
| 10% Secured Convertible Notes Payable dated March 4, 2008, net of unamortized debt discount of $34,885 (see below) | | | 215,115 | |
| % Secured Convertible Note Payable dated May 7, 2008, net of unamortized debt discount of $20,606 (see below) | | | 79,394 | |
| s Secured Convertible Note Payable dated July 31, 2008, net of unamortized debt discount of $66,750 (see below) | | | 83,250 | |
| Secured Convertible Note Payable dated October 21, 2008, net of unamortized debt discount of $248,917 (see below) | | | 251,083 | |
| | | | 1,067,915 | |
| Less: Less current portion | | | (1,067,915 | ) |
| | | $ | - | |
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
10%Secured Convertible Promissory Notes dated January 17, 2008
OnJanuary 17, 2008, the Company issued $450,000 principal amount convertiblepromissory notes due January 17, 2009 with interest at 10% per annum due uponmaturity. The note is convertible at any time prior to maturity, atthe holder’s option, into shares of our common stock at a price equal to thegreater of (i) 50% of the average price of our common stock for the ten tradingdays prior to the date of the notice of conversion or (ii) at $0.073512803 pershare, which is equal to a 30% discount to the average volume, weighted averageprice of our common stock for the ten trading days prior toissuance. At maturity, the note, including any accrued and unpaidinterest, is convertible at $0.073512803 per share. The Company has granted thenoteholders a security interest in all the Company’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the notes. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$205,708 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the notes. The debt discount attributed to the beneficial conversionfeature is amortized over the notes’ maturity period (one year) as interestexpense.
Inconnection with the placement of the notes the Company issued non-detachablewarrants granting the holders the right to acquire 900,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire fiveyears from the issuance. In accordance with Emerging Issues TaskForce Issue 00-27, Application of Issue No. 98-5 to Certain ConvertibleInstruments (“EITF – 0027”), the Company recognized the value attributable tothe warrants in the amount of $43,569 to additional paid in capital and adiscount against the notes. The Company valued the warrants inaccordance with EITF 00-27 using the Black-Scholes pricing model and thefollowing assumptions: contractual terms of 5 years, an average risk freeinterest rate of 2.90%, a dividend yield of 0%, and volatility of102.72%. The debt discount attributed to the value of the warrantsissued is amortized over the notes’ maturity period (one year) as interestexpense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($205,708) and warrants ($43,569) to debt discount, aggregating$249,277, which will be amortized to interest expense over the term of thenotes. Amortization of $62,831 was recorded for the three monthperiod ended December 31, 2008.
10%Secured Convertible Promissory Notes dated March 4, 2008
On March4, 2008, the Company issued $250,000 principal amount convertible promissorynotes due March 4, 2009 with interest at 10% per annum due uponmaturity. The notes are convertible at any time prior to maturity, atthe option of the holders, into shares of our common stock at a price equal tothe greater of (i) 50% of the average price of our common stock for the tentrading days prior to the date of the notice of conversion or (ii) at$0.125875423 per share, which is equal to a 30% discount to the average volume,weighted average price of our common stock for the ten trading days prior toissuance. At maturity, the notes, including any accrued and unpaidinterest, are convertible at $0.125875423 per share. The Company hasgranted the noteholders a security interest in all the Company’sassets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the notes. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$154,805 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the notes. The debt discount attributed to the beneficial conversionfeature is amortized over the notes’ maturity period (one year) as interestexpense.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
Inconnection with the placement of the notes the Company issued non-detachablewarrants granting the holders the right to acquire 500,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire fiveyears from the issuance. In accordance with Emerging Issues TaskForce Issue 00-27, Application of Issue No. 98-5 to Certain ConvertibleInstruments (“EITF – 0027”), the Company recognized the value attributable tothe warrants in the amount of $47,308 to additional paid in capital and adiscount against the notes. The Company valued the warrants inaccordance with EITF 00-27 using the Black-Scholes pricing model and thefollowing assumptions: contractual terms of 5 years, an average risk freeinterest rate of 2.53%, a dividend yield of 0%, and volatility of 106.37%. Thedebt discount attributed to the value of the warrants issued is amortized overthe notes’ maturity period (one year) as interest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($154,805) and warrants ($47,308) to debt discount, aggregating$202,113, which will be amortized to interest expense over the term of thenotes. Amortization of $50,944 was recorded for the three month period endedDecember 31, 2008.
10%Secured Convertible Promissory Note dated May 7, 2008
On May 7,2008, the Company issued a $100,000 convertible promissory note due May 7, 2009with interest at 10% per annum due upon maturity. The note isconvertible at any time prior to maturity, at the holder’s option, into sharesof our common stock at a price equal to the greater of (i) 50% of the averageprice of our common stock for the ten trading days prior to the date of thenotice of conversion or (ii) at $0.079849085 per share, which is equal to a 30%discount to the average volume, weighted average price of our common stock forthe ten trading days prior to issuance. At maturity, the note,including any accrued and unpaid interest, is convertible at $0.079849085 pershare. The Company has granted the noteholder a security interest in all theCompany’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the note. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$48,490 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the note. The debt discount attributed to the beneficial conversionfeature is amortized over the note’s maturity period (one year) as interestexpense.
Inconnection with the placement of the note the Company issued non-detachablewarrants granting the holders the right to acquire 200,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire fiveyears from the issuance. In accordance with Emerging Issues TaskForce Issue 00-27, Application of Issue No. 98-5 to Certain ConvertibleInstruments (“EITF – 0027”), the Company recognized the value attributable tothe warrants in the amount of $10,730 to additional paid in capital and adiscount against the note. The Company valued the warrants inaccordance with EITF 00-27 using the Black-Scholes pricing model and thefollowing assumptions: contractual terms of 5 years, an average risk freeinterest rate of 3.09%, a dividend yield of 0%, and volatility of 101.74%. Thedebt discount attributed to the value of the warrants issued is amortized overthe note’s maturity period (one year) as interest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($48,490) and warrants ($10,730) to debt discount, aggregating $59,220,which will be amortized to interest expense over the term of the Notes.Amortization of $14,927 was recorded for the three month period ended December31, 2008.
10%Secured Convertible Promissory Note dated July 31, 2008
On May 7,2008, the Company issued a $150,000 convertible promissory note due July 31,2009 with interest at 10% per annum due upon maturity. The note isconvertible at any time prior to maturity, at the holder’s option, into sharesof our common stock at a price equal to the greater of (i) 50% of the averageprice of our common stock for the ten trading days prior to the date of thenotice of conversion or (ii) at $0.0549483 per share, which is equal to a 30%discount to the average volume, weighted average price of our common stock forthe ten trading days prior to issuance. At maturity, the note,including any accrued and unpaid interest, is convertible at $0.0549483 pershare. The Company has granted the noteholder a security interest in all theCompany’s assets.
APPLIED DNA SCIENCES,INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the note. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$91,655 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the note. The debt discount attributed to the beneficial conversionfeature is amortized over the note’s maturity period (one year) as interestexpense.
Inconnection with the placement of the note the Company issued non-detachablewarrants granting the holder the right to acquire 300,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire fiveyears from the issuance. In accordance with Emerging Issues TaskForce Issue 00-27, Application of Issue No. 98-5 to Certain ConvertibleInstruments (“EITF – 0027”), the Company recognized the value attributable tothe warrants in the amount of $23,268 to additional paid in capital and adiscount against the note. The Company valued the warrants inaccordance with EITF 00-27 using the Black-Scholes pricing model and thefollowing assumptions: contractual terms of 5 years, an average risk freeinterest rate of 3.259%, a dividend yield of 0%, and volatility of 152.00%. Thedebt discount attributed to the value of the warrants issued is amortized overthe note’s maturity period (one year) as interest expense.
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($91,655) and warrants ($23,268) to debt discount, aggregating $114,923,which will be amortized to interest expense over the term of the Notes.Amortization of $28,967 was recorded for the three month period ended December31, 2008.
10%Secured Convertible Promissory Note dated October 21, 2008
OnOctober 21 2008, the Company issued a $500,000 related party convertiblepromissory note to a related party due October 21, 2009 with interest at 10% perannum due upon maturity. The note is convertible at any time prior tomaturity, at the holder’s option, into shares of our common stock at a priceequal to the greater of (i) 50% of the average price of our common stock for theten trading days prior to the date of the notice of conversion or (ii) at$0.02617152 per share, which is equal to a 30% discount to the average volume,weighted average price of our common stock for the ten trading days prior toissuance. At maturity, the note, including any accrued and unpaidinterest, is convertible at $0.02617152 per share. The Company has granted thenoteholder a security interest in all the Company’s assets.
Inaccordance with Emerging Issues Task Force Issue 98-5, Accounting forConvertible Securities with a Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios (“EITF 98-5”), the Company recognized an embeddedbeneficial conversion feature present in the note. The Company allocated aportion of the proceeds equal to the intrinsic value of that feature toadditional paid-in capital. The Company recognized and measured an aggregate of$279,188 of the proceeds, which is equal to the intrinsic value of the embeddedbeneficial conversion feature, to additional paid-in capital and a discountagainst the note. The debt discount attributed to the beneficial conversionfeature is amortized over the note’s maturity period (one year) as interestexpense.
Inconnection with the placement of the note the Company issued non-detachablewarrants granting the holder the right to acquire 1,000,000 shares of theCompany’s common stock at $0.50 per share. The warrants expire fiveyears from the issuance. In accordance with Emerging Issues TaskForce Issue 00-27, Application of Issue No. 98-5 to Certain ConvertibleInstruments (“EITF – 0027”), the Company recognized the value attributable tothe warrants in the amount of $34,104 to additional paid in capital and adiscount against the note. The Company valued the warrants inaccordance with EITF 00-27 using the Black-Scholes pricing model and thefollowing assumptions: contractual terms of 5 years, an average risk freeinterest rate of 1.86%, a dividend yield of 0%, and volatility of 207.46%. Thedebt discount attributed to the value of the warrants issued is amortized overthe note’s maturity period (one year) as interest expense.
APPLIED DNA SCIENCES,INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
TheCompany recorded the intrinsic value of the embedded beneficial conversionfeature ($279,188) and warrants ($34,104) to debt discount, aggregating$313,292, which will be amortized to interest expense over the term of theNotes. Amortization of $64,375 was recorded for the three month period endedDecember 31, 2008.
NOTEE - RELATED PARTY TRANSACTIONS
TheCompany’s current and former officers and shareholders have advanced funds tothe Company for travel related and working capital purposes. Noformal repayment terms or arrangements existed. There were no advances due atDecember 31, 2008.
Duringthe three months ended December 31, 2008, the Company’s Chief Executive Officer,or entities controlled by the Company’s Chief Executive Officer, had advancedfunds to the Company in the amount of $500,000 in the form of a convertiblepromissory note for working capital purposes (see Note D).
Duringthe three month period ended December 31, 2008 and 2007, the Company had salesof $5,000 and $18,063 (or 3.4% and 14.7% of total sales), respectively, to anentity whereby the Company’s Chief Executive Officer was thePresident.
NOTEF - CAPITAL STOCK
TheCompany is authorized to issue 410,000,000 shares of common stock, with a $0.001par value per share as the result of a shareholder meeting conducted on May 16,2007. Prior to the May 16, 2007 share increase, the Company wasauthorized to issue 250,000,000 shares of common stock with a $0.001 par valueper share. In addition, the Company is authorized to issue 10,000,000 shares ofpreferred stock with a $0.001 par value per share. The preferredstock is convertible at the option of the holder into common stock at the rateof twenty-five (25) shares of common for every one share of preferred at theoption of the holder.
Preferredand Common Stock Transactions During the Three Months Ended December 31,2008:
Duringthe three months ended December 31, 2008, the Company issued 33,131,754 sharesof common stock in exchange for convertible notes and accruedinterest.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
NOTEG - STOCK OPTIONS AND WARRANTS
Warrants
Thefollowing table summarizes the changes in warrants outstanding and the relatedprices for the shares of the Company's common stock issued to non-employees ofthe Company. These warrants were granted in lieu of cash compensation forservices performed or financing expenses in connection with the sale of theCompany's common stock.
| | | | | | | Warrants | | | | | | | | | | |
| | | | | | | Outstanding | | | Weighted | | | | | | Exercisable | |
| | | | | | | Remaining | | | Average | | | Weighted | | | Weighted | |
| Exercise | | | Number | | | Contractual | | | Exercise | | | Average | | | Average | |
| Prices | | | Outstanding | | | Life (Years) | | | Price | | | Exercisable | | | Exercise Price | |
| $0.09 | | | | 16,400,000 | | | | 2.67 | | | $ | 0.09 | | | | 16,400,000 | | | $ | 0.09 | |
| $0.10 | | | | 105,464 | | | | 0.54 | | | $ | 0.10 | | | | 105,464 | | | $ | 0.10 | |
| $0.50 | | | | 26,850,000 | | | | 2.83 | | | $ | 0.50 | | | | 26,850,000 | | | $ | 0.50 | |
| $0.60 | | | | 6,623,500 | | | | 0.70 | | | $ | 0.60 | | | | 6,623,500 | | | $ | 0.60 | |
| $0.70 | | | | 200,000 | | | | 0.03 | | | $ | 0.70 | | | | 200,000 | | | $ | 0.70 | |
| $0.75 | | | | 14,797,000 | | | | 1.10 | | | $ | 0.75 | | | | 14,797,000 | | | $ | 0.75 | |
| | | | | | 64,975,964 | | | | | | | | | | | | 64,975,964 | | | | | |
Transactionsinvolving warrants are summarized as follows:
| | | | | | Weighted Average | |
| | | Number of | | | Price Per | |
| | | Shares | | | Share | |
| Balance, September 30, 2007 | | | 82,434,464 | | | $ | 0.43 | |
| Granted | | | 7,200,000 | | | | 0.50 | |
| Exercised | | | (2,500,000 | ) | | | (0.09 | ) |
| Canceled or expired | | | (23,153,500 | ) | | | (0.41 | ) |
| Outstanding at September 30, 2008 | | | 63,980,964 | | | $ | 0.46 | |
| Granted | | | 1,000,000 | | | | 0.50 | |
| Exercised | | | - | | | | - | |
| Canceled or expired | | | (5,000 | ) | | | (0.20 | ) |
| Balance, December 31, 2008 | | | 64,975,964 | | | $ | 0.46 | |
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
EmployeeStock Options
Thefollowing table summarizes the changes in options outstanding and the relatedprices for the shares of the Company's common stock issued to employees of theCompany under a non-qualified employee stock option plan:
| Options Outstanding | | | Options Exercisable | |
| Exercise Prices | | | Number Outstanding | | | Weighted Average Remaining Contractual Life (Years) | | | Weighted Average Exercise Price | | | Number Exercisable | | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | | | |
| $ | 0.68 | | | | 3,660,000 | | | | 0.75 | | | $ | 0.68 | | | | 3,660,000 | | | $ | 0.68 | |
| | 0.09 | | | | 2,000,000 | | | | 2.67 | | | | 0.09 | | | | 2,000,000 | | | | 0.09 | |
| | 0.11 | | | | 37,670,000 | | | | 4.46 | | | | 0.11 | | | | 9,417,500 | | | | 0.11 | |
| | | | | | 43,330,000 | | | | | | | | | | | | 15,077,500 | | | $ | 0.49 | |
Transactionsinvolving stock options issued to employees are summarized asfollows:
| | | Number of Shares | | | Weighted Average Exercise Price Per Share | |
| | | | | | | |
| Outstanding at October 1, 2007 | | | 5,660,000 | | | $ | 0.47 | |
| Granted | | | - | | | | - | |
| Exercised | | | - | | | | - | |
| Cancelled or expired | | | - | | | | - | |
| Outstanding at September 30, 2008 | | | 5,660,000 | | | $ | 0.47 | |
| Granted | | | 37,670,000 | | | | 0.11 | |
| Exercised | | | - | | | | - | |
| Canceled or expired | | | - | | | | - | |
| Outstanding at December 31, 2008 | | | 43,330,000 | | | $ | 0.16 | |
Amendmentto the 2005 Incentive Stock Plan and Recent Equity Award Grants
On June17, 2008, the Board of Directors adopted an amendment to the 2005 IncentiveStock Plan that will increase the total number of shares of common stockissuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000shares to a total of 100,000,000 shares, subsequently approved by thestockholders at the 2008 annual meeting of stockholders in December2008. In connection with the share increase amendment, the Board ofDirectors granted options to purchase a total of 37,670,000 shares to certainkey employees and non-employee directors under the 2005 Incentive Stock Plan,including 17,000,000, 5,000,000 and 7,000,000 to James A. Hayward, Kurt H.Jensen and Ming-Hwa Liang, respectively, and 500,000 to each of Yacov Shamashand Sanford R. Simon. The options granted to our key employees andnon-employee directors vested with respect to 25% of the underlying shares onthe date of grant and the remaining will vest ratably each anniversarythereafter until fully vested on the third anniversary of the date ofgrant. The fair value, determined using the Black Scholes OptionPricing Model, of the vested portion of the options of $1,850,247 was recordedas stock compensation expense for the three month period ended December 31,2008. The following assumptions were utilized: Dividend yield: -0-%, volatility:208.48%; risk free rate: 3.66%; expected life: 5 years.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
NOTEH- COMMITMENTS AND CONTINGENCIES
OperatingLease Commitments
TheCompany leases office space under an operating lease in Stony Brook, New Yorkfor its corporate use from an entity controlled by a significant formershareholder, expiring in October 2009. In November 2005, the Company vacated theLos Angeles facility to relocated to the new Stony Brook New York address. Totallease rental expense for the three month periods ended December 31, 2008 and2007 was $18,638 and $18,083, respectively.
Employmentand Consulting Agreements
TheCompany has consulting agreements with outside contractors, certain of whom arealso Company stockholders. The Agreements are generally month tomonth.
Litigation
From timeto time, we may become involved in various lawsuits and legal proceedings whicharise in the ordinary course of business. However, litigation is subject toinherent uncertainties, and an adverse result in these or other matters mayarise from time to time that may harm our business. Except as described below,we are currently not aware of any such legal proceedings that we believe willhave, individually or in the aggregate, a material adverse affect on ourbusiness, financial condition or operating results.
DouglasA. Falkner v. Applied DNA Sciences, Inc./N.C. Industrial Commission File No.585698
PlaintiffDouglas Falkner ("Falkner") filed a worker’s compensation claim in NorthCarolina for an alleged work-related neck injury that he alleges occurred onJanuary 14, 2004. Falkner worked as Business Development and Operations Managerat our sole East Coast office at the time of the alleged injury. Falkner was theonly employee employed by us in North Carolina at the time of the alleged injuryand we have employed no other employees in North Carolina at any other time. Theclaim has been denied and is being defended on several grounds, including thelack of both personal and subject matter jurisdiction. Specifically, we contendthat we did not employ the requisite minimum number of employees in NorthCarolina at the time of the alleged injury and that the company is therefore notsubject to the North Carolina Workers' Compensation Act. The claim wasoriginally set for hearing in January 2007, but was continued to allow theparties to engage in further discovery.
DouglasA. Falkner v. Applied DNA Sciences, Inc. (Los Angeles County Superior CourtCase No. BC 386557):
Falknerfiled a claim on March 3, 2008 asserting counts for breach of contract under hisemployment agreements dated March 10, 2003 and June 16, 2003 and wrongfuldischarge in violation of public policy. The relief sought includes compensatorydamages in an aggregate amount of approximately $1.7 million, unspecifiedexemplary and punitive damages, and attorneys’ fees. We have filed a motion forsummary judgment that will be heard on February 19, 2009. The trial is currentlyset for March 24, 2009. We intend to vigorously defend against the claimsasserted against us.
APPLIEDDNA SCIENCES, INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
Intervex, Inc. v.Applied DNA Sciences, Inc. (Supreme Court of the State of NewYorkIndex No.08-601219):
Intervex,Inc., or Intervex, the plaintiff, filed a complaint on or about April 23, 2008related to a claim for breach of contract. In March 2005, we entered into aconsulting agreement with Intervex, which provided for, among other things, apayment of $6,000 per month for a period of 24 months, or an aggregate of$144,000. In addition, the consulting agreement provided for the issuance by usto Intervex of a five-year warrant to purchase 250,000 shares of our commonstock with an exercise price of $.75. Intervex asserts that we owe it 17payments of $6,000, or an aggregate of $102,000, plus accrued interest thereon,and a warrant to purchase 250,000 shares of our common stock. We havecounterclaimed for compensatory and punitive damages, restitution, attorneys’fees and costs, interest and other relief the court deems proper. This matter isin the early stages of discovery. We intend to vigorously defend against theclaims asserted against us.
Registrationof Company’s Shares of Common Stock
Inconnection with the private placement of our convertible promissory notes andwarrants to certain investors during the fiscal quarters ended December 31,2003, December 31, 2004, March 31, 2005, March 31, 2006 and June 30, 2006,pursuant to a registration rights agreement the Company agreed to file aregistration statement to register the common stock issuable upon the conversionof the promissory notes and the exercise of the warrants and to have theregistration statement declared effective by the SEC. Theregistration rights agreement provided for the payment of liquidated damages ifa registration statement was not declared effective by the SEC within 120 daysof the private placement of the convertible promissory notes. Theliquidated damages are equal to 3.5% per month of the aggregate proceeds, withno limitations. The liquidated damages may be paid in cash or ourcommon stock, at our option. Although the promissory notes andwarrants do not provide for net-cash settlement, the existence of liquidateddamages provides for a defacto net-cash settlement option. Therefore,the common stock issuable upon the conversion of the promissory notes and theexercise of the warrants subject to the liquidated damages provisions of theregistration rights agreement does not meet the tests required for shareholders’equity classification in the past, and accordingly has been reflected betweenliabilities and equity in our previous consolidated balance sheet.
As ofSeptember 30, 2007, the Company did not have a registration statement declaredeffective relating to the common stock issuable upon the conversion of thepromissory notes and the exercise of the warrants. In accordance withEITF 00-19-2, the Company evaluated the likelihood of having the registrationstatement declared effective by the SEC. As of September 30, 2007,the Company determined it was probable that it will be required to remitpayments to these investors because of our failure to have the registrationstatement declared effective and the Company estimated that the obligation tomake additional payments would continue for nine months from September 30, 2007,at which time the Company estimated that the registration statement would havebeen declared effective. Although the Company was unable to estimatethe exact amount of time needed to have the registration statement declaredeffective, it believed that an additional nine months would be required tocomplete the SEC’s comment and review process and have the registrationstatement declared effective. In accordance with SFAS No. 5,Accounting For Contingencies, the Company recorded an aggregate liability of$11,750,941 as of September 30, 2007 and an increase of $7,725,585 as comparedto September 30, 2006, in order to account for the potential liquidated damagesaccruing until the registration statement is declared effective by theSEC. This increase, which was charged to operations as a selling,general and administrative expense, in fiscal 2007, is comprised of $8,439,976of current and prior years’ stipulated contractual obligations, plus theadditional accrual of $3,310,965 described previously to account for thepotential liquidated damages until the expected effectiveness of theregistration statement is achieved.
AtDecember 31, 2008, the Company has an accumulative accrual of $12,023,888 ofliquidated damages in connection with certain previously outstanding convertiblepromissory notes and related warrants, which is included in accounts payable andaccrued liabilities. Any increases to the accrued liabilities will becharged to operations as a selling, general and administrativeexpense. Any decreases will be included in other income (expenses).During the year ended September 30, 2008, the SEC declared effective theCompany's registration statement (see Note C).
APPLIED DNA SCIENCES,INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
Indeveloping the best estimate for the accrual of additional liquidating damages,the Company took into account a number of factors and information, including,but not limited to, the following:
| | • | advice of legal counsel and other advisors; |
| | • | its experience in addressing comments raised by the SEC in past registration statements; |
| | • | the limited number of matters needed to be addressed by the Company to achieve effectiveness; |
| | • | its limited resources in connection with responding to SEC comments; and |
| | • | the intent to achieve effectiveness of the registration statement as soon as practicable. |
Estimatesof potential future damages are based on our assumptions and projections andactual results and outcomes could differ significantly.
InSeptember 2007, the Company issued common stock upon conversion of the finalconvertible promissory note that contained embedded derivatives, such as certainconversion features, variable interest features, call options and defaultprovisions.
MattersVoluntarily Reported to the SEC and Securities Act Violations
Wepreviously disclosed that we investigated the circumstances surrounding certainissuances of 8,550,000 shares to employees and consultants in July 2005, andengaged outside counsel to conduct this investigation. We havevoluntarily reported our current findings from the investigation to the SEC, andwe have agreed to provide the SEC with further information arising from theinvestigation. We believe that the issuance of 8,000,000 shares toemployees in July 2005 was effectuated by both our former President and ourformer Chief Financial Officer/Chief Operating Officer without approval of theBoard of Directors. These former officers received a total of3,000,000 of these shares. In addition, it appears that the 8,000,000 sharesissued in July 2005, as well as an additional 550,000 shares issued to employeesand consultants in March, May and August 2005, were improperly issued without arestrictive legend stating that the shares could not be resold legally except incompliance with the Securities Act of 1933, as amended. The membersof our management who effectuated the stock issuances that are being examined inthe investigation no longer work for us. In the event that any of theexemptions from registration with respect to the issuance of the Company’scommon stock under federal and applicable state securities laws were notavailable, the Company may be subject to claims by federal and state regulatorsfor any such violations. In addition, if any purchaser of the Company’s commonstock were to prevail in a suit resulting from a violation of federal orapplicable state securities laws, the Company could be liable to return theamount paid for such securities with interest thereon, less the amount of anyincome received thereon, upon tender of such securities, or for damages if thepurchaser no longer owns the securities. As of the date of these financialstatements, the Company is not aware of any alleged specific violation or thelikelihood of any claim. There can be no assurance that litigation assertingsuch claims will not be initiated, or that the Company would prevail in any suchlitigation.
TheCompany is unable to predict the extent of its ultimate liability with respectto any and all future securities matters. The costs and other effects of anyfuture litigation, government investigations, legal and administrative cases andproceedings, settlements, judgments and investigations, claims and changes inthis matter could have a material adverse effect on the Company’s financialcondition and operating results.
NOTEI - GOING CONCERN
Theaccompanying unaudited condensed consolidated financial statements have beenprepared on a going concern basis, which contemplates the realization of assetsand the satisfaction of liabilities in the normal course of business. As shownin the accompanying unaudited condensed consolidated financial statements duringthe three month period ended December 31, 2008, the Company incurred a loss of$3,316,014. These factors among others may indicate that the Company will beunable to continue as a going concern for a reasonable period oftime.
APPLIED DNA SCIENCES,INC.
NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER31, 2008
(unaudited)
TheCompany's existence is dependent upon management's ability to develop profitableoperations. Management is devoting substantially all of its efforts todeveloping DNA embedded biotechnology security solutions in the United Statesand Europe and there can be no assurance that the Company's efforts will besuccessful and no assurance can be given that management's actions will resultin profitable operations or the resolution of its liquidity problems. Theaccompanying statements do not include any adjustments that might result shouldthe Company be unable to continue as a going concern.
In orderto improve the Company's liquidity, the Company's management is activelypursuing additional equity financing through discussions with investment bankersand private investors. There can be no assurance the Company will be successfulin its effort to secure additional equity financing.
NOTEJ – SUBSEQUENT EVENTS
OnJanuary 17, 2009, the Company issued 6,733,521 shares of common stock upon theautomatic conversion of a secured convertible promissory note.
EffectiveJanuary 13, 2009, the Company entered into a Consulting Agreement with StrategicPartners Consulting, LLC (“SPC”). Under the terms of the ConsultingAgreement, SPC will provide consulting services to the Company on variousmatters related to corporate planning. The Consulting Agreement isfor a term of one year. In consideration for these consultingservices, upon execution of the Consulting Agreement the Company issued to SPCten million (10,000,000) shares of the Company’s common stock, par value $0.001per share.
OnJanuary 29, 2009, the Company sold a $150,000 principal amount securedpromissory note bearing interest at a rate of 10% per annum and a warrant topurchase 300,000 shares of our common stock to James A. Hayward, the Chairman,President, Chief Executive Officer and a director.
Thepromissory note and accrued but unpaid interest thereon shall automaticallyconvert on January 29, 2010 at a conversion price of $0.033337264 per share,which is equal to a 20% discount to the average volume, weighted average priceof the Company’s common stock for the ten trading days prior to issuance, andare convertible into shares of the Company’s common stock at the option of thenoteholder at any time prior to such automatic conversion at a price equal tothe greater of (i) 50% of the average price of the Company’sr common stock forthe ten trading days prior to the date of the notice of conversion and (ii) theautomatic conversion price. In addition, any time prior toconversion, the Company has the irrevocable right to repay the unpaid principaland accrued but unpaid interest under the notes on three days written notice(during which period the holder can elect to convert the note). Thepromissory notes bear interest at the rate of 10% per annum and are due andpayable in full on January 29, 2010. Until the principal and accrued but unpaidinterest under the promissory note are paid in full, or converted into theCompany’s common stock, the promissory note will be secured by a securityinterest in all of our assets.
Thewarrant is exercisable for a four-year period commencing on January 29, 2010,and expiring on January 28, 2014, at a price of $0.50 per share. Thewarrant may be redeemed at our option at a redemption price of $0.01 upon theearlier of (i) January 29, 2012, and (ii) the date our common stock has beenquoted on The Over the Counter Bulletin Board at or above $1.00 per share for 20consecutive trading days.
PARTII
INFORMATIONNOT REQUIRED IN PROSPECTUS
Thefollowing table sets forth an itemization of all estimated expenses, all ofwhich we either have paid or will pay, in connection with the issuance anddistribution of the securities being registered:
| | | | | |
| Nature of Expense | | Amount | |
| | | | | |
| Registration fee | | $ | 20 | |
| Accounting fees and expenses | | $ | 5,000 | * |
| Legal fees and expenses | | $ | 15,000 | * |
| Miscellaneous | | $ | 5,000 | * |
| TOTAL | | $ | 25,020 | * |
*Estimated.
OurCertificate of Incorporation provides to the fullest extent permitted byDelaware law that our directors or officers shall not be personally liable to usor our shareholders for damages for breach of such director’s or officer’sfiduciary duty. The effect of this provision of our Certificate of Incorporationis to eliminate our right and our shareholders (through shareholders’ derivativesuits on behalf of our company) to recover damages against a director or officerfor breach of the fiduciary duty of care as a director or officer (includingbreaches resulting from negligent or grossly negligent behavior), except undercertain situations defined by statute. We believe that the indemnificationprovisions in its Certificate of Incorporation are necessary to attract andretain qualified persons as directors and officers.
Insofaras indemnification for liabilities arising under the Securities Act, as amended,may be permitted to directors, officers and controlling persons of theregistrant pursuant to the foregoing provisions, or otherwise, the registranthas been advised that in the opinion of the SEC such indemnification is againstpublic policy as expressed in the Securities Act and is, therefore,unenforceable. In the event that a claim for indemnification against suchliabilities (other than the payment by the registrant of expenses incurred orpaid by a director, officer or controlling person of the registrant in thesuccessful defense of any action, suit or proceeding) is asserted by suchdirector, officer or controlling person in connection with the securities beingregistered, the registrant will, unless in the opinion of its counsel the matterhas been settled by controlling precedent, submit to a court of appropriatejurisdiction the question whether such indemnification by it is against publicpolicy as expressed in the Securities Act and will be governed by the finaladjudication of such issue.
In thethree years preceding the filing of this registration statement, the registranthas issued the following securities that were not registered under theSecurities Act:
On May 2,2006, we closed on the first tranche of the Offshore Offering in which we sold20 units for aggregate gross proceeds of $1,000,000. On June 15, 2006, wecompleted the second tranche of the Offshore Offering in which we sold 59 unitsfor 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) awarrant to purchase 100,000 shares of our common stock at a price of $0.50 pershare. These issuances are considered exempt under Regulation S of theSecurities Act.
On June15, 2006, in connection with a private placement, we issued 10% SecuredConvertible 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’scommon 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, atthe holder’s option, at fifty cents ($0.50) per share during the period from theone years from the date of issuance (June 15, 2006) through June 15,2007.
On July10, 2006, we issued 2,400,000 shares of common stock in exchange for servicesrendered. 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 andrepresented the fair value of the services received. This issuance is consideredexempt under Regulation D of the Securities Act and Rule 506 promulgatedthereunder. We claim an exemption from the registration requirements of theSecurities Act for the private placement of the units pursuant to Section 4(2)of the Securities Act because each of the securities was made in a sale by theissuer not involving a public offering.
OnDecember 12, 2006 we issued 180,000 shares of common stock in exchange for ourpromissory note in principal amount of $410,429 and accrued interest thereon of$8,883. We valued the shares issued at $0.09 per share for a total of $16,200.This issuance is considered exempt under Section 3(a)(9) of the SecuritiesAct.
On April23, 2007, we issued and sold a $100,000 principal amount secured promissory notebearing interest at a rate of 10% per annum and a warrant to purchase 200,000shares of our common stock to James A. Hayward, a director and the ChiefExecutive Officer of the Company. We claim an exemption from the registrationrequirements of the Securities Act for the private placement of the securitiespursuant to Section 4(2) of the Securities Act because each of the securitieswas made in a sale by the issuer not involving a public offering.
On June27, 2007, we completed a private placement offering (the “Offering”) in which weissued and sold to certain investors an aggregate of 3 units (the “Units”) ofour securities, each Unit consisting of (i) a $50,000 Principal Amount of 10%Secured Convertible Promissory Note (the “Notes”) and (ii) warrants (the“Warrants”) to purchase 100,000 shares of our common stock. Arjent Limited, aregistered broker dealer firm, acted as our placement agent in connection withthe Offering. We paid Arjent Limited: (a) a commission equal to $15,000,representing 10% of the Offering proceeds; (b) a 3% non-accountable expenseallowance in the amount of $4,500; and (c) 2% non-accountable due diligenceexpenses in the amount of $3,000.
On June30, 2007, we issued and sold a $250,000 principal amount secured promissory notebearing interest at a rate of 10% per annum and a warrant to purchase 500,000shares of our common stock to James A. Hayward, a director, the Chairman of theBoard of Directors, our President and Chief Executive Officer. We claim anexemption from the registration requirements of the Securities Act for theprivate placement of the securities pursuant to Section 4(2) of the SecuritiesAct because each of the securities was made in a sale by the issuer notinvolving a public offering.
On July30, 2007, we issued and sold a $200,000 principal amount secured promissory notebearing interest at a rate of 10% per annum and a warrant to purchase 400,000shares of our common stock to James A. Hayward, a director and our ChiefExecutive Officer. We claim an exemption from the registration requirements ofthe Securities Act for the private placement of the securities pursuant toSection 4(2) of the Securities Act because each of the securities was made in asale by the issuer not involving a public offering.
On August8, 2007, we issued and sold a $100,000 principal amount secured promissory notebearing interest at a rate of 10% per annum and a warrant to purchase 200,000shares of our common stock. We claim an exemption from the registrationrequirements of the Securities Act for the private placement of the securitiespursuant to Section 4(2) of the Securities Act because each of the securitieswas made in a sale by the issuer not involving a public offering.
OnOctober 4, 2007, we completed the first tranche of a private placement of up to20 units at a price of $100,000 per unit for sale to “accredited investors,” asdefined in regulations promulgated under the Securities Act of 1933, as amended.In this first tranche, we sold 5 units for aggregate gross proceeds of $500,000.Each such unit consists of (i) a $100,000 Principal Amount 10% SecuredConvertible Promissory Note and (ii) a warrant to purchase 200,000 shares of ourcommon stock, $0.001 par value, exercisable for cash or on a cashless basis fora period of four years commencing on October 4, 2008, at a price of $0.50 pershare. In addition to the first tranche of a private placement on the termsdescribed above, on October 4, 2007, we issued and sold a $50,000 10% SecuredConvertible Promissory Note and a warrant to purchase 100,000 shares of ourcommon stock. Arjent Limited, a registered broker dealer firm, (the “PlacementAgent”) acted as our placement agent in connection with the offering. We paidthe Placement Agent commissions and discounts aggregating $200,000. We claim anexemption from the registration requirements of the Securities Act for theprivate placement of the units pursuant to Section 4(2) of the Securities Actbecause each of the units was made in a sale by the issuer not involving apublic offering.
OnOctober 9, 2007 we issued one million shares of our common stock to TTR GroupLLC pursuant to a consulting agreement for consulting services to be provided tous. This issuance is considered exempt under Regulation D of the Securities Actand Rule 506 promulgated thereunder.
OnOctober 30, 2007, we completed the second tranche of a private placement of upto 20 units at a price of $100,000 per unit for sale to “accredited investors,”as defined in regulations promulgated under the Securities Act of 1933, asamended. In this second tranche, we sold five and a half units for aggregategross proceeds of $550,000. Each such unit consists of (i) a $100,000 PrincipalAmount 10% Secured Convertible Promissory Note and (ii) a warrant to purchase200,000 shares of our common stock, $0.001 par value, exercisable for cash or ona cashless basis for a period of four years commencing on October 30, 2008, at aprice of $0.50 per share. In addition to the second tranche of a privateplacement on the terms described above, we issued and sold two $50,000 10%Secured Convertible Promissory Notes and two warrants to purchase 100,000 sharesof our common stock. In connection with the sale of the sale of securitiesdescribed above, we paid the Placement Agent commissions and discountsaggregating $162,500. We claim an exemption from the registration requirementsof the Securities Act for the private placement of the units pursuant to Section4(2) of the Securities Act because each of the units was made in a sale by theissuer not involving a public offering.
OnNovember 29, 2007, we completed the third tranche of a private placement of upto 20 units at a price of $100,000 per unit for sale to “accredited investors,”as defined in regulations promulgated under the Securities Act of 1933, asamended. In this third tranche, we ten units for aggregate gross proceeds of$1,000,000. Each such unit consists of (i) a $100,000 Principal Amount 10%Secured Convertible Promissory Note and (ii) a warrant to purchase 200,000shares of our common stock, $0.001 par value, exercisable for cash or on acashless basis for a period of four years commencing on November 29, 2008, at aprice of $0.50 per share. In connection with the sale of the sale of securitiesdescribed above, we paid the Placement Agent commissions and discountsaggregating $249,810. We claim an exemption from the registration requirementsof the Securities Act for the private placement of the units pursuant to Section4(2) of the Securities Act because each of the units was made in a sale by theissuer not involving a public offering.
OnDecember 20, 2007, we completed the fourth tranche of a private placement ofunits at a price of $100,000 per unit for sale to “accredited investors,” asdefined in regulations promulgated under the Securities Act of 1933, as amended(the “Securities Act”). In this fourth tranche, we sold four and a half unitsfor aggregate gross proceeds of $450,000. Previously, we completed threetranches of twenty and one units for aggregate gross proceeds of $2,100,000.Each unit consists of (i) a $100,000 Principal Amount 10% Secured ConvertiblePromissory Note and (ii) a warrant to purchase 200,000 shares of our commonstock, $0.001 par value, exercisable for cash or on a cashless basis for aperiod of four years commencing on December 20, 2008, at a price of $0.50 pershare. In connection with the sale of securities described above, we paid thePlacement Agent commissions, discounts, expense reimbursements and advancesaggregating $112,500. We claim an exemption from the registration requirementsof the Securities Act for the private placement of the units pursuant to Section4(2) of the Securities Act because each of the units was made in a sale by theissuer not involving a public offering.
OnDecember 21, 2007, we entered into an amendment to our engagement agreement withthe Placement Agent, dated August 31, 2007 (the “Engagement Agreement”).Pursuant to the Engagement Agreement, as amended, we issued 9,000,000 shares ofour common stock to the Placement Agent in exchange for the cancellation of thecashless exercise warrant to purchase 9,000,000 shares of our common stock at anexercise price of $.10 per share issued to the Placement Agent pursuant to theEngagement Agreement. This issuance is considered exempt under Regulation D ofthe Securities Act and Rule 506 promulgated thereunder.
OnJanuary 17, 2008, we completed the fifth tranche of a private placement of unitsat a price of $100,000 per unit for sale to “accredited investors,” as definedin regulations promulgated under the Securities Act of 1933, as amended. In thisfifth tranche, we sold four and a half units for aggregate gross proceeds of$450,000. Each such unit consists of (i) a $100,000 Principal Amount 10% SecuredConvertible Promissory Note and (ii) a warrant to purchase 200,000 shares of ourcommon stock, $0.001 par value, exercisable for cash or on a cashless basis fora period of four years commencing on January 17, 2009, at a price of $0.50 pershare. In connection with the sale of the sale of securities described above, wepaid the Placement Agent commissions and discounts aggregating $77,500. We claiman exemption from the registration requirements of the Securities Act for theprivate placement of the units pursuant to Section 4(2) of the Securities Actbecause each of the units was made in a sale by the issuer not involving apublic offering.
On March4, 2008, we completed the sixth tranche of a private placement of units at aprice of $100,000 per unit for sale to “accredited investors,” as defined inregulations promulgated under the Securities Act of 1933, as amended. In thissixth tranche, we sold two and a half units for aggregate gross proceeds of$250,000. Each such unit consists of (i) a $100,000 Principal Amount 10% SecuredConvertible Promissory Note and (ii) a warrant to purchase 200,000 shares of ourcommon stock, $0.001 par value, exercisable for cash or on a cashless basis fora period of four years commencing on March 4, 2009, at a price of $0.50 pershare. In connection with the sale of the sale of securities described above, wepaid the Placement Agent commissions and discounts aggregating $37,500. We claiman exemption from the registration requirements of the Securities Act for theprivate placement of the units pursuant to Section 4(2) of the Securities Actbecause each of the units was made in a sale by the issuer not involving apublic offering.
On May 7,2008, we completed the seventh tranche of a private placement of units at aprice of $100,000 per unit for sale to “accredited investors,” as defined inregulations promulgated under the Securities Act. In this seventh tranche, wesold one unit for aggregate gross proceeds of $100,000. The unit consists of (i)a $100,000 Principal Amount 10% Secured Convertible Promissory Note and (ii) awarrant to purchase 200,000 shares of our common stock, $0.001 par value,exercisable for cash or on a cashless basis for a period of four yearscommencing on May 7, 2009, at a price of $0.50 per share. In connectionwith the sale of the sale of securities described above, we paid the PlacementAgent commissions and discounts aggregating $15,000. We claim an exemption fromthe registration requirements of the Securities Act for the private placement ofthe units pursuant to Section 4(2) of the Securities Act because each of theunits was made in a sale by the issuer not involving a publicoffering.
On July31, 2008, we completed the eighth tranche of a private placement of units at aprice of $100,000 per unit for sale to “accredited investors,” as defined inregulations promulgated under the Securities Act. In this eighth tranche, wesold one and a half units for aggregate gross proceeds of $150,000. Each suchunit consists of (i) a $100,000 Principal Amount 10% Secured ConvertiblePromissory Note and (ii) a warrant to purchase 200,000 shares of our commonstock, $0.001 par value, exercisable for cash or on a cashless basis for aperiod of four years commencing on July 31, 2009, at a price of $0.50 per share.In connection with the sale of the sale of securities described above, we paidthe Placement Agent commissions and discounts aggregating $22,500. We claim anexemption from the registration requirements of the Securities Act for theprivate placement of the units pursuant to Section 4(2) of the Securities Actbecause each of the units was made in a sale by the issuer not involving apublic offering.
OnOctober 21, 2008, we issued and sold to James A. Hayward a $500,000 principalamount secured promissory note (“October Note”) bearing interest at a rate of10% per annum and a warrant (“October Warrant”) to purchase 1,000,000 shares ofour common stock. The October Note and accrued but unpaid interest thereon isconvertible into shares of our common stock at a price of $0.50 per share by theholder at any time from October 21, 2008, through October 20, 2009, and shallautomatically convert on October 21, 2009 at a conversion price of $0.026171520per share, which is equal to a 30% discount to the average volume, weightedaverage price of our common stock for the ten trading days prior to issuance. Atany time prior to conversion, we have the right to prepay the October Note andaccrued but unpaid interest thereon upon 3 days prior written notice (duringwhich period the holder can elect to convert the note). The October Warrant isexercisable for a four-year period commencing on October 21, 2009, and expiringon October 20, 2013, at a price of $0.50 per share. The October Warrant may beredeemed at our option at a redemption price of $0.01 upon the earlier of (i)October 20, 2011, and (ii) the date our common stock has traded on The Over theCounter Bulletin Board at or above $1.00 per share for 20 consecutive tradingdays. No commissions were paid in connection with the sale of the sale ofsecurities described above. We claim an exemption from the registrationrequirements of the Securities Act for the private placement of the securitiespursuant to Section 4(2) of the Securities Act because the securities were soldby the issuer not involving a public offering.
OnJanuary 29, 2009, in connection with a Consulting Agreement dated January 13,2009 with Strategic Partners Consulting, LLC (“SPC”), we issued to SPC tenmillion (10,000,000) shares of our common stock, par value $0.001 pershare.
OnJanuary 29, 2009, we issued and sold to James A. Hayward a $150,000 principalamount secured promissory note (“January Note”) bearing interest at a rate of10% per annum and a warrant (“January Warrant”) to purchase 300,000 shares ofour common stock. The January Note and accrued but unpaid interestthereon shall automatically convert on January 29, 2010 at a conversionprice of $0.033337264 per share, which is equal to a 20% discount to the averagevolume, weighted average price of our common stock for the ten trading daysprior to issuance, and are convertible into shares of our common stock at theoption of the noteholder at any time prior to such automatic conversion at aprice equal to the greater of (i) 50% of the average price of our common stockfor the ten trading days prior to the date of the notice of conversion and (ii)the automatic conversion price. In addition, any time prior toconversion, we have the irrevocable right to repay the unpaid principal andaccrued but unpaid interest under the January Note on three days written notice(during which period the holder can elect to convert the note). The JanuaryNote bears interest at the rate of 10% per annum and is due and payable in fullon January 29, 2010. Until the principal and accrued but unpaid interestunder the January Note are paid in full, or converted into our common stock, theJanuary Note will be secured by a security interest in all of our assets. TheJanuary Warrant is exercisable for a four-year period commencing on January 29,2010, and expiring on January 28, 2014, at a price of $0.50 pershare. The January Warrant may be redeemed at our option at aredemption price of $0.01 upon the earlier of (i) January 29, 2012, and (ii) thedate our common stock has been quoted on The Over the Counter Bulletin Board ator above $1.00 per share for 20 consecutive trading days.
OnFebruary 20, 2009, we entered into an engagement agreement with Arjent ServicesLLC, (the “Engagement Agreement”). Pursuant to the Engagement Agreement, weissued to Arjent Limited (UK) a warrant to purchase 2,000,000 shares of ourcommon stock at an exercise price of $.06 per share. This issuance is consideredexempt under Regulation D of the Securities Act andRule 506 promulgated thereunder.
OnFebruary 27, 2009, we issued and sold a $200,000 principal amount securedpromissory note (“February Note”) bearing interest at a rate of 10% per annum toJames A. Hayward, our Chairman, President and Chief ExecutiveOfficer. The February Note and accrued but unpaid interest thereonshall automatically convert into shares of our common stock on February 27, 2010at a conversion price of $0.046892438 per share, which is equal to a 20%discount to the average volume, weighted average price of our common stock forthe ten trading days prior to issuance, and is convertible into shares of ourcommon stock at the option of the noteholder at any time prior to such automaticconversion at a price equal to the greater of (i) 50% of the average price ofour common stock for the ten trading days prior to the date of the notice ofconversion and (ii) the automatic conversion price. In addition, anytime prior to conversion, we have the irrevocable right to repay the unpaidprincipal and accrued but unpaid interest under the February Note on three dayswritten notice (during which period the holder can elect to convert the FebruaryNote). The February Note bears interest at the rate of 10% per annumand is due and payable in full on February 27, 2010. Until theprincipal and accrued but unpaid interest under the February Note are paid infull, or converted into shares of our common stock, the February Note will besecured by a security interest in all of our assets.
On March16, 2009, in connection with a letter agreement dated March 16, 2009 withCrystal Research Associates, LLC (CRA), pursuant to which CRA agreed, amongother things, to prepare an executive informational overview, we issued toemployees of CRA warrants to purchase an aggregate of two hundred thousand(200,000) shares of our common stock at an exercise price equal to the closingprice of our common stock on the date of the letter agreement, or $0.07,exercisable for a three year period commencing on March 16, 2009.
On March27, 2009, we entered into a settlement agreement and mutual general release withMr. Douglas Falkner, one of our former employees and consultants, to settle alawsuit in California for alleged breach of contract under his employment andconsulting agreements and wrongful discharge in violation of public policy and alawsuit in North Carolina for a worker’s compensation claim. Inexchange for the dismissal of all claims against us, we agreed to issue to Mr.Falkner 3,000,000 restricted shares of our common stock and a warrant topurchase 1,500,000 shares of our common stock with an exercise price of $.10exercisable for a period of three years beginning on the first anniversary ofissuance. As of the date of the settlement agreement, the closingsales price for our common stock on the OTC Bulletin Board was $0.06 pershare. Under the settlement agreement, we are obligated to registerthe shares issued to Mr. Falkner, subject to certain conditions, and we arefiling the registration statement, of which this prospectus is a part, pursuantto the provisions of the settlement agreement.
On March30, 2009, we issued and sold a $250,000 principal amount secured promissory note(“March Note”) bearing interest at a rate of 10% per annum to James A. Hayward,our Chairman, President and Chief Executive Officer. The March Noteand accrued but unpaid interest thereon shall automatically convert into sharesof our common stock on March 30, 2010 at a conversion price of $0.043239467 pershare, which is equal to a 20% discount to the average volume, weighted averageprice of our common stock for the ten trading days prior to issuance, and isconvertible into shares of our common stock at the option of the noteholder atany time prior to such automatic conversion at a price equal to the greater of(i) 50% of the average price of our common stock for the ten trading days priorto the date of the notice of conversion and (ii) the automatic conversionprice. In addition, any time prior to conversion, we have theirrevocable right to repay the unpaid principal and accrued but unpaid interestunder the March Note on three days written notice (during which period theholder can elect to convert the March Note). The March Note bearsinterest at the rate of 10% per annum and is due and payable in full on March30, 2010. Until the principal and accrued but unpaid interest underthe March Note are paid in full, or converted into shares of our common stock,the March Note will be secured by a security interest in all of ourassets.
On April14, 2009, we issued and sold an aggregate of $300,000 principal amount securedpromissory notes bearing interest at a rate of 10% per annum to “accreditedinvestors,” as defined in regulations promulgated under the Securities Act of1933, as amended. The promissory notes and accrued but unpaidinterest thereon shall automatically convert into shares of our common stock onApril 14, 2010 at a conversion price of $0.070756456 per share, which isequal to a 20% discount to the average volume, weighted average price of ourcommon stock for the ten trading days prior to issuance, and are convertibleinto shares of our common stock at the option of the noteholders at any timeprior to such automatic conversion at a price equal to the greater of (i) 50% ofthe average price of our common stock for the ten trading days prior to the dateof the notice of conversion and (ii) the automatic conversionprice. In addition, any time prior to conversion, we have theirrevocable right to repay the unpaid principal and accrued but unpaid interestunder the promissory notes on three days written notice (during which period theholders can elect to convert the promissory notes). The promissorynotes bear interest at the rate of 10% per annum and are due and payable in fullon April 14, 2010. Until the principal and accrued but unpaidinterest under the promissory notes are paid in full, or converted into sharesof our common stock, the promissory notes will be secured by a security interestin all of our assets. Arjent Services LLC, a registered brokerdealer firm (the “Placement Agent”), acted as our placement agent. Inconnection with the sale of the sale of promissory notes described above, wepaid the Placement Agent commissions and discounts aggregating $45,000. Inaddition, we issued to an affiliate of the Placement Agent a warrant to purchasetwo million (2,000,000) shares of our common stock at an exercise price equal tothe closing price of our common stock on the date of the engagement agreement,or $0.06, exercisable for a four year period commencing on February 20, 2010(see above).
* All ofthe above offerings and sales were deemed to be exempt under Rule 506 ofRegulation D and/or Section 4(2) of the Securities Act. No advertising orgeneral solicitation was employed in offering the securities. The offerings andsales were made to a limited number of persons, all of whom were accreditedinvestors, business associates of Applied DNA Sciences or executive officers ofApplied DNA Sciences, and transfer was restricted by Applied DNA Sciences inaccordance with the requirements of the Securities Act. In addition torepresentations by the above-referenced persons, we have made independentdeterminations that all of the above-referenced persons were accredited orsophisticated investors, and that they were capable of analyzing the merits andrisks of their investment, and that they understood the speculative nature oftheir investment. Furthermore, all of the above-referenced persons were providedwith access to our SEC filings. Except as disclosed above, we have not employedany underwriters in connection with any of the abovetransactions.
Except asexpressly set forth above, the individuals and entities to whom we issuedsecurities as indicated in this section of the registration statement areunaffiliated with us.
(A)Exhibits
Thefollowing exhibits are included as part of this Form S-1. References to “theCompany” in this Exhibit List mean Applied DNA Sciences, Inc., a Delawarecorporation.
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| Exhibit | Description |
| 3.1 | Certificate of Incorporation of Applied DNA Sciences, Inc., filed December 17, 2008 with the Secretary of State of the State of Delaware, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 16, 2009 and incorporated herein by reference. |
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| 3.2 | By-Laws of Applied DNA Sciences, Inc., filed as an exhibit to the current report on Form 8-K filed with the Commission on January 16, 2009 and incorporated herein by reference. |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| 4.6 | Form of Subscription Agreement, filed as an exhibit to the current report on Form 8-K filed with the Commission on October 11, 2007 and incorporated herein by reference. |
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| 4.7 | Form of 10% Secured Convertible Promissory Note, filed as an exhibit to the current report on Form 8-K filed with the Commission on October 11, 2007 and incorporated herein by reference. |
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| 4.8 | Form of Warrant Agreement, filed as an exhibit to the current report on Form 8-K filed with the Commission on October 11, 2007 and incorporated herein by reference. |
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| 5.1 | Fulbright & Jaworski L.L.P. Opinion and Consent (filed herewith). |
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| 10.1# | Technology Reseller Agreement, dated March 19, 2007 by and between Applied DNA Sciences and HPT International LLC, filed as an exhibit to the current report on Form 8-K filed with the Commission on March 23, 2007 and incorporated herein by reference. |
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| 10.2# | Joint Development and Marketing Agreement, dated April 18, 2007 by and between Applied DNA Sciences and International Imaging Materials, Inc., filed as an exhibit to the current report on Form 8-K filed with the Commission on April 24, 2007 and incorporated herein by reference. |
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| 10.3 | Settlement Agreement and General Release of All Claims by and between the Applied DNA parties and Chanty Cheang, filed as an exhibit to the current report on Form 8-K filed with the Commission on May 4, 2007 and incorporated herein by reference. |
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| 10.4# | Technology Reseller Agreement, dated May 30, 2007 by and between Applied DNA Sciences, Inc. and Printcolor Screen Ltd., filed as an exhibit to the current report on Form 8-K filed with the Commission on June 1, 2007 and incorporated herein by reference. |
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| 10.5# | Feasibility Study Agreement, dated June 27, 2007 by and between Applied DNA Sciences, Inc. and Supima, filed as an exhibit to the current report on Form 8-K filed with the Commission on July 3, 2007 and incorporated herein by reference. |
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| 10.6 | Engagement Agreement, dated August 23, 2007 by and between Applied DNA Sciences, Inc. and ARjENT Limited, filed as an exhibit to the current report on Form 8-K filed with the Commission on September 7, 2007 and incorporated herein by reference. |
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| 10.7 | Amendment to Engagement Letter, dated December 20, 2007, by and between Applied DNA Sciences, Inc. and ARjENT Limited, filed as an exhibit to the current report on Form 8-K filed with the Commission on December 28, 2007 and incorporated herein byreference. |
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| 10.8 | Form of Employee Stock Option Agreement under The Applied DNA Sciences, Inc. 2005 Incentive Stock Plan of Applied DNA Sciences, Inc. filed as an exhibit to the quarterly report on Form 10-QSB filed with the Commission on August 14, 2008 and incorporated herein byreference. |
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| 10.9 | Form of Director Stock Option Agreement under The Applied DNA Sciences, Inc. 2005 Incentive Stock Plan of Applied DNA Sciences, Inc. filed as an exhibit to the quarterly report on Form 10-QSB filed with the Commission on August 14, 2008 and incorporated herein byreference. |
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| 10.10 | Form of Subscription Agreement by and among Applied DNA Sciences, Inc. and the investors named on the signature pages thereto, filed as an exhibit to the current report on Form 8-K filed with the Commission on April 20, 2009 and incorporated herein by reference. |
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| 10.11 | 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 April 20, 2009 and incorporated herein by reference. |
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| 23.1 | Consent of RBSM LLP (filed herewith). |
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| 24.1 | Power of Attorney (filedherewith). |
# Arequest for confidentiality has been filed for certain portions of the indicateddocument. Confidential portions have been omitted and filed separately with theSecurities and Exchange Commission as required by Rule 24b-2 promulgated underthe Securities Exchange Act of 1934.
(b)Financial Statement Schedules.
Scheduleshave been omitted because the information required to be set forth therein isnot applicable or is shown in the financial statements or notesthereto.
Theundersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, apost-effective amendment to this Registration Statement:
(i) To include any propectus required by section 10(a)(3) of the Securities Act of1933;
(ii)To reflect in the prospectus any facts or events arising after the effectivedate of the registration statement (or the most recent post-effective amendmentthereof) which, individually or in the aggregate, represent a fundamental changein the information set forth in the registration statement. Notwithstanding theforegoing, any increase or decrease in volume of securities offered (if thetotal dollar value of securities offered would not exceed that which wasregistered) and any deviation from the low or high end of the estimated maximumoffering range may be reflected in the form of prospectus filed with theCommission pursuant to Rule 424(b) if, in the aggregate, the changes in volumeand price represent no more than 20% change in the maximum aggregate offeringprice set forth in the “Calculation of Registration Fee” table in the effectiveregistration statement.
(iii)To include any material information with respect to the plan of distribution notpreviously disclosed in the registration statement or any material change tosuch information in the registration statement;
2. That, for the purpose of determining any liability under the Securities Act of1933, each such post-effective amendment shall be deemed to be a newregistration statement relating to the securities offered therein, and theoffering of such securities at that time shall be deemed to be the initial bonafide offering thereof.
3. To remove from registration by means of a post-effective amendment any of thesecurities being registered which remain unsold at the termination of theoffering.
4. That, for the purpose of determining liability of the registrant under theSecurities Act of 1933 to any purchaser in the initial distribution of thesecurities: The undersigned registrant undertakes that in a primary offering ofsecurities of the undersigned registrant pursuant to this registrationstatement, regardless of the underwriting method used to sell the securities tothe purchaser, if the securities are offered or sold to such purchaser by meansof any of the following communications, the undersigned registrant will be aseller to the purchaser and will be considered to offer or sell such securitiesto such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relatingto the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf ofthe undersigned registrant or used or referred to by the undersignedregistrant;
(iii)The portion of any other free writing prospectus relating to the offeringcontaining material information about the undersigned registrant or itssecurities provided by or on behalf of the undersigned registrant;and
(iv)Any other communication that is an offer in the offering made by the undersignedregistrant to the purchaser.
Insofaras indemnification for liabilities arising under the Securities Act may bepermitted to our directors, officers and controlling persons pursuant to theprovisions above, or otherwise, we have been advised that in the opinion of theSEC such indemnification is against public policy as expressed in the SecuritiesAct, and is, therefore, unenforceable. In the event that a claim forindemnification against such liabilities, other than the payment by us ofexpenses incurred or paid by one of our directors, officers, or controllingpersons in the successful defense of any action, suit or proceeding, is assertedby one of our directors, officers, or controlling persons in connection with thesecurities being registered, we will, unless in the opinion of our counsel thematter has been settled by controlling precedent, submit to a court ofappropriate jurisdiction the question of whether such indemnification is againstpublic policy as expressed in the Securities Act, and we will be governed by thefinal adjudication of such issue.
Pursuantto the requirements of the Securities Act of 1933 the registrant has duly causedthis Registration Statement to be signed on its behalf by the undersigned,thereunto duly authorized, in Stony Brook, New York, on April 24,2009.
| | APPLIED DNA SCIENCES, INC. | |
| | (Registrant) | |
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| | By: /s/ JAMES A. HAYWARD | |
| | James A. Hayward | |
| | Chairman, President and Chief ExecutiveOfficer |
POWEROF ATTORNEY
Eachperson whose signature appears below appoints Dr. James A. Hayward and Mr. KurtH. Jensen, and each of them, any of whom may act without the joinder of theother, as his true and lawful attorney-in-fact and agent, with full power ofsubstitution and resubstitution, for him and in his name, place and stead, inany and all capacities, to sign any and all amendments (including post-effectiveamendments) to this Registration Statement and any Registration Statement(including any amendment thereto) for this offering that is to be effective uponfiling pursuant to Rule 462 under the Securities Act of 1933 and to filethe same, with all exhibits thereto, and all other documents in connectiontherewith, with the SEC, granting unto said attorneys-in-fact and agents fullpower and authority to do and perform each and every act and thing requisite andnecessary to be done, as fully to all intents and purposes as he might or woulddo in person, hereby ratifying and confirming all that said attorneys-in-factand agents or any of them of their or his substitute and substitutes, maylawfully do or cause to be done by virtue hereof.
Pursuantto the requirements of the Securities Act of 1933 this registration statementhas been signed by the following persons in the capacities and on the datesindicated.
| Signature | | Title | | Date |
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| /s/ James A. Hayward Sotirios J. Vahaviolos | | Chairman, President, Chief Executive Officer (Principal Executive Officer) and Director | | April 24, 2009 |
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| /s/ Kurt H. Jensen Paul Peterik | | Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary | | April 24, 2009 |
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| /s/ Yacov Shamash Yacov Shamash | | Director | | April 24, 2009 |
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| /s/ Sanford R. Simon Sanford R. Simon | | Director | | April 24, 2009 |
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