UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended September 30, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From _____ to _____
Commission File Number 002-90539
APPLIED DNA SCIENCES, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 59-2262718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790 (631) 444-6862
--------------------- ----- --------------
(Address of principal executive office) (Postal Code) (Issuer's telephone
number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act [ ]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
Indicate by checkmark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act).
Yes [ ] No |X|
State issuer's revenues for its most recent fiscal year. $18,900.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates was $10.6 million, as computed by reference to the last sale
price of the Company's Common Stock, as reported by the OTC Bulletin Board, on
January 11, 2007.
As of December 29, 2006, the Company had outstanding 121,162,385 shares of
Common Stock.
APPLIED DNA SCIENCES, INC.
FORM 10-KSB
For the Fiscal Year Ended September 30, 2006
Part I Page
Item 1. Description of Business. 3
Item 2. Description of Property. 15
Item 3. Legal Proceedings. 15
Item 4. Submission of Matters to a Vote of Security Holders. 16
Part II Page
Item 5. Market for Common Equity and Related Stockholder Matters. 16
Item 6. Management's Discussion and Analysis or Plan of Operation. 17
Item 7. Financial Statements 32
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure. 33
Item 8A. Controls and Procedures. 33
Item 8B. Other Information. 33
Part III Page
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act. 34
Item 10. Executive Compensation. 36
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 37
Item 12. Certain Relationships and Related Transactions. 40
Item 13. Exhibits. 41
Item 14. Principal Accountant Fees and Services. 44
Signatures. 45
2
PART I
Forward-looking Information
This Annual Report on Form 10-KSB (including the section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations) contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, including statements
using terminology such as "can", "may", "believe", "designated to", "will",
"expect", "plan", "anticipate", "estimate", "potential" or "continue", or the
negative thereof or other comparable terminology regarding beliefs, plans,
expectations or intentions regarding the future. You should read statements that
contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of
our financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
forward looking statements involve risks and uncertainties and our actual
results and the timing of certain events could differ materially from those
discussed in forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors," "Business" and elsewhere in this
prospectus. All forward-looking statements and risk factors included in this
document are made as of the date hereof, based on information available to us as
of the date thereof, and we assume no obligations to update any forward-looking
statement or risk factor, unless we are required to do so by law.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, which requires us to file reports, proxy
statements and other information with the Securities and Exchange Commission
("SEC"). Such reports, proxy statements and other information may be inspected
at public reference facilities of the SEC at 100 F Street, N.E., Washington,
D.C. 20549. Copies of such material can be obtained from the Public Reference
Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549 at prescribed
rates. Because we file documents electronically with the SEC, you may also
obtain this information by visiting the Securities SEC's website at
http://www.sec.gov.
ITEM 1. DESCRIPTION OF BUSINESS.
Corporate History
We are a Nevada corporation, which was initially formed under the laws
of the State of Florida as Datalink Systems, Inc. in 1983. In 1998, we
reincorporated in Nevada, and in November of 2002, we changed our name to our
current name, Applied DNA Sciences, Inc. In November 2005, our corporate
headquarters were relocated from Los Angeles, California to the Long Island High
Technology Incubator at Stony Brook University in Stony Brook, New York. This
relocation was part of our restructuring effort during the fourth quarter of
2005 to transform the company from the developmental stage to an operating
business. During this period and in the first two quarters of 2006, we
established laboratories for the manufacture of DNA markers and product
prototypes, and DNA authentication. To date, the company has a very limited
operating history, and as a result, the company's operations have produced
insignificant revenues. On May 9, 2006, we entered into, and on July 25, 2006 we
announced the performance of our first SigNature Program contract.
Overview
We provide botanical DNA encryption, embedment and authentication
solutions that can help protect companies, governments and consumers from
counterfeiting, fraud, piracy, product diversion, identity theft, and
unauthorized intrusion into physical locations and databases. Our SigNature
Program provides a secure, accurate and cost-effective means for our potential
customers to incorporate our SigNature DNA Markers in, and then quickly and
reliably authenticate and identify, a broad range of items such as artwork and
collectibles, fine wine, consumer products, digital media, financial
instruments, identity cards and other official documents. Having the ability to
reliably authenticate and identify counterfeit versions of such items enables
companies and governments to detect, deter, interdict and prosecute
counterfeiting enterprises and individuals.
Our SigNature Program enables our potential clients to
cost-effectively:
o give assurance to manufacturers, suppliers, distributors,
retailers and end-users that their products are authentic and
can be forensically authenticated;
o integrate our SigNature DNA Markers with existing security
solutions such as barcodes, radio frequency identification
(RFID) tags, holograms, microchips and other securities
measures; and
o add value to the "bottom-line" by helping to diminish product
diversion and counterfeiting.
3
Counterfeit and diverted products continue to pose a significant and
growing problem with consumer packaged goods, especially for prestige and
established brands worldwide. Piracy, identity theft and forged documents and
items are also highly prevalent in vertical markets such as digital media, fine
art, luxury goods, and alcoholic beverages. Key aspects of our strategy include:
o continuing to improve and customize our solution to meet our
potential customers' needs;
o continuing to develop and enhance our existing DNA marker
authentication technologies;
o expanding our customer base both domestically and abroad by
targeting high volume markets; and
o augmenting our competitive position through strategic
acquisitions and alliances.
Industry Background
Counterfeiting, product diversion, piracy, forgery, identity theft, and
unauthorized intrusion into physical locations and databases create significant
and growing problems to companies in a wide range of industries as well as
governments and individuals worldwide. The U.S. Chamber of Commerce reported in
2006 that counterfeiting and piracy cost the U.S. economy between $200-$250
billion per year, or an estimated 750,000 American jobs, and pose a real threat
to consumer health and safety. The World Customs Organization and Interpol
estimate that annual global trade in illegitimate goods increased from $5.5
billion in 1982 to roughly $600 billion in 2004.
Product counterfeiting and diversion particularly harms manufacturers
of consumer products, especially for prestige and established brands, and the
consumers who purchase them. For instance, according to the Gieschen
Consultancy's 2005 Document, Product and Intellectual Property Security Report,
or DOPIP, consumer products associated with worldwide counterfeit enforcement
arrests, charges, convictions, sentences and civil litigation in 2005 amounted
to around $1.5 billion. This total includes:
o $695 million of entertainment and software products;
o $283 million of clothing and accessories;
o $193 million of cigarettes and tobacco products;
o $61 million of drugs and other medical supplies;
o $36 million of toys and sports equipment;
o $35 million of electronic equipment and supplies;
o $12 million in perfume and cosmetics;
o $11 million of food and alcohol products;
o $11 million in jewelry and watches;
o $10 million of computer equipment and supplies;
o $123 million of other goods.
According to this report, the value of seizures and losses associated
with counterfeit documents, products and intellectual property in the United
States alone was $1.29 billion in 2005.
The artworks and collectibles markets are also particularly vulnerable
to counterfeiting, forgery and fraud. New works are produced and then passed off
as originating from a particular artistic period or source, authentic fragments
are pieced together to simulate an original work, and existing works are
modified in order to increase their purported value. Such phony artwork and
collectibles are then often sold with fake or questionable signatures and
"provenance," or documented ownership histories that confirm authenticity.
Governments are increasingly vulnerable to counterfeiting, terrorism
and other security threats at least in part because currencies, identity and
security cards and other official documents can be counterfeited with relative
ease. For instance, the DOPIP valued 2005 seizures and losses associated with
counterfeit currency at around $609 billion, and counterfeit identification at
$124 million. Governments must also enforce the various anti-counterfeiting and
anti-piracy regimes of their respective jurisdictions which becomes increasingly
difficult with the continued expansion of global trade.
The digital and recording media industry, including the segment that
records computer software on compact discs, has long been a victim of piracy, or
the production of illegal copies of genuine media or software, and the
counterfeiting and distribution of imitation media or software. Compact discs,
DVDs, videotapes, computer software and other digital and recording media that
appears identical to genuine products are sold at substantial discounts by
vendors at street and night markets, via mail order catalogs and on the internet
at direct retail websites or at auction sites. In 2006 the Business Software
Alliance ("BSA") reported that in 2005, the United States lost $6.9 billion as a
result of software piracy. The BSA also estimated that 21 percent of software
programs in the U.S. are unlicensed and that since January 1, 2000, the BSA has
settled with 1,668 companies for a total of $81,821,895. In a
white paper published in December 2005, the BSA and the IDC
also reported that they found in a 2004 study
4
that the world spent more than $59 billion for commercial packaged
software. Yet, software worth over $90 billion was actually installed. In other
words, for every two dollars worth of software purchased legitimately, one
dollar was obtained illegally.
The pharmaceutical industry also faces major problems relative to
counterfeit, diluted, or falsely labeled drugs that make their way through
healthcare systems worldwide, posing a health threat to patients and a financial
threat to drugmakers and distributors. In 2006 the Center for Medicine in the
Public Interest predicted that counterfeit drug sales will reach $75 billion
globally in 2010, an increase of more than 90% from 2005. In February, 2006, the
World Health Organization ("WHO") estimated that counterfeits account for more
than 10% of the global pharmaceuticals market, 25% of pharmaceuticals consumed
in developing countries and as much as 50% in some countries, are counterfeit.
According to the WHO, counterfeiting can apply to both branded and generic
products and counterfeit pharmaceuticals may include products with the correct
ingredients but fake packaging, with the wrong ingredients, without active
ingredients or with insufficient active ingredients. The challenges presented by
traditional counterfeiters have recently been supplemented by the many websites,
from direct retailers to auction sites, that offer counterfeit prescription
drugs online. As a result, the pharmaceutical industry and regulators are
examining emerging anti-counterfeit technologies, including radio-frequency
identification tags and electronic product codes, known as EPCs, to help stem
the wave of counterfeit drugs and better track legitimate drugs from
manufacturing through the supply chain.
As more and more companies in each of these markets begin to address
the problem of counterfeiting, we expect that different systems will compete to
be the leading standards by which products can be tracked across world markets.
Historically, counterfeiting, product diversion and other types of fraud have
been combated by embedding various authentication systems and rare and easily
distinguishable materials into products, such as radio frequency identification
(RFID) devices and banknote threads in packaging, integrated circuit chips and
magnetic strips in automatic teller machine cards, holograms on currency,
elemental taggants in explosives, and radioactivity and rare molecules in crude
oil. These techniques are effective but have generally been reverse-engineered
and replicated by counterfeiters, which limits their usefulness as forensic
methods for authentication of the sources of products and other items.
The Applied DNA Solution
We believe our solution, which we call the SigNature Program, is as
broadly applicable, convenient and inexpensive as existing authentication
systems, while highly resistant to reverse-engineering or replication, so that
it can either be applied independently or supplement existing systems in order
to allow for a forensic level of authentication of the sources of a broad range
of items, such as artwork and collectibles, fine wine, consumer products,
digital and recording media, pharmaceuticals, financial instruments, identity
cards and official documents. The SigNature Program first involves our design
and manufacture of a highly customized and encrypted botanical DNA marker, or
SigNature DNA Marker. The SigNature DNA Marker is then encapsulated and
stabilized so that it is resistant to heat, organic solvents, chemicals and most
importantly, ultraviolet, or UV radiation. Once it has been encapsulated, our
SigNature DNA Embedment system can be used to embed the SigNature DNA Marker
directly onto products or other items or into special inks, threads and other
media, which in turn can be incorporated into packaging or products. Once it is
embedded, our SigNature DNA Encryption Detector pen can instantly show the
presence or absence of any of our SigNature DNA Markers, and our SigNature
polymerase chain reaction (PCR) Kits can provide rapid forensic level
authentication of specific SigNature DNA Markers.
We believe that the key characteristics and benefits of the SigNature
Program are as follows:
We Believe Our SigNature DNA Markers Are Virtually Impossible to Copy
In creating unique SigNature DNA Markers, we use DNA segments from one
or more botanical sources, rearrange them into unique encrypted sequences, and
then implement one or more layers of anti-counterfeit techniques. Because the
portion of DNA in a SigNature DNA Marker used to identify the marker is so
minute, it cannot be detected unless it is replicated billions of times over, or
amplified. This amplification can only be achieved by applying matching strands
of DNA, or a primer, and PCR techniques to the SigNature DNA Marker. The
sequence of the relevant DNA in a SigNature DNA Marker must be known in order to
manufacture the primer for that DNA. As a result, we believe the effort required
to find, amplify, select and clone the relevant DNA in a SigNature DNA Marker
would involve such enormous effort and expense that SigNature DNA Markers are
virtually impossible to copy without our proprietary systems.
Simple and Rapid Authentication
With our advanced SigNature DNA Marker detection devices and PCR
testing kits, any of our customers can quickly complete an on-site verification.
When our SigNature DNA Encryption Detector pen comes in contact
5
with our proprietary overt ink on a label or product package, a biochemical
reaction triggers a reversible color change from blue to pink and back to blue.
Testing of this color change can be repeated between 30 to 50 times. For
forensic level authentication, our SigNature PCR testing kits can produce
absolute authentication in less than 30 minutes using portable PCR machines.
Low Cost and High Accuracy
The costs associated with the DNA required to manufacture our SigNature
DNA Markers are not significant since the amount of DNA required for each marker
is so minute (for instance, only 3-5 parts per million when incorporated in an
ink). We manufacture the identifying segment of DNA to be used in a SigNature
DNA Marker by cloning them inside microorganisms such as yeast or bacteria,
which are highly productive and inexpensive to grow. As a result, SigNature DNA
Markers are relatively inexpensive when compared to other anti-counterfeiting
devices such as RFIDs, EPCs, integrated circuit chips, and holograms. Our
SigNature DNA Encryption Detectors, which use color changing dyes and molecular
"triggers" to instantly detect SigNature DNA Markers, are also relatively
inexpensive. At the same time, the probability of mistakenly identifying a
SigNature DNA Marker is less than 1 in 1 trillion, so our authentication systems
are highly accurate, and in fact, our SigNature PCR Kits can authenticate to a
forensic level.
Easily Integrated with Other Anti-Counterfeit Technologies
Our DNA Markers can be embedded onto RFID devices, banknote threads,
labels, serial numbers, holograms, and other marking systems using inks, threads
and other media. We believe that combined with other traditional methods, our
SigNature Program provides a significant deterrent against counterfeiting,
product diversion, piracy, fraud and identity theft.
Broad Applicability and Ingestible
Our SigNature DNA Markers can be embedded into almost any consumer
product, and virtually any other item. For instance, the indelible SigNature DNA
Ink we produce is safe to consume and can be used in pharmaceutical drug tablets
and capsules. Use of our SigNature DNA in ingestible products and drugs will
require FDA approval. We have initiated a strategy to approach FDA in the first
quarter of calendar year 2007.
Our Strategy
We expect to generate revenues principally from sales of our SigNature
Program. Key aspects of our strategy include:
Customize and Refine the SigNature Program to Meet Potential Customers' Needs
We are continuously attempting to improve our SigNature Program by
testing the incorporation of our DNA Markers into different media, such as newly
configured labels, inks or packing elements, for use in new applications. Each
prospective customer has specific needs and employs varying levels of existing
security technologies with which our solution must be integrated. Our goal is to
develop a secure and cost-effective system for each potential customer that can
be incorporated into that potential customer's products or items themselves or
their packaging so that they can, for instance, be tracked throughout the entire
supply chain and distribution system.
Continue to Enhance Detection Technologies for Authentication of our SigNature
DNA Markers
We have also identified and are further examining opportunities to
collaborate with companies and universities to develop a new line of detection
technologies that will provide faster and more convenient ways to authenticate
our SigNature DNA Markers.
Target Potential High-Volume Markets
We will continue to focus our efforts on target vertical markets that
are characterized by a high level of vulnerability to counterfeiting, product
diversion, piracy, fraud, identity theft, and unauthorized intrusion into
physical locations and databases. Today our target markets include art and
collectibles, fine wine, consumer products, digital and recording media,
pharmaceuticals, and homeland security. If and when we have significantly
penetrated these markets, we intend to expand into additional related high
volume markets.
Pursue Strategic Acquisitions and Alliances
We intend to pursue strategic acquisitions of companies and
technologies that strengthen and complement our core technologies, improve our
competitive positioning, allow us to penetrate new markets, and grow our
customer base. We also intend to work in collaboration with our licensee Biowell
and potential strategic partners in order to continue to market and sell new
product lines derived from, but not limited to, DNA technology.
6
Target Markets
A licensee of our products, Biowell, has incorporated DNA markers,
based upon the same technology we use to create our SigNature DNA Markers, in
more than 1 billion consumer products including DVDs, CDs, fine art, cosmetics,
luxury teas and rice wine, seafood and many other items distributed in Asia. We
have just begun offering our products and services in Europe and the United
States and are targeting the following six principal markets:
Art & Collectibles
The fine art and collectibles markets are particularly vulnerable to
counterfeiting, forgeries and fraud. Phony artwork and collectibles are often
sold with fake or questionable signatures or attributions. We believe our
SigNature DNA Markers can safely be embedded directly in, and so can be used to
designate and then authenticate all forms of artwork and collectibles, including
paintings, books, porcelain, marble, stone, bronzes, tapestries, glass and fine
woodwork, including frames. They can also be embedded in any original supporting
documentation related to the artwork or collectible, the signature of the artist
and any other relevant material that would provide provenance, such as:
o A signed certificate or statement of authenticity from a
respected authority or expert on the artist;
o An exhibition or gallery sticker attached to the art or
collectible;
o An original sales receipt;
o A film or recording of the artist talking about the art or
collectible;
o An appraisal from a recognized authority or expert on the art
or collectible; and
o Letters or papers from recognized experts or authorities
discussing the art or collectible.
Fine Wine
Vintners and purveyors of fine wine are also vulnerable to
counterfeiting or product diversion. We believe our SigNature Program can
provide vintners and purveyors of fine wines several benefits:
o Verifed authenticity increases potential customers' confidence
in the product and their purchase decision;
o For the vintner, the SigNature Program can strengthen brand
support and recognition, and offers the potential for improved
marketability and sales; and,
o SigNature DNA Markers can be embedded in bottles, labels, or
both at the winery, and easily authenticated at the location
of the wine distributor or auctioneer.
Consumer Products
Counterfeit items are a significant and growing problem with all kinds
of consumer packaged goods, especially in the retail and apparel industries.
According to the 2005 DOPIP, up to $283 million worth of clothing and
accessories worldwide are fake, as well as $12 million worth of fragrances and
cosmetics are counterfeit each year. In the United States, $1.29 billion dollars
worth of seizures and losses were incurred resulting from counterfeit of apparel
and other consumer products. We have developed and are currently marketing a
number of solutions aimed at brand protection and authentication for the retail
and apparel industries, including the clothing, accessories, fragrances and
cosmetics segments. Our SigNature Program can be used by manufacturers in these
industries to combat counterfeiting and piracy of primary, secondary and
tertiary packaging, as well as the product itself, and to track products that
have been lost in transit, whether misplaced or stolen.
Digital and Recording Media
The digital and recording media industry, including the segment that
records computer software on compact discs, faces significant threats from
piracy and the counterfeiting and distribution of imitation media or software.
For instance, according to the BSA, in 2005 the United States lost $6.9 billion
as a result of software piracy. Our SigNature DNA Markers can be embedded onto
digital and recording media products, such as CDs, DVDs, videotapes and computer
software, as well as the packaging of these products.
Pharmaceuticals
The pharmaceutical industry also faces major problems relative to
counterfeit, diluted, or falsely labeled drugs that make their way through
healthcare systems worldwide, posing a health threat to patients and a financial
threat to drugmakers and distributors. As a result, the pharmaceutical industry
and regulators are examining emerging anti-counterfeit technologies, including
RFID tags and EPCs to help stem the wave of counterfeit drugs and better track
legitimate drugs from manufacturing through the supply chain. Our SigNature DNA
Markers can easily be embedded directly into pharmaceutical packaging
or into RFID tags or EPCs attached to packaging, and
7
since they are ingestible, may be applied as part of a unit dose. In its 2004
report "Combating Counterfeit Drugs," the Food and Drug Administration ("FDA")
noted that authentication technologies for pharmaceuticals (such as
color-shifting inks, holograms, taggants, or chemical markers embedded in
a drug or its label) have been sufficiently perfected that they can now serve
as a critical component of a layered approach to control counterfeit drugs.
FDA's 2004 Report acknowledged the importance of using one or more
authentication technologies for drug products.
Homeland Security
Governments worldwide are increasingly faced with the problems of
counterfeit currencies, official documents, and identity and security cards, as
well as terrorism and other security threats. Governments must also enforce the
various anti-counterfeiting and anti-piracy regimes of their respective
jurisdictions which becomes increasingly difficult with the continued expansion
of global trade. Our SigNature Program can provide secure, forensic, and
cost-effective anti-counterfeiting, anti-piracy and identification solutions to
local, state, and federal governments as well as the defense contractors and the
other companies that do business with them. Our SigNature Program can be used
for all types of identification and official documents, such as:
o Passports;
o Lawful permanent resident, or "green" cards;
o Visas;
o Drivers' licenses;
o Social Security cards;
o Military identification cards;
o National transportation cards;
o Security cards for access to sensitive physical locations;
and,
o Other important identity cards, official documents and
security-related cards.
Our Technology
Every living organism has a unique DNA code that determines the
character and composition of its cells. The core technologies of our business
allow us to use the DNA of everyday plants to mark objects in a unique manner
that we believe can only be replicated at great expense, and then identify these
objects by detecting the absence or presence of the DNA.
SigNature DNA Encryption
Our patent pending encryption system allows us to isolate strands of
botanical DNA and then fragment and reconstitute them to form unique "DNA
chimers", or encrypted DNA segments, whose sequences are known only to us.
SigNature DNA Encapsulation
Our patented encapsulation system allows us to apply a protective
coating to encrypted DNA chimers, creating a SigNature DNA Marker that is
resistant to heat, organic solvents, chemicals and UV radiation, and so can be
identified for hundreds of years after being embedded directly, or into media
applied or attached to the item to be marked.
SigNature DNA Embedment
Our patented embedment system allows us to incorporate our SigNature
DNA Markers into a broad variety of media, such as petroleum and petroleum
derivatives, inks, dyes, laminates, glues, threads, and textiles.
SigNature DNA Authentication
Our patent pending forensic level authentication methods allow us to
unlock the encrypted DNA chimers by using PCR techniques and proprietary primers
that were specifically designed by us to detect the DNA sequences we encrypted
and embedded into the product or other item. Detection of the DNA chimers unique
to a particular item or series of items allows us to authenticate its or their
origin.
Products And Services
Our SigNature Program consists of three steps: creating and
encapsulating a specific encrypted DNA segment, applying it to a product or
other item, and detecting the presence or absence of the specific segment. We
plan for the first two steps to be controlled exclusively by Applied DNA and its
certified agents to ensure the security of SigNature DNA Markers. Once applied,
the presence of any of our SigNature DNA Markers can be detected by us or a
customer in a simple spot test, or a sample taken from the
product or other item can be analyzed
8
forensically to obtain definitive proof of the presence or absence of a specific
type of SigNature DNA Marker (e.g. one designed to mark a particular product).
Creating a Customer or Product-Specific SigNature DNA Marker
Our SigNature DNA Markers are botanical DNA segments custom
manufactured by us to identify a particular class of or individual products or
items. During this manufacturing process, we scramble and encrypt a naturally
occurring botanical DNA code segment or segments, and then encapsulate the
resulting DNA segment utilizing our proprietary SigNature DNA Encapsulation
system. We then record and store the sequence of the DNA segment in a secure
database in order that we can later detect it.
Embedding the SigNature DNA Marker
Our SigNature DNA Markers may be directly embedded in products or other
items, or otherwise attached by embedding them into media that is incorporated
in or attached to the product or item. For example, we can embed SigNature DNA
Markers directly in paper, metal, plastics, stone, ceramic, and other materials.
Media in which we can embed SigNature DNA Markers include:
SigNature DNA Ink: Our SigNature DNA Ink can be applied directly or on
a label that is then affixed to the product or item. SigNature DNA Ink is highly
durable and degradation resistant. SigNature DNA Ink can be visible (colored) or
invisible. This makes it possible to mark products with a visible, or overt,
and/or invisible, or covert, SigNature DNA Marker on any tangible surface such
as a label. The location of covert Signature DNA Markers on a product are
recorded and stored in a secure database. Similar media like varnish and paints
can also be used instead of ink. Examples of products and other items onto which
SigNature DNA Ink can be applied include:
o Artwork and Collectibles: paintings, artifacts, antiques,
stamps, coins, documents, collectibles and memorabilia;
o Corporate documents: confidential, date and time dependent
documents or security clearance documents;
o Financial services: currency, stock certificates, checks,
bonds and debentures;
o Retail: event tickets, VIP tickets, clothing labels,
luxury products;
o Pharmaceuticals: tablet, capsule and pill surface printing;
and,
o Miscellaneous: lottery tickets, inspection stamps, custom
seals, passports and visas, etc.
SigNature DNA Thread: Our SigNature DNA Thread, which can consist of
any fabric from cotton to wool, is embedded with SigNature DNA Markers and can
be used to mark and authenticate products and other items incorporating
textiles. For example, SigNature DNA Thread can be incorporated in a finished
garment, bag, purse, shoe or other product or item. SigNature DNA Thread can
help textile vendors, clothing and accessory manufacturers and governments
authenticate thread, yarn and fabric at any stage in the supply chain.
Other Security Devices: Our SigNature DNA Markers can also be embedded
onto printed barcodes, RFID tags, optical memory strips, holograms, tamper proof
labels and other security devices incorporated into products and other items for
various security-related purposes.
SigNature DNA Detection and Product Authentication
Level 1 "Spot Test" Detection: Our SigNature DNA Encryption Detector
pens, which are custom manufactured to identify our SigNature DNA Markers, allow
us or our customers to determine the presence or absence of these markers in
around one second when they have been embedded in a special overt DNA Ink. When
the SigNature DNA Encryption Detector is swiped over matching overt DNA Ink, the
color of the ink temporarily changes from blue to pink, indicating the presence
of the markers, and validating the product or other item. Though this detection
process cannot distinguish between different types of SigNature DNA Markers,
such as markers we have designed for one customer or product versus another, it
allows for instant sampling at any point in the supply chain.
Level 2 Forensic DNA Authentication: Our SigNature PCR Kits allow us or
our customers to use a sample taken from the product or other item to be
authenticated, and using our proprietary primers and PCR technology, determine
the sequences of DNA included in the sample, and conclude whether it includes a
specific SigNature DNA Marker. This more elaborate test generally requires about
30 minutes to complete. This authentication process provides absolute certainty
about the presence or absence of specific types of a SigNature DNA Marker.
9
Sales and Marketing
We have since inception only had sales of our products in Europe
through direct sales. As of January 16, 2007, we had 2 employees devoted to and
3 employees engaged in direct sales. We expect to hire additional sales
directors and/or consultants to assist us with sales and marketing efforts with
respect to our 6 target vertical markets.
Research and Development
From June 1, 2005 to September 20, 2005, we retained the Idaho National
Laboratory ("INL"), which is managed and operated by Battelle Energy Alliance
LLC for the Department of Energy, for the purpose of independently validating
our SigNature DNA Encryption, Encapsulation, Embedment and Authentication
technologies. Currently our research and development efforts are primarily
focused on the development of prototypes of new versions of our products using
our existing technologies for review by prospective customers, such as different
types of SigNature DNA Ink and SigNature DNA Thread. Nonetheless, we believe
that our development of new and enhanced technologies relating to our business
may be important to our future success, and we continue to examine whether
investments in the research and development of such technologies is merited.
Manufacturing
We have the capability to manufacture SigNature DNA Markers, covert DNA
Ink, and SigNature PCR Kits at our laboratories in Stony Brook. We rely upon
Biowell to manufacture our overt color-changing DNA Ink and our SigNature DNA
Encryption Detector pens.
Competition
The principal markets for our SigNature Program are intensely
competitive. We compete with many existing suppliers and new competitors
continue to enter the market. Many of our competitors, both in the United States
and elsewhere, are major pharmaceutical, chemical and biotechnology companies,
or have strategic alliances with such companies, and many of them have
substantially greater capital resources, marketing experience, research and
development staff, and facilities than we do. Any of these companies could
succeed in developing products that are more effective than the products that we
have or may develop and may be more successful than us in producing and
marketing their existing products. Some of our competitors that operate in the
anti-counterfeiting and fraud prevention markets include: Applied Optical
Technologies, Authentix, ChemTAG, Collectors Universe Inc., Collotype, Data Dot
Technology, Digimarc Corp., DNA Technologies, Inc., Informium AG, Inksure
Technologies, L-1 Identity Solutions, Manakoa, SmartWater Technology, Inc.,
SureTrace , Tracetag and Warnex.
Some examples of competing security products include:
o Fingerprint scanner: a system that scans fingerprints before
granting access to secure information or facilities;
o Voice recognition software: software that authenticates users
based on individual vocal patterns;
o Cornea scanner: a scanner that scan the iris of a user's eye
to compare with data in a computer database;
o Face scanner: a scanning system that use complex algorithms to
distinguish one face from another;
o Integrated circuit chip & magnetic strips: integrated circuit
chips that receive and, if authentic, send a correct electric
signal back to the reader, and magnetic strips that contain
information, both of which are common components of debit and
credit cards;
o Optically variable microstructures: these include holograms,
which display images in three dimensions and are generally
difficult to reproduce using advanced color photocopiers and
printing techniques, along with other devices with similar
features;
o Elemental Taggants and Fluorescence: elemental taggants are
various unique substances that can be used to mark products
and other items, are revealed by techniques such as x-ray
fluorescence; and,
o Radioactivity & Rare Molecules: radioactive substances or rare
molecules which are uncommon and readily detected.
We expect competition with our products and services to continue and
intensify in the future. We believe competition in our principal markets is
primarily driven by:
o product performance, features and liability;
o price;
o timing of product introductions;
10
o ability to develop, maintain and protect proprietary products
and technologies;
o sales and distribution capabilities;
o technical support and service;
o brand loyalty;
o applications support; and
o breadth of product line.
If a competitor develops superior technology or cost-effective
alternatives to our products, our business, financial condition and results of
operations could be significantly harmed.
PROPRIETARY RIGHTS
We believe that our 7 patents, 14 patents pending, 2 registered
trademarks, and 2 registered trademarks pending, which are described in the
table below, and our trademarks, trade secrets, copyrights and other
intellectual property rights are important assets for us.
Patents Issued:
Patent Name Patent No: Assignee of Record Dated Issued Jurisdiction
Nucleic Acid as Marker for Product 89108443 APDN (B.V.I.) Inc. March 17,2000 Taiwan
Anticounterfeiting and Identification
Method of using ribonucleic acid as 00107580.2 Rixflex Holdings February 2, 2005 China
product antifake mark and for verification Limited (2)
EppenLocker (A Leakage-Prevention 89204158 APDN (B.V.I.) Inc. March 10, 2000 Taiwan
Apparatus of Microcentrifuge)
Multiple Tube Structure for Multiple PCR 89210575 APDN (B.V.I.) Inc. June 20, 2000 Taiwan
in a Closed Container
A Device for Multiple Polymerase Chain 89111477 APDN (B.V.I.) Inc. June 12, 2000 Taiwan
Reactions In a Closed Container and a
Method of Using Thereof
Method for Mixing Nucleic Acid in Water 921221973 APDN (B.V.I.) Inc. August 11, 2003 Taiwan
Insoluble Media and Application Thereof
A Method of Utilizing Nucleic Acids as US 7,115,301 B2 Rixflex Holdings Limited October 3, 2006 United States
Markers for Product Anti-Counterfeit (2)
Labeling and Verification
Patents Pending:
Patent Name Application No. Filed in the Name of Dated Filed Jurisdiction
Method for Mixing Nucleic Acid in Water 2002-294229 Biowell (1) August 31, 2002 Japan
Insoluble Media and Application Thereof
03007023.9 Rixflex Holdings March 27, 2003 EU
Limited (2)
10/645,602 Rixflex Holdings August 22, 2003 United States
Limited (2)
Method of dissolving nucleic acid in 03155949.2 Rixflex Holdings August 27, 2003 China
water insoluble medium and its application Limited (2)
Novel nucleic acid based steganography 10/909,431 Rixflex Holdings August 3, 2004 United States
system and application thereof Limited (2)
Patent Name
11
thereof
Cryptic method of secret information 921221490 APDN (B.V.I.) Inc. August 6, 2003 Taiwan
carried in DNA molecule and it
deencryption method
A novel nucleic acid based steganography 03127517.6 Biowell (1) August 6, 2003 China
system and application thereof
61387/2004 Rixflex Holdings August 4, 2004 Korea
Limited (2)
A novel method for coding based on
nucleic acids and utility thereof 04018374.1 Rixflex Holdings August 3, 2004 EU
Limited (2)
1-2004-00742 Rixflex Holdings August 4, 2004 Vietnam
Limited (2)
A novel nucleic acid based steganography
system and applications thereof 092819 Rixflex Holdings August 4, 2004 Thailand
Limited (2)
PI20043145 Biowell (1) August 4, 2004 Malaysia
2004-225987 Rixflex Holdings August 2, 2004 Japan
Limited (2)
P-00200400374 Rixflex Holdings August 4, 2004 Indonesia
Limited (2)
764/CHE/2004 Rixflex Holdings August 4, 2004 India
Limited (2)
Method for classifying group ID of 92119302 APDN (B.V.I.) Inc. July 15, 2003 Taiwan
shoppers and transferring the shopping
discount to group development funds
development
Method For transferring feedback 03150071.4 Rixflex Holdings July 31, 2003 China
foundation capable of identifying Limited (2)
multiple objects
Method of Classifying Group ID of PI20042889 Rixflex Holdings August 4, 2004 Malaysia
Shoppers and Transferring the Shopping Limited (2)
Discount to Group Development Funds
092217 Rixflex Holdings July 12, 2004 Thailand
Limited (2)
2004-200730 Biowell (1) July 7, 2004 Japan
System and Method for authenticating 11/437,265 APDN (B.V.I.) Inc. May 19, 2005 US
multiple components associated with a
particular product. PCT/US2006/019660 APDN (B.V.I.) Inc. May 19, 2006 PCT
12
System and Method for Marking Textiles 10/825,968 APDN (B.V.I.) Inc. April 15, 2004 US
with Nucleic Acid
Method for Transferring 92119302 APDN (B.V.I.) Inc. July 15, 2003 Taiwan
Feedback-Foundation capable of
identifying multiple objects 03150071.4 Rixflex July 31, 2003 China
Holdings Limited(2)
(1) All patents in the name of and patent applications filed in the
name of Biowell have been assigned to our wholly-owned subsidiary APDN
(B.V.I.) Inc., and we are making efforts to ensure APDN (B.V.I.) is the
assignee or filer of record, as the case may be.
(2) All patents in the name of and patent applications filed in the
name of Rixflex Holdings Limited, which merged into APDN (B.V.I.) Inc.
on July 12, 2005, have been assigned to APDN (B.V.I.) Inc., and we are
making efforts to ensure APDN (B.V.I.) is the assignee or filer of
record, as the case may be.
Trademarks Issued:
Trademark Registration No: Registered Owner Registration Date Jurisdiction
APPLIED DNA and model molecule design 846354 Applied DNA Sciences August 13, 2004 Mexico
Inc.
APPLIED DNA and model molecule design 846711 Applied DNA Sciences Inc. August 16, 2004 Mexico
APPLIED DNA and model molecule design 3392818 Applied DNA Sciences Inc. March 21, 2005 European
Community
BIOWELL and Design 3,155,578 Rixflex Holdings October 17, 2006 United States
Limited (1)
BIOWELL and Design 2,675,941 Rixflex Holdings January 21, 2003 United States
Limited (1)
BIOWELL and Design 2,611,291 Rixflex Holdings August 27, 2002 United States
Limited (1)
BIOWELL and Design 4101159010000 Biowell (2) May 4, 2005 South Korea
BIOWELL and Design 4,819,252 Rixflex Holdings November 19, 2004 Japan
Limited (1)
(1) All registered trademarks in the name of Rixflex Holdings Limited
have been assigned to APDN (B.V.I.) Inc., and we are making efforts to
ensure APDN (B.V.I.) Inc. is the registered owner.
(2) All registered trademarks in the name of Biowell have been assigned
to APDN (B.V.I.) Inc., and we are making efforts to ensure APDN
(B.V.I.) Inc. is the registered owner.
Trademarks Pending:
Trademark Application No: Owner Filing Date Jurisdiction
APPLIED DNA 76/549,861 APDN (B.V.I.) Inc. September 22, 2003 United States
SIGNATURE 78/871,967 APDN (B.V.I.) Inc. April 28, 2006 United States
However, there are events that are outside of our control that pose a
threat to our intellectual property rights as well as to our
products and services. For example, effective intellectual property
protection may not be available
13
in every country in which our products and services are distributed.
The efforts we have taken to protect our proprietary rights may not be
sufficient or effective. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete. Protecting our
intellectual property rights is costly and time consuming. Any increase in the
unauthorized use of our intellectual property could make it more expensive to do
business and harm our operating results. Although we seek to obtain patent
protection for our innovations, it is possible we may not be able to protect
some of these innovations. Given the costs of obtaining patent protection, we
may choose not to protect certain innovations that later turn out to be
important. There is always the possibility that the scope of the protection
gained from one of our issued patents will be insufficient or deemed invalid or
unenforceable. We also seek to maintain certain intellectual property as trade
secrets. This secrecy could be compromised by third parties, or intentionally or
accidentally by our employees, which would cause us to lose the competitive
advantage resulting from these trade secrets.
Additionally, litigation regarding patents and other intellectual
property rights is extensive in the biotechnology industry. In the event of an
intellectual property dispute, we may be forced to litigate. This litigation
could involve proceedings instituted by the U.S. Patent and Trademark Office or
the International Trade Commission, as well as proceedings brought directly by
affected third parties. Intellectual property litigation can be extremely
expensive, and these expenses, as well as the consequences should we not
prevail, could seriously harm our business. If a third party claims an
intellectual property right to technology we use, we might need to discontinue
an important product or product line, alter our products and processes, pay
license fees or cease our affected business activities. Although we might under
these circumstances attempt to obtain a license to this intellectual property,
we may not be able to do so on favorable terms, or at all.
Strategic Alliances
Purchase of Intellectual Property and License Agreement with Biowell
In the first half of 2005, Biowell transferred substantially all of its
intellectual property to Rixflex Holdings Limited, a British Virgin Islands
company, and on July 12, 2005, Rixflex Holdings Limited merged with and into our
wholly-owned subsidiary APDN (B.V.I.) Inc., a British Virgin Islands company.
The shareholders of Rixflex Holdings Limited received 36 million shares of our
common stock in consideration of this merger. In connection with the acquisition
of this Biowell intellectual property, we terminated the license agreement that
we had previously entered into with Biowell in October 2002, under which we had
the exclusive right to sell, market, and sub-license certain Biowell
intellectual property within the United States, the European Union, Canada,
Mexico, Colombia, Saudi Arabia and the United Arab Emirates. Also in connection
with this acquisition, on July 12, 2005, the Company entered into a license
agreement with Biowell, whereby the Company granted Biowell an exclusive license
to sell, market, and sub-license certain of the Company's products in most Asian
countries and certain Middle Eastern countries. The license is for an initial
term ending December 31, 2010, and if Biowell meets its performance goals, the
license agreement will extend for an additional five year term. If Biowell
sub-licenses these products within these countries, Biowell is required to pay
the Company 50% of all fees, payments or consideration or any kind received in
connection with the grant of the sublicense. Biowell is also required to pay a
royalty of 10% on all net sales of these products and is required to meet
certain minimum annual net sales in each of the various countries covered by the
license. We have the right to terminate the exclusivity of the license with
respect to any particular country if Biowell fails to meet its annual net sales
requirements for that country during the first year after the date of the
agreement, and to terminate the license altogether with respect to any
particular country if Biowell fails to meet its annual net sales requirements
for that country for two consecutive years. Although Biowell has not met its
annual net sales requirements for any particular country to date, we have not
yet terminated the exclusivity of the license with respect to any country.
Cumulative royalties earned from this agreement for the period from July 2005
through September 30, 2006 totaled $33,722. Until the license agreement is
terminated, it also provides us ownership of all improvements, modifications or
alterations made by Biowell to the licensed products, the technologies
underlying them, or the mode of using them, that are related to our business,
and provides Biowell an exclusive license to any such improvements,
modifications or alterations made by us.
Sub-License Agreement with G.A. Corporate Finance
In July of 2003, we, Biowell and G. A. Corporate Finance Ltd. entered
into a Sub-License Agreement for the United Kingdom in exchange for $3 million.
G. A. Corporate Finance Ltd. paid $25,000 upon its execution of the Agreement,
and the remaining $2.975 million in the form of its interest bearing promissory
note, payable in twenty (20) consecutive quarterly installments of principal
and interest in the amount equal to the lesser of $185,937.50 or 35% of gross
revenues for that quarter it generated from sales of certain of our products in
the United Kingdom, due on the final day of each quarter. Due in part to our
lack of marketable products during the first two years after the date of this
agreement, G.A. Corporate Finance Ltd. has not generated any revenue from
14
sales of our products in the United Kingdom, and so has never made any payments
to us under its note. We are currently in negotiations with G.A. Corporate
Finance Ltd. to either amend or terminate this agreement.
Employees
Presently, we employ a total of 7 full-time employees and 2 part-time
employees, including 2 in management, 3 in operations, 3 in sales and marketing
and 1 in investor relations. None of our employees are covered by collective
bargaining agreements, and we believe our relations with our employees are
favorable.
ITEM 2. DESCRIPTION OF PROPERTY.
We maintain our principal office at 25 Health Sciences Drive, Suite
113, Stony Brook, New York 11790. We moved our principal office to the Long
Island High Technology Incubator, which is located on the campus of Stony Brook
University, in December 2005. We believe that our current office space and
facilities are sufficient to meet our present needs and do not anticipate any
difficulty securing alternative or additional space, as needed, on terms
acceptable to us.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
described below, we are currently not aware of any such legal proceedings that
we believe will have, individually or in the aggregate, a material adverse
affect on our business, financial condition or operating results.
Paul Reep v. Applied DNA Sciences, Inc., Case No.: BC345702
Plaintiff Paul Reep, a former employee, commenced this action against
us on January 10, 2006. Mr. Reep asserts eight causes of action for breach of
contract, breach of an oral agreement, negligent misrepresentation, interference
with prospective business advantages, defamation, fraud, accounting and
constructive trust, unjust enrichment. The relief sought includes declaratory
relief, unspecified compensatory damages, unpaid salary, unspecified penalties
under the California Labor Code, interest, and attorneys' fees. We have
successfully moved the court to indefinitely stay all proceedings in this matter
in light of a forum selection clause designating Nevada state courts as the
proper forum. Attorneys for Reep have indicated that they intend to file suit in
Nevada, but to date have not done so. We intend to vigorously defend any case
brought against us by Reep.
Applied DNA Sciences, Inc. v. Paul Reep, Adrian Butash, John Barnett, Chanty
Cheang, Jaime Cardona, and Angela Wiggins, Case No. CV06-2027 RGK
We filed this action against the defendants, Paul Reep, Adrian Butash,
John Barnett, Chanty Cheang, Jaime Cardona, and Angela Wiggins on April 4, 2006,
in the United States District Court for the Central District of California. In
this matter we have asked the court to make a judicial determination that an
agreement amending the employment contracts of all named defendants, which we
did not authorize and which is the basis of the Reep and Butash litigation
against Applied DNA, is invalid and unenforceable. This matter is in the early
stages of discovery. Trial has been set for April 3, 2007.
Barnett, et al. v. Applied DNA Sciences, et al., Case No.: BC 350904
Plaintiffs John D. Barnett, Jr., Adrian Butash, Jaime A. Cardona, and
Chanty Cheang, our former employees, filed suit against us, Applied DNA
Operations Management, Inc., APDN (B.V.I.), Inc., Peter Brocklesby, James A.
Hayward, and Jun-Jei Sheu in Los Angeles County Superior Court on April 17,
2006. The complaint alleges causes of action for breach of written contract,
breach of oral contract, fraud, violations of the California Labor Code, and
wrongful termination. The complaint seeks $159,000 (trebled to $477,000) in
alleged unpaid salary, $546,000 in severance pay, other unspecified compensatory
and consequential damages, unspecified punitive damages, attorneys' fees and
costs, and interest. With the exception of Peter Brocklesby, all defendants,
including us, have answered the complaint. The trial date has been set for May
21, 2007.
In re the Unemployment Insurance Claims of Adrian Butash, John Barnett, and Paul
Reep, California Unemployment Insurance Appeals Board Case Nos. 1809031,
1801356, and 1842399, respectively.
We are in the process of appealing an administrative law judge's
determination John Barnett, Paul Reep, and Adrian Butash are entitled to
unemployment benefits following their separation from employment with us and
that our unemployment insurance account will be charged. We will appeal on the
determination on the grounds that the claimants were terminated for reasons
other than lack of work. We have filed a notice of appeal, and no trial date has
yet been set.
15
Douglas A. Falkner v. Applied DNA Sciences, Inc./N.C. Industrial Commission File
No. 585698
Plaintiff Douglas Falkner ("Falkner") filed a worker's compensation
claim in North Carolina for an alleged work-related neck injury that he alleges
occurred on January 14, 2004. Falkner worked as Business Development and
Operations Manager at our sole East Coast office at the time of the alleged
injury. Plaintiff Falkner was the only employee employed by us in North Carolina
at the time of the alleged injury and we have employed no other employees in
North Carolina at any other time. The claim has been denied and is being
defended on several grounds, including the lack of both personal and subject
matter jurisdiction. Specifically, we contend that we did not employ the
requisite minimum number of employees in North Carolina at the time of the
alleged injury and that the company is therefore not subject to the North
Carolina Workers' Compensation Act. The claim was originally set for hearing in
January 2007, but was continued to allow the parties to engage in further
discovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
Our Common Stock is traded over-the-counter on The Over The Counter
Bulletin Board (the "OTC Bulletin Board") maintained by the National Association
of Securities Dealers under the symbol "APDN." There is no certainty that the
Common Stock will continue to be quoted or that any liquidity exists for our
shareholders.
The following table sets forth the quarterly quotes of high and low
prices for our Common Stock on the OTC Bulletin Board during the fiscal years
ended September 30, 2005 and September 30, 2006. In February of 2003, we changed
our year end to September 30. We changed our fiscal year end in connection with
a reverse merger we entered into in December 2002, in which the acquirer for
accounting purposes had a fiscal year end of September 30. For ease of fiscal
reporting, we adopted the same fiscal year end.
Fiscal 2006 Fiscal 2005
============= ============
High Low High Low
============= =========== ============ ===========
First Quarter $0.58 $0.16 $2.39 $0.42
Second Quarter $0.37 $0.15 $1.83 $0.78
Third Quarter $0.27 $0.10 $1.01 $0.58
Fourth Quarter $0.17 $0.07 $0.74 $0.48
Holders
As of December 29, 2006, we had approximately 1,309 holders of our
common stock. The number of record holders was determined from the records of
our transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock is American
Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219.
Dividends
We have never declared or paid any cash dividends on our common stock.
We do not anticipate paying any cash dividends to stockholders in the
foreseeable future. In addition, any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements, and such
other factors as the Board of Directors deem relevant.
Recent Sales of Unregistered Securities
In October 2005, We issued 400,000 shares of common stock for services
rendered. We valued the shares issued at $0.50 per share for a total of
$200,000, which represents the fair value of the services received which did not
differ materially from value of the services received. This issuance is
considered exempt under Regulation D of the Securities Act of 1933 and Rule 506
promulgated thereunder.
On July 10, 2006, we issued 2,400,000 shares of common stock in
exchange for services rendered. We valued the shares issued at $0.20 per share
for a total of $480,000, which did not differ materially from the value of the
stock issued and represented the fair value of the services received. This
issuance is considered exempt under Regulation D of the Securities Act of 1933
and Rule 506 promulgated thereunder.
16
On December 12, 2006 we issued 180,000 shares of common stock in
exchange for our promissory 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 Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion should be read in conjunction with our
Consolidated Financial Statements and Notes thereto, included elsewhere within
this report. The Annual Report on Form 10-KSB contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including statements using terminology such as "can", "may",
"believe", "designated to", "will", "expect", "plan", "anticipate", "estimate",
"potential" or "continue", or the negative thereof or other comparable
terminology regarding beliefs, plans, expectations or intentions regarding the
future. You should read statements that contain these words carefully because
they:
o discuss our future expectations;
o contain projections of our future results of operations or of
our financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
forward looking statements involve risks and uncertainties and our actual
results and the timing of certain events could differ materially from those
discussed in forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors," "Business" and elsewhere in this
prospectus. All forward-looking statements and risk factors included in this
document are made as of the date hereof, based on information available to us as
of the date thereof, and we assume no obligations to update any forward-looking
statement or risk factor, unless we are required to do so by law.
Introduction
We provide botanical DNA encryption, embedment and authentication
solutions that can help protect companies, governments and consumers from
counterfeiting, fraud, piracy, product diversion, identity theft, and
unauthorized intrusion into physical locations and databases. Our SigNature
Program provides a secure, accurate and cost-effective means for customers to
incorporate our SigNature DNA Markers in, and then quickly and reliably
authenticate and identify, a broad range of items such as artwork and
collectibles, fine wine, consumer products, digital media, financial
instruments, identity cards and other official documents. Having the ability to
reliably authenticate and identify counterfeit versions of such items enables
companies and governments to detect, deter, interdict and prosecute
counterfeiting enterprises and individuals.
Our SigNature Program enables our potential clients to
cost-effectively:
o assure manufacturers, suppliers, distributors, retailers and
end-users that their products are authentic and can be
forensically authenticated;
o integrate our SigNature DNA Markers with existing security
solutions such as barcodes, radio frequency identification
(RFID) tags, holograms, microchips and other securities
measures; and
o add value to the "bottom-line" by helping to diminish product
diversion and counterfeiting.
Counterfeit and diverted products continue to pose a significant and
growing problem with consumer packaged goods, especially for prestige and
established brands worldwide. Piracy, identity theft and forged documents and
items are also highly prevalent in vertical markets such as digital media, fine
art, luxury goods, and alcoholic beverages. Key aspects of our strategy include:
o continuing to improve and customize our solution to meet our
potential customers' needs;
o continuing to develop and enhance our existing DNA marker
authentication technologies;
o expanding our customer base both domestically and abroad by
targeting high volume markets; and
o augmenting our competitive position through strategic
acquisitions and alliances.
Plan of Operations
General
We expect to generate revenues principally from sales of our SigNature
Program. We are currently attempting to develop business in six target markets:
art and collectibles, fine wine, consumer products, digital recording media,
pharmaceuticals, and homeland security driven programs. We intend to pursue both
domestic and international sales opportunities in each of these vertical
markets.
We believe that our existing capital resources will enable us to fund
our operations until approximately April 2007. We believe we may be required to
seek additional capital to sustain or expand our prototype and sample
17
manufacturing, and sales and marketing activities, and to otherwise continue our
business operations beyond that date. We have no commitments for any future
funding, and may not be able to obtain additional financing or grants on terms
acceptable to us, if at all, in the future. If we are unable to obtain
additional capital this would restrict our ability to grow and may require us to
curtail or discontinue our business operations. Additionally, while a reduction
in our business operations may prolong our ability to operate, that reduction
would harm our ability to implement our business strategy. If we can obtain any
equity financing, it may involve substantial dilution to our then existing
shareholders.
Product Research and Development
We anticipate spending approximately $200,000 for product research and
development activities during the next twelve (12) months.
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the sale of any material property, plant or
equipment during the next 12 months. We do anticipate spending approximately
$100,000 on the acquisition of leasehold improvements during the next 12 months.
We believe our current leased space is adequate to manage our growth, if any,
over the next 2 to 3 years.
Number of Employees
From our inception through the period ended September 30, 2006, we have
principally relied on the services of outside consultants for services. We
currently have seven employees and two part-time employees. Specifically, the
company expects to increase its staffing dedicated to sales, product
prototyping, manufacturing of DNA markers and forensic authentication services.
Expenses related to travel, marketing, salaries, and general overhead will be
increased as necessary to support our growth in revenue. In order for us to
attract and retain quality personnel, we anticipate we will have to offer
competitive salaries to future employees. We anticipate that it may become
desirable to add additional full and or part time employees to discharge certain
critical functions during the next 12 months. This projected increase in
personnel is dependent upon our ability to generate revenues and obtain sources
of financing. There is no guarantee that we will be successful in raising the
funds required or generating revenues sufficient to fund the projected increase
in the number of employees. As we continue to expand, we will incur additional
costs for personnel.
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends
that all companies include a discussion of critical accounting policies used in
the preparation of their financial statements. While all these significant
accounting policies impact our financial condition and results of operations, we
view certain of these policies as critical. Policies determined to be critical
are those policies that have the most significant impact on our consolidated
financial statements and require management to use a greater degree of judgment
and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely
that applying any other reasonable judgments or estimate methodologies would
cause a material effect on our consolidated results of operations, financial
position or liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
o Equity issued with registration rights
o Warrant liability
o Fair value of intangible assets
Equity Issued with Registration Rights
In connection with placement of our convertible notes and warrants to
certain investors during the fiscal quarters ended December 31, 2003, December
31, 2004, March 31, 2005, March 31, 2006 and June 30, 2006, we granted certain
registration rights that provide for liquidated damages in the event of failure
to timely perform under the agreements. Although these notes and warrants do not
provide for net-cash settlement, the existence of liquidated damages provides
for a defacto net-cash settlement option. Therefore, the common stock underlying
the notes and warrants subject to such liquidated damages does not meet the
tests required for shareholders' equity classification, and accordingly has been
reflected between liabilities and equity in the accompanying consolidated
balance sheet until such time as the conditions are eliminated.
Warrant Liability
18
In connection with the placement of certain debt instruments, as
described above, we issued freestanding warrants. Although the terms of the
warrants do not provide for net-cash settlement, in certain circumstances,
physical or net-share settlement is deemed to not be within our control and,
accordingly, we are required to account for these freestanding warrants as a
derivative financial instrument liability, rather than as shareholders' equity.
The warrant liability is initially measured and recorded at its fair
value, and is then re-valued at each reporting date, with changes in the fair
value reported as non-cash charges or credits to earnings. For warrant-based
derivative financial instruments, the Black-Scholes option pricing model is used
to value the warrant liability.
The classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is re-assessed at
the end of each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether or
not net-cash settlement of the derivative instrument could be required within 12
months of the balance sheet date.
We do not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.
Fair Value of Intangible Assets
We have adopted SFAS No. 142, Goodwill and Other Intangible Assets,
whereby we periodically test our intangible assets for impairment. On an annual
basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations. On July 12, 2005, we acquired
certain intellectual properties from Biowell through an Asset Purchase Agreement
in exchange for 36 million shares of our restricted common stock having an
aggregate fair value at the date of issuance of $24.12 million. The value of the
acquired intangible assets was $9,430,900, with the balance of the purchase
price, or $14,689,100, charged to operations as a cost of the transaction.
During the year ended September 30, 2006, the Company management
preformed an evaluation of its intangible assets (intellectual property) for
purposes of determining the implied fair value of the assets at September 30,
2006. The test indicated that the recorded remaining book value of its
intellectual property exceeded its fair value, as determined by discounted cash
flows. As a result, upon completion of the assessment, management recorded a
non-cash impairment charge of $5,655,011, net of tax, or $0.05 per share during
the year ended September 30, 2006 to reduce the carrying value of the patents to
$2,091,800. Considerable management judgment is necessary to estimate the fair
value. Accordingly, actual results could vary significantly from management's
estimates.
The identifiable intangible assets acquired and their carrying value at
September 30, 2006 are:
Weighted
Average
Gross Accumulated Amortization
Amortization
Carrying and Residual Period
Impairment
Amount Charge Net Value (Years)
============= ============== ============= =========== ==============
Amortizable
Intangible
Assets:
Intellectual
Property $9,430,900 $7,339,100 $2,091,800 -- 7
Patents 34,237 18,574 15,663 -- 5
Total
Amortized
Identifiable
Intangible $9,465,137 $7,357,674 $2,107,463 -- 6.99
============= ============== =============
--
19
Total amortization expense charged to operations for the year ended
September 30, 2006 and 2005 were $1,354,101 and $346,825.
Estimated amortization expense as of September 30, 2006 are as follows:
2007 $ 370,643
2008 370,643
2009 365,753
2010 363,792
2011 and after 636,632
Total $ 2,107,463
Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenue and expenses during the
reporting period. The most significant estimates relate to the estimation of
percentage of completion on uncompleted contracts, valuation of inventory,
allowance for doubtful accounts and estimated life of customer lists. Actual
results could differ from those estimates.
Restatement of Consolidated Financial Statements
The Company has restated its consolidated financial statements as of
September 30, 2005 and for the year ended September 30, 2005 and the quarterly
unaudited data for the first three quarters of 2006 and all of 2005.
These restatements and resulting revisions relate to the accounting
treatment for and disclosing the issuance by the Company of options and warrants
to acquire the Company's common stock. In addition the Company corrected certain
errors in accounting for the exchange of its common stock for previously
incurred debt with a Company director. These errors were discovered in
connection with comments raised by the SEC in their review and comment on this
Registration Statement.
In this regard, you should rely on the restated financial results for
the year and each of the quarters in the years 2005 and the first, second and
third quarters of 2006 and, as the Company previously reported in its Current
Report on Form 8-K, dated May 16, 2006, you should not rely on the Company's
previously issued consolidated financial statements and other financial
information for these reporting periods.
As a result, the accompanying consolidated financial statements for the
year ended September 30, 2005 and the quarterly periods ended December 31, 2005,
March 31, 2006 and June 30, 2006 have been restated from the amounts previously
reported to correct the accounting for financial derivatives. While the effect
of the corrections to the financial statements is fully described in
accompanying notes to the restated consolidated financial statements, the
following is a summary of the net effect of the errors on these consolidated
financial statements:
o the Company's net loss for the year ended September 30, 2005
increased by $14,499,139 from $52,610,380 to $67,109,519;
o the Company's current liabilities as of September 30, 2005
increased by $384,651 from $2,595,897 to $2,980,548; and,
o the Company's other liabilities, representing warranty
liabilities, as of September 30, 2005 increased by $13,673,574
from $0 to $13,673,574.
Revenues
From our inception on September 16, 2002, we did not generate material
revenues from operations. We have, however, generated $0.019 million in sales of
our products for the year ended September 30, 2006. Our cost of sales for the
same period was $0.016 million netting us a gross profit of $0.003 million. All
of our revenues from sales of our products in the year ended September 30, 2006
are attributable to Dr. Suwelack Skin & Health Care AG ("Dr. Suwelack"). James
A. Hayward, a director and our Chief Executive Officer, serves on Dr. Suwelack's
board of directors. BioCogent, whose President and Chief Executive Officer and
sole stockholder is Dr. Hayward, provides consulting services to Dr. Suwelack.
Costs and Expenses
Selling, General and Administrative
20
Selling, general and administrative expenses for the twelve months
ended September 30, 2006 compared to 2005 decreased 496% to $8.5 million from
$50.7 million in the prior period. See a discussion of non cash items below in
the Liquidity & Capital Resources section. Included within the selling, general
and administrative expenses for the year ended September 30, 2005 were expensed
intellectual property of $14.7 million and costs relating to fund raising and
consultant costs of $4.7 million. Additionally, for the year ended September 30,
2006, we had a reduction in fair value of warrants issued to non employees of
$5.8 million as compared to the year ended September 30, 2005 and a reduction in
common stock issued in exchange for services rendered of $16.8 million as
compared to the same period last year.
Research and Development
Research and development expenses decreased $485,682 for the twelve
months ended September 30, 2006 compared to 2005 from $0.6 million to $0.2
primarily due to deceased independent testing costs.
Depreciation and Amortization
In the twelve months ended September 30, 2006, depreciation and
amortization increased $1,014,033 for the period compared to 2005 from $356,266
to $1,370,299. The increase is attributable to entire year amortization of our
intellectual property acquired in 2005.
Impairment of intangible asset(s)
During the year ended September 30, 2006, we performed an evaluation of
our intangible assets (intellectual property) and determined that the implied
fair carrying value exceeded its fair value. Accordingly, we recorded a non cash
impairment charge to operations of $5.7 million in the year ended September 30,
2006 as compared to $0 in the prior year.
Total Operating Expenses
Total operating expenses decreased to $15.7 million from $51.7 million,
or a decrease of $36 million as a result of the combination of factors listed
above.
Other Income/Loss
Net loss for the twelve months ended September 30, 2006 decreased to a
loss of $2.4 million from a loss of $67.1 million in the prior period as a
result of the combination of factors described above.
Interest Expenses
Interest expense, for the twelve months ended September 30, 2006
decreased to $3.6 million from $32.1 million in the same period of 2005, an
decrease of $28.5 million. For the year ended September 30, 2005, we incurred a
non cash interest expense relating to the fair value of warrants issued in
conjunction with our financing of $23.1 million.
Net Income (loss)
Net loss for the twelve months ended September 30, 2006 decreased to a
loss of $2.4 million from a loss of $6.7 million in the prior period as a result
of the combination of factors described above.
Liquidity and Capital Resources
Our liquidity needs consist of our working capital requirements,
indebtedness payments and research and development expenditure funding.
Historically, we have financed our operations through the sale of equity and
convertible debt as well as borrowings from various credit sources.
As of September 30, 2006, we had a working capital deficit of $4.6
million. For the year ended September 30, 2006, we generated a net cash flow
deficit from operating activities of $2.8 million consisting primarily of year
to date losses of $2.4 million. Non cash adjustments included $2.0 million in
depreciation and amortization charges, $5.7 million in impairment charges, $3.0
million for options, warrants and common stock issued in exchange for services,
$2.3 million in financing costs attributable to issuance of warrants and net
change in net increase in current liabilities of $2.5 million net with a non
cash adjustment of $16.8 million for income attributable to re-pricing of
warrants and debt derivatives. Cash used in investing activities totaled $0.2
million, which was utilized for acquisition of property and equipment. Cash
provided by financing activities for the year ended September 30, 2006 totaled
$4.2 million consisting of proceeds from issuance of convertible debt.
We expect capital expenditures to be less than $500,000 in fiscal 2007.
Our primary investments will be in laboratory equipment to support prototyping
and our authentication services.
21
Exploitation of potential revenue sources will be financed primarily
through the sale of securities and convertible debt, exercise of outstanding
warrants, issuance of notes payable and other debt or a combination thereof,
depending upon the transaction size, market conditions and other factors.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required within the next 3 months in
order to meet our current and projected cash flow deficits from operations and
development. We have sufficient funds to conduct our operations for several
months, but not for 3 months or more. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.
By adjusting our operations and development to the level of
capitalization, we believe we have sufficient capital resources to meet
projected cash flow deficits. However, if during that period or thereafter, we
are not successful in generating sufficient liquidity from operations or in
raising sufficient capital resources, on terms acceptable to us, this could have
a material adverse effect on our business, results of operations liquidity and
financial condition.
Our registered independent certified public accountants have stated in
their report dated January 5, 2007, that we have incurred operating losses in
the last two years, and that we are dependent upon management's ability to
develop profitable operations. These factors among others may raise substantial
doubt about our ability to continue as a going concern.
In fiscal 2005, we completed two private placements of convertible debt
and associated warrants. In November and December, 2004 we issued and sold
$1.465 million in aggregate principal amount of promissory notes, convertible at
$0.50 per share, and associated warrants to purchase up to 2,930,000 shares of
our common stock, exercisable at $0.75 per share for three years from their date
of issuance, to 13 investors (the "December 2004 Placement"). Each promissory
note was automatically convertible into shares of our common stock at a price of
$0.50 per share upon the closing of a subsequent private placement by us for at
least $1 million. In January and February of 2005, we issued and sold $7.371
million in aggregate principal amount of 10% Secured Convertible Promissory
Notes, convertible at $0.50 per share, and associated warrants to purchase up to
14,742,000 shares of our common stock, exercisable at $0.75 per share until five
years from their date of issuance, to 61 investors (the "January and February
2005 Placement"). Upon the closing of the January and February 2005 Offering,
the notes issued in the December 2004 Placement automatically converted into an
aggregate of 2,930,000 shares of our common stock, and upon the filing of this
registration statement on February 15, 2005, the notes issued in the January and
February 2005 Placement automatically converted into an aggregate of 14,742,000
shares of our common stock. Additional private placements in fiscal 2005 raised
$243,000. We also received proceeds of $60,000 from the exercise of a warrant to
purchase 100,000 shares of our common stock in fiscal 2005. The $9.135 million
in gross proceeds from these private placements and warrant exercises were used
to fund commissions, fees and expenses associated with the placements,
consultants and public reporting costs, salaries and wages, royalties, research
and development, facility costs as well as general working capital needs. Since
the conversion price of the notes issued in the November and December 2003,
December 2004, December 2005 and the January and February 2005 placements were
less than the market price of our common stock at the time these notes were
issued, we recognized a charge relating to the beneficial conversion feature of
these notes during the quarter in which they are issued.
In fiscal 2006, we completed three additional private placements of
convertible debt and associated warrants. On November 3, 2005, we issued and
sold a promissory note in the principal amount of $550,000 to Allied
International Fund, Inc. ("Allied"). Allied in turn financed a portion of the
making of this loan by borrowing $450,000 from certain persons, including
$100,000 from James A. Hayward, a director and our Chief Executive Officer. The
terms of the promissory note provided that we issue upon the funding of the note
warrants to purchase 5,000,000 shares of our common stock at an exercise price
of $0.50 per share to certain persons designated by Allied. On November 9, 2005,
we issued nine warrants to Allied and eight other persons to purchase an
aggregate of 5,500,000 shares of our common stock at an exercise price of $0.50
per share. These warrants included a warrant to purchase 1,100,000 shares that
was issued to James A. Hayward, a director and our Chief Executive Officer. We
paid $55,000 in cash to VC Arjent, Ltd. for its services as the placement agent
with respect to this placement. All principal and accrued but unpaid interest
under the promissory note was paid in full shortly after the closing of and from
the proceeds of a private placement we completed on March 8, 2006. On March 8,
2006, we issued and sold an aggregate of 30 units consisting of (i) a $50,000
principal amount secured convertible promissory note bearing interest at 10% per
annum and convertible at $0.50 per share, and (ii) a warrant to purchase 100,000
shares of our common stock at an exercise price of $0.50 per share, for
aggregate gross proceeds of $1.5 million. The units were sold pursuant to
subscription agreements by and between each of the purchasers and Applied DNA
Operations Management, Inc., a Nevada corporation and our wholly owned
subsidiary (our "Subsidiary"). The $2.050 million
22
in gross proceeds from these first two offerings were held by our Subsidiary for
our benefit and used to fund commissions, fees and expenses associated with the
placements, to repay the outstanding promissory note described above plus
accrued interest thereunder, to fund financing fees, consultants and public
reporting costs, salaries and wages, research and development, facility costs as
well as and general working capital needs. On March 24, 2006, we commenced an
offering (the "Offshore Offering") of up to 140 units, at a price of $50,000
per unit, for a maximum offering of $7 million for sale to "accredited
investors" who are not "U.S. persons." The units being sold as part of the
Offshore Offering consist of (i) a $50,000 principal amount secured convertible
promissory note, and (ii) a warrant to purchase 100,000 shares of our common
stock at a price of $0.50 per share. On May 2, 2006, we closed on the first
tranche of the Offshore Offering in which we sold 20 units for aggregate gross
proceeds of $1,000,000. We paid Arjent Limited $375,000 in commissions, fees
and expenses from these gross proceeds. On June 15, 2006, we completed the
second tranche of the Offshore Offering in which we sold 59 units for aggregate
gross proceeds of $2,950,000. We paid Arjent Limited $442,500 in commissions,
fees and expenses from these gross proceeds. Additionally, on July 10, 2006 we
issued 2.4 million shares of our common stock to Arjent Limited at $0.001 per
share as partial consideration for its services in connection with the Offshore
Offering.
On March 29, 2006 and April 13, 2006, we borrowed $200,000 in the
aggregate, at a rate of 7.5% per annum, from BioCogent whose President and Chief
Executive Officer and sole stockholder is James A. Hayward, one of our directors
and our Chief Executive Officer. These loans were due and payable upon the
earlier to occur of (1) the close of business on June 30, 2006, or (2) the
closing of the issuance and sale of our securities for gross proceeds of at
least $250,000. The proceeds from the loans were used for general corporate
purposes. The note issued on March 29, 2006 was repaid with interest in May,
2006. The note issued on April 13, 2006 was repaid with interest in June, 2006.
We presently do not have any available credit, bank financing or other
external sources of liquidity. Due to our brief history and historical operating
losses, our operations have not been a source of liquidity. We will need to
obtain additional capital in order to expand operations and become profitable.
We intend to pursue the building of a re-seller network outside the United
States, and if successful, the re-seller agreements would constitute a source of
liquidity and capital over time. In order to obtain capital, we may need to sell
additional shares of our common stock or borrow funds from private lenders.
There can be no assurance that we will be successful in obtaining additional
funding and execution of re-seller agreements outside the Unites States.
We will still need additional investments in order to continue
operations to cash flow break even. Additional investments are being sought, but
we cannot guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations.
Substantially all of the real property used in our business is leased
under operating lease agreements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Going Concern
The financial statements included in this filing have been prepared in
conformity with generally accepted accounting principles that contemplate our
continuance as a going concern. Our auditors, in their report dated January 5,
2007, have expressed substantial doubt about our ability to continue as going
concern. Our cash position may be inadequate to pay all of the costs associated
with the testing, production and marketing of our products. Management intends
to use borrowings and the sale of equity or convertible debt to mitigate the
effects of its cash position, however no assurance can be given that debt or
equity financing, if and when required will be available. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets and classification of liabilities that might
be necessary should we be unable to continue existence.
23
FACTORS THAT COULD AFFECT FUTURE RESULTS
Because of the following factors, as well as other variables affecting
our operating results and financial condition, past financial performance may
not be a reliable indicator of future performance, and historical trends should
not be used to anticipate results or trends in future periods.
Risks Relating to Our Business:
We have a Short Operating History, a Relatively New Business Model, and Have Not
Produced Significant Revenues. This Makes it Difficult to Evaluate Our Future
Prospects and Increases the Risk That We Will Not Be Successful.
We have a short operating history with our current business model,
which involves the marketing, sale and distribution of botanical DNA encryption,
embedment and authentication products and services, which are based on
technologies that we acquired in July 12, 2005 from, and some of which are
manufactured for us by, Biowell Technology, Inc. ("Biowell"). We first derived
revenue from this model in the second calendar quarter of 2006, which was
insignificant. Prior to the July 12, 2005 acquisition, our operations consisted
principally of providing marketing and business development services to Biowell.
As a result, we have a very limited operating history for you to evaluate in
assessing our future prospects. We are in the process of transitioning from a
developmental stage to an early-stage growth enterprise. Our operations since
inception have not produced significant revenues, and may not produce
significant revenues in the near term, or at all, which may harm our ability to
obtain additional financing and may require us to reduce or discontinue our
operations. If we create revenues in the future, prior to our introduction of
any new products, we will derive all such revenues from the sale of botanical
DNA encryption, encapsulation, embedment and authentication products and
services, which is an immature industry. You must consider our business and
prospects in light of the risks and difficulties we will encounter as an
early-stage company in a new and rapidly evolving industry. We may not be able
to successfully address these risks and difficulties, which could significantly
harm our business, operating results, and financial condition.
We Have a History Of Losses Which May Continue, and Which May Harm Our Ability
to Obtain Financing and Continue Our Operations.
We incurred net losses of $2.4 million for the year ended September 30,
2006 and $6.7 million for the year ended September 30, 2005. These net losses
have principally been the result of the various costs associated with our
selling, general and administrative expenses as we commenced operations,
acquired, developed and validated technologies, began marketing activities, and
our interest expense on notes and warrants we issued to obtain financing. Our
operations are subject to the risks and competition inherent in a company moving
from the development stage to a new growth enterprise. We may not generate
sufficient revenues from operations to achieve or sustain profitability on a
quarterly, annual or any other basis in the future. Our revenues and profits, if
any, will depend upon various factors, including whether our existing products
and services or any new products and services we develop will achieve any level
of market acceptance. If we continue to incur losses, our accumulated deficit
will continue to increase, which might significantly impair our ability to
obtain additional financing. As a result, our business, results of operations
and financial condition would be significantly harmed, and we may be required to
reduce or terminate our operations.
If We Are Unable to Obtain Additional Financing Our Business Operations Will be
Harmed or Discontinued, and If We Do Obtain Additional Financing Our
Shareholders May Suffer Substantial Dilution.
We believe that our existing capital resources will enable us to fund
our operations until approximately April, 2007. We believe we will be required
to seek additional capital to sustain or expand our prototype and sample
manufacturing, and sales and marketing activities, and to otherwise continue our
business operations beyond that date. We have no commitments for any future
funding, and may not be able to obtain additional financing or grants on terms
acceptable to us, if at all, in the future. If we are unable to obtain
additional capital this would restrict our ability to grow and may require us to
curtail or discontinue our business operations. Additionally, while a reduction
in our business operations may prolong our ability to operate, that reduction
would harm our ability to implement our business strategy. If we can obtain any
equity financing, it may involve substantial dilution to our then existing
shareholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated January 5, 2007, our independent auditors stated
that our financial statements for the year ended September 30, 2006 were
prepared assuming that we would continue as a going concern, and
that they have substantial doubt about our ability to continue
as a going concern. Our auditors' doubts are based on our
24
incurring net losses of $92.3 million during the period from September 16, 2002
(date of inception) to September 30, 2006. We continue to experience net
operating losses. Our ability to continue as a going concern is subject to our
ability to generate a profit and/or obtain necessary funding from outside
sources, including by the sale of our securities, obtaining loans from financial
institutions, or obtaining grants from various organizations or governments,
where possible. Our continued net operating losses and our auditors doubts
increase the difficulty of our meeting such goals and our efforts to continue as
a going concern may not prove successful.
If Our Existing Products and Services are Not Accepted by Potential Customers or
We Fail to Introduce New Products and Services, Our Business, Results of
Operations and Financial Condition Will be Harmed.
There has been limited or no market acceptance of our botanical DNA
encryption, encapsulation, embedment and authentication products and services to
date. Some of the factors that will affect whether we achieve market acceptance
of our solutions include:
o availability, quality and price relative to competitive
solutions;
o customers' opinions of the solutions' utility;
o ease of use;
o consistency with prior practices;
o scientists' opinions of the solutions' usefulness;
o citation of the solutions in published research; and
o general trends in anti-counterfeit and security solutions'
research.
The expenses or losses associated with the continued lack of market
acceptance of our solutions will harm our business, operating results and
financial condition.
Rapid technological changes and frequent new product introductions are
typical for the markets we serve. Our future success may depend in part on
continuous, timely development and introduction of new products that
address evolving market requirements. We believe successful new product
introductions may provide a significant competitive advantage because customers
invest their time in selecting and learning to use new products, and are often
reluctant to switch products. To the extent we fail to introduce new and
innovative products, we may lose any market share we then have to our
competitors, which will be difficult or impossible to regain. Any inability, for
technological or other reasons, to successfully develop and introduce new
products could reduce our growth rate or damage our business. We may experience
delays in the development and introduction of products. We may not keep pace
with the rapid rate of change in anti-counterfeiting and security products'
research, and any new products acquired or developed by us may not meet the
requirements of the marketplace or achieve market acceptance.
If We Are Unable to Retain the Services of Drs. Hayward or Liang We May Not Be
Able to Continue Our Operations.
Our success depends to a significant extent upon the continued service
Dr. James A. Hayward, our Chief Executive Officer; and Dr. Benjamin Liang, our
Secretary and Strategic Technology Development Officer. We do not have
employment agreements with Drs. Hayward or Liang. Loss of the services of Drs.
Hayward or Liang could significantly harm our business, results of operations
and financial condition. We do not maintain key-man insurance on the lives of
Drs. Hayward or Liang.
The Markets for our SigNature Program are Very Competitive, and We May be Unable
to Continue to Compete Effectively in this Industry in the Future.
The principal markets for our SigNature Program are intensely
competitive. We compete with many existing suppliers and new competitors
continue to enter the market. Many of our competitors, both in the United States
and elsewhere, are major pharmaceutical, chemical and biotechnology companies,
or have strategic alliances with such companies, and many of them have
substantially greater capital resources, marketing experience, research and
development staff, and facilities than we do. Any of these companies could
succeed in developing products that are more effective than the products that we
have or may develop and may be more successful than us in producing and
marketing their existing products. Some of our competitors that operate in the
anti-counterfeiting and fraud prevention markets include: Applied Optical
Technologies, Authentix, ChemTAG, Collectors Universe Inc., Collotype, Data Dot
Technology, Digimarc Corp., DNA Technologies, Inc., Informium AG, Inksure
Technologies, L-1 Identity Solutions, Manakoa, SmartWater Technology, SureTrace,
Tracetag and Warnex.
We expect this competition to continue and intensify in the future.
Competition in our markets is primarily driven by:
o product performance, features and liability;
25
o price;
o timing of product introductions;
o ability to develop, maintain and protect proprietary products
and technologies;
o sales and distribution capabilities;
o technical support and service;
o brand loyalty;
o applications support; and
o breadth of product line.
If a competitor develops superior technology or cost-effective
alternatives to our products, our business, financial condition and results of
operations could be significantly harmed.
We Need to Expand Our Sales, Marketing and Support Organizations and Our
Distribution Arrangements to Increase Market Acceptance of Our Products and
Services.
We currently have few sales, marketing, customer service and support
personnel and will need to increase our staff to generate a greater volume of
sales and to support any new customers or the expanding needs of existing
customers. The employment market for sales, marketing, customer service and
support personnel in our industry is very competitive, and we may not be able to
hire the kind and number of sales, marketing, customer service and support
personnel we are targeting. Our inability to hire qualified sales, marketing,
customer service and support personnel may harm our business, operating results
and financial condition. We do not currently have any arrangements with any
distributors and we may not be able to enter into arrangements with qualified
distributors on acceptable terms or at all. If we are not able to develop
greater distribution capacity, we may not be able to generate sufficient revenue
to support our operations.
A Manufacturer's Inability or Willingness to Produce Our Goods on Time and to
Our Specifications Could Result in Lost Revenue and Net Losses.
Though we manufacture prototypes, samples and some of our own products,
we currently do not own or operate any significant manufacturing facilities and
depend upon independent third parties, and particularly Biowell, for the
manufacture of some of our products to our specifications. The inability of a
manufacturer to ship orders of such products in a timely manner or to meet our
quality standards could cause us to miss the delivery date requirements of our
customers for those items, which could result in cancellation of orders, refusal
to accept deliveries or a reduction in purchase prices, any of which could harm
our business by resulting in decreased revenues or net losses upon sales of
products, if any sales could be made.
If We Need to Replace Manufacturers, Our Expenses Could Increase, Resulting in
Smaller Profit Margins.
We compete with other companies for the production capacity of our
manufacturers and import quota capacity. Some of these competitors have greater
financial and other resources than we have, and thus may have an advantage in
the competition for production and import quota capacity. If we experience a
significant increase in demand, or if our existing manufacturers must be
replaced, we will need to establish new relationships with another or multiple
manufacturers. We cannot assure you that this additional third party
manufacturing capacity will be available when required on terms that are
acceptable to us or terms similar to those we have with our existing
manufacturers, either from a production standpoint or a financial standpoint. We
do not have long-term contracts with our manufacturers, and our manufacturers do
not produce our products exclusively. Should we be forced to replace our
manufacturers, we may experience an adverse financial impact, or an adverse
operational impact, such as being forced to pay increased costs for such
replacement manufacturing or delays upon distribution and delivery of our
products to our customers, which could cause us to lose customers or lose
revenues because of late shipments.
If a Manufacturer Fails to Use Acceptable Labor Practices, We Might Have Delays
in Shipments or Face Joint Liability for Violations, Resulting in Decreased
Revenue and Increased Expenses.
While we require our independent manufacturers to operate in compliance
with applicable laws and regulations, we have no control over their ultimate
actions. While our internal and vendor operating guidelines promote ethical
business practices and our staff and buying agents periodically visit and
monitor the operations of our independent manufacturers, we do not control these
manufacturers or their labor practices. The violation of labor or other laws by
our independent manufacturers, or by one of our licensing partners, or the
divergence of an independent manufacturer's or licensing partner's labor
practices from those generally accepted as ethical in the United States, could
interrupt, or otherwise disrupt the shipment of finished products to us or
damage our reputation. Any of these, in turn, could have a material adverse
effect on our financial condition and results of operations, such as the loss of
potential revenue and incurring additional expenses.
26
Failure to License New Technologies Could Impair Sales of Our Existing Products
or Any New Product Development We Undertake in the Future.
To generate broad product lines, it is advantageous to sometimes
license technologies from third parties rather than depend exclusively on the
development efforts of our own employees. As a result, we believe our ability to
license new technologies from third parties is and will continue to be important
to our ability to offer new products. In addition, from time to time we are
notified or become aware of patents held by third parties that are related to
technologies we are selling or may sell in the future. After a review of these
patents, we may decide to seek a license for these technologies from these third
parties. There can be no assurance that we will be able to successfully identify
new technologies developed by others. Even if we are able to identify new
technologies of interest, we may not be able to negotiate a license on favorable
terms, or at all. If we lose the rights to patented technology, we may need to
discontinue selling certain products or redesign our products, and we may lose a
competitive advantage. Potential competitors could license technologies that we
fail to license and potentially erode our market share for certain products.
Intellectual property licenses would typically subject us to various
commercialization, sublicensing, minimum payment, and other obligations. If we
fail to comply with these requirements, we could lose important rights under a
license. In addition, certain rights granted under the license could be lost for
reasons beyond our control, and we may not receive significant indemnification
from a licensor against third party claims of intellectual property
infringement.
Our Failure To Manage Our Growth In Operations and Acquisitions of New Product
Lines and New Businesses Could Harm our Business.
Any growth in our operations, if any, will place a significant strain
on our current management resources. To manage such growth, we would need to
improve our:
o operations and financial systems;
o procedures and controls; and
o training and management of our employees.
Our future growth, if any, may be attributable to acquisitions of new
product lines and new businesses. Future acquisitions, if successfully
consummated, would likely create increased working capital requirements, which
would likely precede by several months any material contribution of an
acquisition to our net income. Our failure to manage growth or future
acquisitions successfully could seriously harm our operating results. Also,
acquisition costs could cause our quarterly operating results to vary
significantly. Furthermore, our stockholders would be diluted if we financed the
acquisitions by incurring convertible debt or issuing securities.
Although we currently only have operations within the United States, if
we were to acquire an international operation; we would face additional risks,
including:
o difficulties in staffing, managing and integrating
international operations due to language, cultural or other
differences;
o different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
Failure to Attract and Retain Qualified Scientific, Production and Managerial
Personnel Could Harm Our Business.
Recruiting and retaining qualified scientific and production personnel
to perform and manage prototype, sample, and product manufacturing and business
development personnel to conduct business development are critical to our
success. In addition, our desired growth and expansion into areas and activities
requiring additional expertise, such as clinical testing, government approvals,
production, and marketing will require the addition of new management personnel
and the development of additional expertise by existing management personnel.
Because the industry in which we compete is very competitive, we face
significant challenges attracting and retaining a qualified personnel base.
Although we believe we have been and will be able to attract and retain these
personnel, we may not be able to continue to successfully attract qualified
personnel. The failure to attract and retain these personnel or, alternatively,
to develop this expertise internally would harm our business since our ability
to conduct business development and manufacturing will be reduced or eliminated,
resulting in lower revenues. We generally do not enter into employment
agreements requiring our employees to continue in our employment for any period
of time.
27
Our Intellectual Property Rights Are Valuable, and Any Inability to Protect Them
Could Reduce the Value of Our Products, Services and Brand.
Our patents, trademarks, trade secrets, copyrights and all of our other
intellectual property rights are important assets for us. There are events that
are outside of our control that pose a threat to our intellectual property
rights as well as to our products and services. For example, effective
intellectual property protection may not be available in every country in which
our products and services are distributed. The efforts we have taken to protect
our proprietary rights may not be sufficient or effective. Any significant
impairment of our intellectual property rights could harm our business or our
ability to compete. Protecting our intellectual property rights is costly and
time consuming. Any increase in the unauthorized use of our intellectual
property could make it more expensive to do business and harm our operating
results. Although we seek to obtain patent protection for our innovations, it is
possible we may not be able to protect some of these innovations. Given the
costs of obtaining patent protection, we may choose not to protect certain
innovations that later turn out to be important. There is always the possibility
that the scope of the protection gained from one of our issued patents will be
insufficient or deemed invalid or unenforceable. We also seek to maintain
certain intellectual property as trade secrets. The secrecy could be compromised
by third parties, or intentionally or accidentally by our employees, which would
cause us to lose the competitive advantage resulting from these trade secrets.
Intellectual Property Litigation Could Harm Our Business.
Litigation regarding patents and other intellectual property rights is
extensive in the biotechnology industry. In the event of an intellectual
property dispute, we may be forced to litigate. This litigation could involve
proceedings instituted by the U.S. Patent and Trademark Office or the
International Trade Commission, as well as proceedings brought directly by
affected third parties. Intellectual property litigation can be extremely
expensive, and these expenses, as well as the consequences should we not
prevail, could seriously harm our business.
If a third party claims an intellectual property right to technology we
use, we might need to discontinue an important product or product line, alter
our products and processes, pay license fees or cease our affected business
activities. Although we might under these circumstances attempt to obtain a
license to this intellectual property, we may not be able to do so on favorable
terms, or at all. Furthermore, a third party may claim that we are using
inventions covered by the third party's patent rights and may go to court to
stop us from engaging in our normal operations and activities, including making
or selling our product candidates. These lawsuits are costly and could affect
our results of operations and divert the attention of managerial and technical
personnel. A court may decide that we are infringing the third party's patents
and would order us to stop the activities covered by the patents. In addition, a
court may order us to pay the other party damages for having violated the other
party's patents. The biotechnology industry has produced a proliferation of
patents, and it is not always clear to industry participants, including us,
which patents cover various types of products or methods of use. The coverage of
patents is subject to interpretation by the courts, and the interpretation is
not always uniform. If we are sued for patent infringement, we would need to
demonstrate that our products or methods of use either do not infringe the
patent claims of the relevant patent and/or that the patent claims are invalid,
and we may not be able to do this. Proving invalidity, in particular, is
difficult since it requires a showing of clear and convincing evidence to
overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in the United States may be maintained
in secrecy until the patents are issued, because patent applications in the
United States and many foreign jurisdictions are typically not published until
eighteen months after filing, and because publications in the scientific
literature often lag behind actual discoveries, we cannot be certain that others
have not filed patent applications for technology covered by our or our
licensor's issued patents or pending applications or that we or our licensors
were the first to invent the technology. Our competitors may have filed, and may
in the future file, patent applications covering technology similar to ours. Any
such patent application may have priority over our or our licensors' patent
applications and could further require us to obtain rights to issued patents
covering such technologies. If another party has filed a United States patent
application on inventions similar to ours, we may have to participate in an
interference proceeding declared by the United States Patent and Trademark
Office to determine priority of invention in the United States. The costs of
these proceedings could be substantial, and it is possible that such efforts
would be unsuccessful, resulting in a loss of our United States patent position
with respect to such inventions.
Some of our competitors may be able to sustain the costs of complex
patent litigation more effectively than we can because they have substantially
greater resources. In addition, any uncertainties resulting from the initiation
and continuation of any litigation could have a material adverse effect on our
ability to raise the funds necessary to continue our operations.
28
Accidents Related to Hazardous Materials Could Adversely Affect Our Business.
Some of our operations require the controlled use of hazardous
materials. Although we believe our safety procedures comply with the standards
prescribed by federal, state, local and foreign regulations, the risk of
accidental contamination of property or injury to individuals from these
materials cannot be completely eliminated. In the event of an accident, we could
be liable for any damages that result, which could seriously damage our business
and results of operations.
Potential Product Liability Claims Could Affect Our Earnings and Financial
Condition.
We face a potential risk of liability claims based on our products and
services, and we have faced such claims in the past. Though we have product
liability insurance coverage which we will believe is adequate, we may not be
able to maintain this insurance at reasonable cost and on reasonable terms. We
also cannot assure that this insurance, if obtained, will be adequate to protect
us against a product liability claim, should one arise. In the event that a
product liability claim is successfully brought against us, it could result in a
significant decrease in our liquidity or assets, which could result in the
reduction or termination of our business.
Litigation Generally Could Affect Our Financial Condition and Results of
Operations.
We generally may be subject to claims made by and required to respond
to litigation brought by customers, former employees, former officers and
directors, former distributors and sales representatives, and vendors and
service providers. We have faced such claims and litigation in the past and we
cannot assure that we will not be subject to claims in the future. In the event
that a claim is successfully brought against us, considering our lack of revenue
and the losses our business has incurred for the period from our inception to
June 30, 2006, this could result in a significant decrease in our liquidity or
assets, which could result in the reduction or termination of our business.
We Are Obligated to Pay Liquidated Damages As a Result of Our Failure to Have
this Registration Statement Declared Effective Prior to June 15, 2005, and any
Payment of Liquidated Damages Will Either Result in Depletion of Our Limited
Working Capital or Issuance of Shares of Common Stock Which Would Cause Dilution
to Our Existing Shareholders.
Pursuant to the terms of a registration rights agreement with respect
to common stock underlying convertible notes and warrants we issued in private
placements in November and December, 2003, December, 2004, and January and
February, 2005, if we did not have a registration statement registering the
shares underlying these convertible notes and warrants declared effective on or
before June 15, 2005, we are obligated to pay liquidated damages in the amount
of 3.5% per month of the face amount of the notes, which equals $367,885, until
the registration statement is declared effective. At our option, these
liquidated damages can be paid in cash or restricted shares of our common stock.
To date we have decided to pay certain of these liquidated damages in common
stock, although any future payments of liquidated damages may, at our option, be
made in cash. If we decide to pay such liquidated damages in cash, we would be
required to use our limited working capital and potentially raise additional
funds. If we decide to pay the liquidated damages in shares of common stock, the
number of shares issued would depend on our stock price at the time that payment
is due. Based on the closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32
and $0.20 for our common stock on July 15, 2005, August 15, 2005, September 15,
2005, October 17, 2005, November 15, 2005 and December 15, 2005, respectively,
we issued a total of 3,807,375 shares of common stock in liquidated damages from
August, 2005 to January, 2006 to persons who invested in the January and
February, 2005 private placements. The issuance of shares upon any payment by us
of further liquidated damages will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
We paid liquidated damages in the form of common stock only for the
period from June 15, 2005 to December 15, 2005, and only to persons who invested
in the January and February, 2005 private placements. We believe that we have no
enforceable obligation to pay liquidated damages to holders of any shares we
agreed to register under the registration rights agreement for periods after the
first anniversary of the date of issuance of such shares, since they were
eligible for resale under Rule 144 of the Securities Act during such periods,
and such liquidated damages are grossly inconsistent with actual damages to such
persons. Nonetheless, as of September 30, we have accrued $4.0 million in
penalties representing further liquidated damages associated with our failure to
have the registration statement declared effective by the deadline, and have
included this amount in accounts payable and accrued expenses.
Matter Voluntarily Reported to the Securities and Exchange Commission
During the months of March, May, July and August 2005, we issued a
total of 8,550,000 shares of our common stock to certain employees and
consultants pursuant to the 2005 Incentive Stock Plan. We engaged our
29
outside counsel to conduct an investigation of the circumstances surrounding the
issuance of these shares. On April 26, 2006, we voluntarily reported the
findings from this investigation to the SEC, and agreed to provide the SEC with
further information arising from the investigation. We believe that the issuance
of 8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of our board of directors. These former officers received a total of
3,000,000 of these shares. In addition, it appears that the 8,000,000 shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance with the Securities Act of 1933, as amended. The members of the
Company's management who effectuated the stock issuances no longer work for the
Company. These shares were not registered under the Securities Act of 1933, or
the securities laws of any state, and we believe that certain of these shares
may have been sold on the open market, though we have been unable to determine
the magnitude of such sales. If violations of securities laws occurred in
connection with the resale of certain of these shares, the employees and
consultants or persons who purchased shares from them may have rights to have
their purchase rescinded or other claims against us for violation of securities
laws, which could harm our business, results of operations, and financial
condition.
Risks Relating to Our Common Stock
There Are a Large Number of Shares Underlying Our Options and Warrants That May
be Available for Future Sale and the Sale of These Shares May Depress the Market
Price of Our Common Stock and Will Cause Immediate and Substantial Dilution to
Our Existing Stockholders.
As of December 29, 2006, we had 121,162,385 shares of common stock
issued and outstanding and outstanding options and warrants to purchase
77,929,464 shares of common stock. All of the shares issuable upon exercise of
our options and warrants may be sold without restriction. The sale of these
shares may adversely affect the market price of our common stock. The issuance
of shares upon exercise of options and warrants will cause immediate and
substantial dilution to the interests of other stockholders since the selling
stockholders may convert and sell the full amount issuable on exercise.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on The Over The Counter Bulletin Board (the "OTC
Bulletin Board"), such as us, must be reporting issuers under Section 12 of the
Securities Exchange Act of 1934, as amended, and must be current in their
reports under Section 13, in order to maintain price quotation privileges on the
OTC Bulletin Board. If we fail to remain current on our reporting requirements,
we could be removed from the OTC Bulletin Board. As a result, the market
liquidity for our securities could be severely adversely affected by limiting
the ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market. Prior to May
2001, we were delinquent in our reporting requirements, having failed to file
our quarterly and annual reports for the years ended 1998 - 2000 (except the
quarterly reports for the first two quarters of 1999). We have been current in
our reporting requirements for the last five years, however, there can be no
assurance that in the future we will always be current in our reporting
requirements.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a
"penny stock," for the purposes relevant to us, as any equity security that has
a market price of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must:
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
30
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
31
ITEM 7. FINANCIAL STATEMENTS.
APPLIED DNA SCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet as of September 30, 2006 F-2
Consolidated Statements of Losses for the years ended September 30,
2006 and 2005 and the period September 16, 2002 (date of inception)
to September 30, 2006 F-3
Consolidated Statement of Stockholders' Equity (Deficiency) for the
period September 16, 2002 (date of inception) to September 30, 2065 F-4
Consolidated Statements of Cash Flows for the years ended September
30, 2006 and 2005 and the period September 16, 2002 (date of
inception) to September 30, 2006 F-19
Notes to Consolidated Financial Statements F-21
32
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Applied DNA Sciences, Inc.
Stony Brook, New York
We have audited the accompanying consolidated balance sheet of Applied
DNA Sciences, Inc. (a development stage company) as of September 30, 2006 and
the related consolidated statements of losses, deficiency in stockholders'
equity, and cash flows for each of the two years in the period ended September
30, 2006 and the period September 16, 2002 (date of inception) through September
30, 2006. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on the financial
statements based upon our audits.
We have conducted our audits in accordance with auditing standards of
the Public Company Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Applied DNA
Sciences, Inc. (a development stage company) at September 30, 2006 and the
results of its operations and its cash flows for the each of the two years in
the period ended September 30, 2006 and the period September 16, 2002 (date of
inception) through September 30, 2006 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in the Note L to the
accompanying financial statements, the Company is in the development stage and
has not established a source of revenues. This raises substantial doubt about
the company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
As discussed in Note M, the Company has restated the consolidated
statements of losses, deficiency in stockholders' equity, and cash flows for the
year ended September 30, 2005 and the period September 16, 2002 (date of
inception) through September 30, 2005.
/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
Russell Bedford Stefanou Mirchandani LLP
McLean, Virginia
January 5, 2007
F-1
APPLIED DNA SCIENCES, INC.
(A Development stage company)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006
ASSETS
Current assets:
Cash $ 1,225,304
Accounts receivable 9,631
Advances and other receivables 8,419
Prepaid expenses 106,667
------------
Total current assets 1,350,021
Property and equipment-net of accumulated depreciation of $20,885 (Note A) 156,437
Other assets:
Deposits 13,822
Capitalized finance costs-net of accumulated amortization of $636,013 1,049,087
Intangible assets:
Patients, net of accumulated amortization of $18,593 (Note B) 15,663
Intellectual property, net of accumulated amortization of $7,339,100 (Note B) 2,091,800
------------
Total Assets $ 4,676,830
============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (Note C) $ 5,560,032
Convertible notes payable, net of unamortized discount (Note D) 3,761,771
Note payable-Related Party (Note E) 410,429
------------
Total current liabilities 9,732,232
Debt derivative and warrant liability 4,530,795
Commitments and contingencies (Note K)
Deficiency in Stockholders' Equity- (Note F)
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; 60,000 issued
and outstanding 6
Common stock, par value $0.001 per share; 250,000,000 shares authorized; 120,982,385 issued
and outstanding 120,982
Additional paid in capital 82,627,606
Accumulated deficit (92,334,791)
------------
Total deficiency in stockholders' equity (9,586,197)
Total liabilities and Deficiency in Stockholders' Equity $ 4,676,830
============
See the accompanying notes to the consolidated financial statements
F-2
APPLIED DNA SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF LOSSES
From September 16, 2002
For the Year Ended September 30, (Date of Inception)
2005 Through September 30, 2006
------------- --------------------
2006 (RESTATED) (RESTATED)
------------- ------------- --------------------
Sales $ 18,900 $ - $ 18,900
Cost of sales 15,639 - 15,639
------------- ------------- --------------------
Gross Profit 3,261 - 3,261
Operating expenses:
Selling, general and administrative 8,530,354 50,714,017 80,065,959
Research and development 153,191 638,873 1,030,599
Impairment of intangible asset(s) 5,655,011 - 5,655,011
Depreciation and amortization 1,370,299 356,266 1,729,726
------------- ------------- --------------------
Total operating expenses 15,708,855 51,709,156 88,481,295
------------- ------------- --------------------
NET LOSS FROM OPERATIONS (15,705,594) (51,709,156) (88,478,034)
Net gain in revaluation of debt derivative and warrant
liabilities 16,844,837 16,700,990 33,545,827
Other income 79,488 4,957 110,830
Interest expense (3,828,968) (32,106,310) (37,513,414)
------------- ------------- --------------------
Net loss before provision for income taxes (2,410,237) (67,109,519) (92,334,791)
Income taxes (benefit) - - -
------------- ------------- --------------------
NET LOSS $ (2,410,237) $ (67,109,519) $ (92,334,791)
============= ============= ====================
Net loss per share-basic and fully diluted $ (0.02) $ (1.05)
============= =============
Weighted average shares outstanding-
Basic and fully diluted 116,911,022 63,917,009
------------- -------------
See the accompanying notes to the consolidated financial statements
F-3
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Issuance of
common stock
to Founders in
exchange for
services on
September 16,
2002 at $.01
per share -- -- 100,000 $ 10 $ 990 $ -- $ -- $ -- $ 1,000
Net Loss -- -- -- -- -- -- -- (11,612) (11,612)
Balance at
September 30,
2002 -- $ -- 100,000 $ 10 $ 990 $ -- $ -- $ (11,612) $ (10,612)
========= ========= ============ =========== =========== =========== ============ ============ ============
Issuance of
common stock
in connection
with merger
with Prohealth
Medical
Technologies,
Inc on October
1, 2002 -- -- 10,178,352 1,015 -- -- -- -- 1,015
Cancellation of
Common stock in
connection with
merger with
Prohealth
Medical
Technologies,
Inc on October
21, 2002 -- -- (100,000) (10) (1,000) -- -- -- (1,010)
Issuance of
common stock
in exchange for
services in
October 2002 at
$0.65 per share -- -- 602,000 60 39,070 -- -- -- 39,130
Issuance of
common stock
in exchange for
subscription in
November and
December 2002
at $0.065 per
share -- -- 876,000 88 56,852 -- (56,940) -- --
Cancellation of
common stock in
January 2003
previously
issued in
exchange for
consulting
services -- -- (836,000) (84) (54,264) -- 54,340 -- (8)
Issuance of
common stock
in exchange for
licensing
services valued
at $0.065 per
share in
January 2003 -- -- 1,500,000 150 97,350 -- -- -- 97,500
Issuance of
common stock
in exchange for
consulting
services valued
at $0.13 per
share in
January 2003 -- -- 586,250 58 76,155 -- -- -- 76,213
Issuance of
common stock
in exchange for
consulting
services at
$0.065 per
share in
February 2003 -- -- 9,000 1 584 -- -- -- 585
F-4
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Issuance of
common stock
to Founders in
exchange for
services valued
at $0.0001 per
share in
March 2003 -- -- 10,140,000 1,014 -- -- -- -- 1,014
Issuance of
common stock
in exchange for
consulting
services valued
at $2.50 per
share in March
2003 -- -- 91,060 10 230,624 -- -- -- 230,634
Issuance of
common stock
in exchange for
consulting
services valued
at $0.065 per
share in March
2003 -- -- 6,000 1 389 -- -- -- 390
Common stock
subscribed in
exchange for
cash at $1 per
share in March
2003 -- -- -- -- 18,000 -- -- -- 18,000
Common stock
issued in
exchange for
consulting
services at
$0.065 per
share on April
1, 2003 -- -- 860,000 86 55,814 -- -- -- 55,900
Common stock
issued in
exchange for
cash at $1.00
per share on
April 9, 2003 -- -- 18,000 2 -- -- -- -- 2
Common stock
issued in
exchange for
consulting
services at
$0.065 per
share on April
9, 2003 -- -- 9,000 1 584 -- -- -- 585
Common stock
issued in
exchange for
consulting
services at
$2.50 per
share on April
23, 2003 -- -- 5,000 1 12,499 -- -- -- 12,500
Common stock
issued in
exchange for
consulting
services at
$2.50 per
share, on June
12, 2003 -- -- 10,000 1 24,999 -- -- -- 25,000
Common stock
issued in
exchange for
cash at $1.00
per share on
June 17, 2003 -- -- 50,000 5 49,995 -- -- -- 50,000
Common stock
subscribed in
exchange for
cash at $2.50
per share
pursuant to
private
placement on
June 27, 2003 -- -- -- -- -- 24,000 -- -- 24,000
F-5
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common stock
retired in
exchange for
note payable at
$0.0118 per
share, in June
30, 2003 -- -- (7,500,000) (750) 750 -- -- -- --
Common stock
issued in
exchange for
consulting
services at
$0.065 per
share, on June
30, 2003 -- -- 270,000 27 17,523 -- -- -- 17,550
Common stock
subscribed in
exchange for
cash at $1.00
per share
pursuant to
private
placement on
June 30, 2003 -- -- -- -- -- 10,000 -- -- 10,000
Common stock
subscribed in
exchange for
cash at $2.50
per share
pursuant to
private
placement on
June 30, 2003 -- -- -- -- -- 24,000 -- -- 24,000
Common stock
issued in
exchange for
consulting
services at
approximately
$2.01 per
share, July
2003 -- -- 213,060 21 428,798 -- -- -- 428,819
Common stock
canceled in
July 2003,
previously
issued for
services
rendered at
$2.50 per share -- -- (24,000) (2) (59,998) -- -- -- (60,000)
Common stock
issued in
exchange for
options
exercised at
$1.00 per
share in July
2003 -- -- 20,000 2 19,998 -- -- -- 20,000
Common stock
issued in
exchange for
exercised of
options
previously
subscribed at
$1.00 per
share in July
2003 -- -- 10,000 1 9,999 (10,000) -- -- --
Common stock
issued in
exchange for
consulting
services at
approximately
$2.38 per
share, August
2003 -- -- 172,500 17 410,915 -- -- -- 410,932
Common stock
issued in
exchange for
options
exercised at
$1.00 per
share in August
2003 -- -- 29,000 3 28,997 -- -- -- 29,000
Common stock
issued in
exchange for
consulting
services at
approximately
$2.42 per
share,
September 2003 -- -- 395,260 40 952,957 -- -- -- 952,997
F-6
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common stock
issued in
exchange for
cash at $2.50
per share-
subscription
payable-
September 2003 -- -- 19,200 2 47,998 (48,000) -- -- --
Common stock
issued in
exchange for
cash at $2.50
per share
pursuant
to private
placement
September 2003 -- -- 6,400 1 15,999 -- -- -- 16,000
Common stock
issued in
exchange for
options
exercised at
$1.00 per
share in
September 2003 -- -- 95,000 10 94,991 -- -- -- 95,001
Common stock
subscriptio
receivable
reclassificat
adjustment -- -- -- -- -- -- 2,600 -- 2,600
Common Stock
subscribed to
at $2.50 per
share in
September 2003 -- -- -- -- -- 300,000 -- -- 300,000
Net Loss for
the year ended
September 30,
2003 -- -- -- -- -- -- -- (3,445,164) (3,445,164)
--------- --------- ------------ ----------- ----------- ----------- ------------ ------------ ------------
Balance at
September 30,
2003 -- $ -- 17,811,082 $ 1,781 $ 2,577,568 $ 300,000 $ -- $ (3,456,776) $ (577,427)
========= ========= ============ =========== =========== =========== ============ ============ ============
Preferred
shares issues
in exchange for
services at
$25.00 per
share,
October 2003 15,000 15 -- -- -- -- -- -- 15
Common stock
issued in
exchange for
consulting
services at
approximately
$2.85 per
share, October
2003 -- -- 287,439 29 820,389 -- -- -- 820,418
Common stock
issued in
exchange for
cash at $2.50
per share-
subscription
payable-
October 2003 -- -- 120,000 12 299,988 (300,000) -- -- --
Common stock
canceled in
October 2003,
previously
issued for
services
rendered at
$2.50 per
share -- -- (100,000) (10) (249,990) -- -- -- (250,000)
Common stock
issued in
exchange for
consulting
services at
approximately
$3 per share,
November 2003 -- -- 100,000 10 299,990 -- -- -- 300,000
F-7
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common stock
subscribed
in exchange for
cash at $2.50
per share
pursuant
to private
placement,
November, 2003 -- -- 100,000 10 249,990 -- -- -- 250,000
Common stock
subscribed
in exchange for
cash at $2.50
per share
pursuant to
private
placement,
December, 2003 -- -- 6,400 1 15,999 -- -- -- 16,000
Common stock
issued in
exchange for
consulting
services at
approximately
$2.59 per
share, December
2003 -- -- 2,125,500 213 5,504,737 -- -- -- 5,504,950
Common Stock
subscribed
to at $2.50 per
share in
December 2003 -- -- -- -- -- 104,000 -- -- 104,000
Beneficial
conversion
feature
relating to
notes payable -- -- -- -- 1,168,474 -- -- -- 1,168,474
Beneficial
conversion
feature
relating to
warrants -- -- -- -- 206,526 -- -- -- 206,526
Adjust common
stock par value
from $0.0001 to
$0.50 per
share, per
amendment of
articles dated
in December 200 -- -- -- 10,223,166 (10,223,166) -- -- -- --
Common Stock
issued pursuant
to subscription
at $2.50 share
in January 2004 -- -- 41,600 20,800 83,200 (104,000) -- -- --
Common stock
issued in
exchange for
consulting
services at
$2.95 per
share, January
2004 -- -- 13,040 6,520 31,948 -- -- -- 38,468
Common stock
issued in
exchange for
consulting
services at
$2.60 per
share, January
2004 -- -- 123,000 61,500 258,300 -- -- -- 319,800
Common stock
issued in
exchange for
consulting
services at
$3.05 per
share, January
2004 -- -- 1,000 500 2,550 -- -- -- 3,050
Common stock
issued in
exchange for
employee
services at
$3.07 per
share, February
2004 -- -- 6,283 3,142 16,147 -- -- -- 19,289
Common stock
issued in
exchange for
consulting
services at
$3.04 per
share, March
2004 -- -- 44,740 22,370 113,640 -- -- -- 136,010
Common Stock
issued for
options
exercised at
$1.00 per share
in March 2004 -- -- 55,000 27,500 27,500 -- -- -- 55,000
F-8
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common stock
issued in
exchange for
employee
services at
$3.00 per
share, March
2004 -- -- 5,443 2,722 13,623 -- -- -- 16,345
Common stock
issued in
exchange for
employee
services at
$3.15 per
share, March
2004 -- -- 5,769 2,885 15,292 -- -- -- 18,177
Preferred
shared
converted to
common shares
for consulting
services at
$3.00 per
share, March
2004 (5,000) (5) 125,000 62,500 312,500 -- -- -- 374,995
Common stock
issued in
exchange for
employee
services at
$3.03 per
share, March
2004 -- -- 8,806 4,400 22,238 -- -- -- 26,638
Common Stock
issued pursuant
to subscription
at $2.50 per
share in
March 2004 -- -- 22,500 11,250 (9,000) -- -- -- 2,250
Beneficial
Conversion
Feature
relating to
Notes Payable -- -- 122,362 -- -- -- 122,362
Beneficial
Conversion
Feature
relating to
Warrants -- -- -- -- 177,638 -- -- -- 177,638
Common stock
issued in
exchange for
consulting
services at
$2.58 per
share,
April 2004 -- -- 9,860 4,930 20,511 -- -- -- 25,441
Common stock
issued in
exchange for
consulting
services at
$2.35 per
share,
April 2004 -- -- 11,712 5,856 21,667 -- -- -- 27,523
Common stock
issued in
exchange for
consulting
services at
$1.50 per
share,
April 2004 -- -- 367,500 183,750 367,500 -- -- -- 551,250
Common stock
returned to
treasury at
$0.065 per
share,
April 2004 -- -- (50,000) (25,000) 21,750 -- -- -- (3,250)
Preferred
stock converted
to common stock
for consulting
services at
$1.01 per share
in May 2004 (4,000) (4) 100,000 50,000 51,250 -- -- -- 101,246
Common stock
issued per
subscription
May 2004 -- -- 10,000 5,000 (4,000) -- (1,000) -- --
Common stock
issued in
exchange for
consulting
services at
$0.86 per
share in
May 2004 -- -- 137,000 68,500 50,730 -- -- -- 119,230
F-9
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common stock
issued in
exchange for
consulting
services at
$1.15 per
share in
May 2004 -- -- 26,380 13,190 17,147 -- -- -- 30,337
Common stock
returned to
treasury at
$0.065 per
share,
June 2004 -- -- (5,000) (2,500) 2,175 -- -- -- (325)
Common stock
issued in
exchange for
consulting
services at
$0.67 per
share in
June 2004 -- -- 270,500 135,250 45,310 -- -- -- 180,560
Common stock
issued in
exchange for
consulting
services at
$0.89 per
share in
June 2004 -- -- 8,000 4,000 3,120 -- -- -- 7,120
Common stock
issued in
exchange for
consulting
services at
$0.65 per
share in
June 2004 -- -- 50,000 25,000 7,250 -- -- -- 32,250
Common stock
issued pursuant
to private
placement at
$1.00 per share
in June 2004 -- -- 250,000 125,000 125,000 -- -- -- 250,000
Common stock
issued in
exchange for
consulting
services at
$0.54 per share
in July 2004 -- -- 100,000 50,000 4,000 -- -- -- 54,000
Common stock
issued in
exchange for
consulting
services at
$0.72 per share
in July 2004 -- -- 5,000 2,500 1,100 -- -- -- 3,600
Common stock
issued in
exchange for
consulting
services at
$0.47 per share
in July 2004 -- -- 100,000 50,000 (2,749) -- -- -- 47,251
Common stock
issued in
exchange for
consulting
services at
$0.39 per share
in August 2004 -- -- 100,000 50,000 (11,000) -- -- -- 39,000
Preferred stock
converted to
common stock
for consulting
services at
$0.39 per share
in August 2004 (2,000) (2) 50,000 25,000 (5,500) -- -- -- 19,498
Common stock
issued in
exchange for
consulting
services at
$0.50 per share
in August 2004 -- -- 100,000 50,000 250 -- -- -- 50,250
Common stock
issued in
exchange for
consulting
services at
$0.56 per share
in August 2004 -- -- 200,000 100,000 12,500 -- -- -- 112,500
F-10
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common stock
issued in
exchange for
consulting
services at
$0.41 per share
in August 2004 -- -- 92,500 46,250 (8,605) -- -- -- 37,645
Common stock
issued in
exchange for
consulting
services at
$0.52 per share
in September
2004 -- -- 1,000,000 500,000 17,500 -- -- -- 517,500
Common stock
issued in
exchange for
consulting
services at
$0.46 per share
in September
2004 -- -- 5,000 2,500 (212) -- -- -- 2,288
Common stock
issued pursuant
to subscription
at $0.50 per
share in
September 2004 -- -- 40,000 20,000 -- -- -- -- 20,000
Preferred
shares
converted to
common stock
for consulting
services at
$0.41 per share
in September
2004 (4,000) (4) 100,000 50,000 4,000 -- -- -- 53,996
Preferred
shares issued
in exchange for
service at $25
per share in
September 2004 60,000 6 -- -- 1,499,994 -- -- -- 1,500,000
Fair value of
2,841,000
warrants issued
to non
employees and
consultants for
services
rendered at
approximately
$0.71 per
warrant in
September 200 -- -- -- -- 2,019,862 -- -- -- 2,019,862
Net Loss -- -- -- -- -- -- -- (19,358,258) (19,358,258)
--------- --------- ------------ ----------- ----------- ----------- ------------ ------------ ------------
Balance at
September 30,
2004 60,000 $ 6 23,981,054 $11,990,527 $ 6,118,993 $ -- $ (1,000) $(22,815,034) $ (4,706,508)
========= ========= ============ =========== =========== =========== ============ ============ ============
Common stock
issued in
exchange for
consulting
services at
$0.68 per share
in October 2004 -- -- 200,000 100,000 36,000 -- -- -- 136,000
Common stock
returned to
treasury at
$0.60 per share
in October 2004 -- -- (1,069,600) (534,800) (107,297) -- -- -- (642,097)
Common stock
issued in
exchange for
consulting
services at
$0.60 per share
in October 2004 -- -- 82,500 41,250 8,250 -- -- -- 49,500
F-11
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common Stock
issued pursuant
to subscription
at $0.60 per
share in
October 2004 -- -- 500,000 250,000 50,000 (300,000) -- -- --
Common stock
issued in
exchange for
consulting
services at
$0.50 per share
in October 2004 -- -- 532,500 266,250 -- -- -- -- 266,250
Common Stock
issued in
exchange for
debt at $0.50
per share in
October 2004 -- -- 500,000 250,000 -- -- -- -- 250,000
Common Stock
issued pursuant
to subscription
at $0.45 per
share in
October 2004 -- -- 1,000,000 500,000 (50,000) (450,000) -- -- --
Common stock
issued in
exchange for
consulting
services at
$0.45 per share
in October 2004 -- -- 315,000 157,500 (15,750) -- -- -- 141,750
Common Stock
issued in
exchange for
consulting
services at
$0.47 per share
in November
2004 -- -- 100,000 50,000 (3,000) -- -- -- 47,000
Common Stock
issued in
exchange for
consulting
services at
$0.80 per share
in November
2004 -- -- 300,000 150,000 90,000 -- -- -- 240,000
Common Stock
issued in
exchange for
consulting
services at
$1.44 per share
in November 200 -- -- 115,000 57,500 108,100 -- -- -- 165,600
Common Stock
issued in
exchange for
employee
services at
$1.44 per share
in November
2004 -- -- 5,000 2,500 4,700 -- -- -- 7,200
Warrants
exercised at
$0.60 per share
in November
2004 -- -- 60,000 30,000 6,000 (4,000) -- -- 32,000
Beneficial
Conversion
discount
relating to
Notes Payable -- -- -- -- 1,465,000 -- -- -- 1,465,000
Common stock
issued at
$0.016 per
share in
exchange for
note payable in
December 2004 -- -- 5,500,000 2,750,000 (2,661,500) -- -- -- 88,500
Common stock
issued in
settlement of
debt at $0.50
per share in
December 2004 -- -- 2,930,000 1,465,000 -- (125,000) -- -- 1,340,000
F-12
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Fair value of
6,063,500
warrants issued
to non employee
and consultants
for services
rendered at
$0.52 per
warrant in
October and
December 2004 -- -- -- -- 3,169,052 -- -- -- 3,169,052
Warrants
exercised at
$0.10 per share
in January 2005 -- -- 25,000 12,500 (10,000) -- -- -- 2,500
Common Stock
issued in
settlement of
debt at $0.33
per share in
January 2005 -- -- 1,628,789 814,395 (276,895) -- -- -- 537,500
Warrants
exercised at
$0.10 per share
in January 2005 -- -- 17,500 8,750 (7,000) -- -- -- 1,750
Common Stock
issued in
settlement of
debt at $0.33
per share in
January 2005 -- -- 2,399,012 1,199,504 (407,830) -- -- -- 791,674
Common Stock
issued in
exchange fo
consulting
services at
$1.30 per share
in January 2005 -- -- 315,636 157,818 252,508 -- -- -- 410,326
Fair value of
warrant
liability
reclassed due
to registration
rights granted
in February
2005 -- -- -- -- (3,108,851) -- -- -- (3,108,851)
Common Stock
issued in
exchange for
consulting
services at
$1.44 per share
in February 200 -- -- 5,796,785 2,898,393 5,418,814 -- -- -- 8,317,207
Fair value of
55,000 warrants
issued to
consultants for
services at
$1.31 per
warrant in
February 2005 -- -- -- -- 72,017 -- -- -- 72,017
F-13
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common Stock
issued in
settlement of
debt at $0.33
per share in
February 2005 -- -- 75,757 37,879 (12,879) -- -- -- 25,000
Warrants
exercised at
$0.10 per share
in February
2005 -- -- 20,000 10,000 (8,000) -- -- -- 2,000
Common Stock
issued in
settlement of
debt at $0.33
per share in
February 2005 -- -- 606,060 303,030 (103,030) -- -- -- 200,000
Warrants
exercised at
$0.10 per share
in February
2005 -- -- 45,000 22,500 (18,000) -- -- -- 4,500
Common Stock
issued in
exchange for
related party
debt at $1.31
per share in
February 2005 -- -- 1,500,000 750,000 1,215,000 -- -- -- 1,965,000
Common Stock
issued in
settlement of
debt at $0.33
per share in
February 2005 -- -- 278,433 139,217 (47,334) -- -- -- 91,883
Common Stock
issued in
exchange for
consulting
services at
$1.17 per share
in February 200 -- -- 17,236 8,618 11,548 -- -- -- 20,166
Common stock
issued in
exchange for
debt at $0.50
per share in
February 2005 -- -- 300,000 150,000 -- -- -- -- 150,000
Common Stock
issued in
exchange for
consulting
services at
$0.95 per share
in February
2005 -- -- 716,500 358,250 322,425 -- -- -- 680,675
Common Stock
issued in
exchange for
consulting
services at
$0.95 per share
in February
2005 -- -- 10,500 5,250 4,725 -- -- -- 9,975
Common stock
issued in
exchange for
debt at $0.50
per share in
March 2005 -- -- 13,202,000 6,601,000 -- -- -- -- 6,601,000
Common Stock
issued in
exchange for
consulting
services at
$1.19 per share
in March 2005 -- -- 185,000 92,500 127,650 -- -- -- 220,150
Options
exercised at
$0.60 per share
in March 2005 -- -- 100,000 50,000 10,000 -- -- -- 60,000
Common Stock
issued in
exchange for
consulting
services at
$0.98 per share
in March 2005 -- -- 1,675,272 837,636 804,131 -- -- -- 1,641,767
Common Stock
issued in
exchange for
consulting
services at
$0.92 per share
in March 2005 -- -- 24,333 12,167 10,219 -- -- -- 22,386
Common Stock
issued in
exchange for
consulting
services at
$0.99 per share
in March 2005 -- -- 15,000 7,500 7,350 -- -- -- 14,850
Common stock
issued in
exchange for
debt at $0.50
per share in
March 2005 -- -- 1,240,000 620,000 -- -- -- -- 620,000
Common stock
canceled for
shares issued
in exchange of
debt in
March 2005 -- -- (500,000) (250,000) -- -- -- -- (250,000)
F-14
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common stock
subscribed
Canceled in
March 2005 -- -- -- -- -- 750,000 -- -- 750,000
Common Stock
issued in
exchange for
consulting
services at
$0.89 per share
in March 2005 -- -- 10,000 5,000 3,900 -- -- -- 8,900
Adjust common
stock par value
from $0.50 to
$0.001 per
share, per
amendment of
articles
dated March-05 -- -- -- (32,312,879) 32,312,879 -- -- -- --
Beneficial
Conversion
discount
relating to
Notes Payable
in March 2005 -- -- -- -- 7,371,000 -- -- -- 7,371,000
Stock options
granted to
employees in
exchange for
services
rendered, at
exercise price
below fair
value of common
stock in March
2005 -- -- -- -- 180,000 -- -- -- 180,000
Common Stock
issued in
exchange for
consulting
services at
$0.80 per
share in April
2005 -- -- 160,000 160 127,840 -- -- -- 128,000
Common Stock
issued in
exchange for
consulting
services at
$0.80 per
share in April
2005 -- -- 40,000 40 31,960 -- -- -- 32,000
Common Stock
issued in
exchange for
consulting
services at
$0.75 per share
in April 2005 -- -- 850,000 850 636,650 -- -- -- 637,500
Common Stock
issued in
exchange for
consulting
services at
$0.33 per share
in April 2005 -- -- 500,000 500 164,500 -- -- -- 165,000
Common Stock
canceled during
April 2005,
previously
issued for
services
rendered at
$3.42 per share -- -- (10,000) (10) (34,190) -- -- -- (34,200)
Common Stock
issued in
settlement of
debt at $0.33
per share in
April 2005 -- -- 75,758 77 24,923 (25,000) -- -- --
Common Stock
issued in
exchange for
consulting
services at
$0.68 per share
in April 2005 -- -- 50,000 50 33,950 -- -- -- 34,000
Proceeds
received
against
subscription
Payable in June
2005 -- -- -- -- -- 118,000 -- -- 118,000
F-15
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common Stock
canceled in
June 2005,
previously
issued for
services
rendered at
$0.50 per share -- -- (10,000) (10) (4,990) -- -- -- (5,000)
Cancellation of
previously
granted stock
options granted
to employees
for services
rendered, at
exercise
price below
fair value
of common stock -- -- -- -- (180,000) -- -- -- (180,000)
Common Stock
issued in
exchange for
consulting
services at
$0.60 per share
in July 2005 -- -- 157,000 157 94,043 -- -- -- 94,200
Common Stock
issued in
exchange for
intellectua
property at
$0.67 per share
in July 2005 -- -- 36,000,000 36,000 24,084,000 -- -- -- 24,120,000
Common Stock
issued in
exchange for
consulting
services at
$0.60 per share
in July 2005 -- -- 640,000 640 383,360 -- -- -- 384,000
Common Stock
issued in
exchange for
employee
services at
$0.48 per share
in July 2005 -- -- 8,000,000 8,000 3,832,000 -- -- -- 3,840,000
Common Stock
issued in
exchange for
consulting
services at
$0.94 per share
in July 2005 -- -- 121,985 121 168,217 -- -- -- 168,338
Common Stock
issued in
exchange for
consulting
services at
$0.48 per share
in August 2005 -- -- 250,000 250 119,750 -- -- -- 120,000
Common Stock
penalty shares
issued pursuant
to pending SB-2
registration at
$0.62 per share
in September
2005 -- -- 814,158 814 501,858 -- -- -- 502,672
Common Stock
penalty shares
issued pursuant
to pending SB-2
registration at
$0.70 per share
in September
2005 -- -- 391,224 391 273,466 -- -- -- 273,857
Common Stock
issued in
exchange for
consulting
services at
$0.94 per share
in September
2005 -- -- 185,000 185 173,715 -- -- -- 173,900
F-16
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common Stock
returned in
September 2005,
previously
issued for
services
rendered at
$0.40 per share -- -- (740,000) (740) (453,232) 56,000 1,000 -- (396,972)
Net Loss -- -- -- -- -- -- -- (67,109,519) (67,109,519)
--------- --------- ------------ ----------- ----------- ----------- ------------ ------------ ------------
Balance as of
September
30, 2005 60,000 $ 6 112,230,392 $ 112,230 $82,320,715 $ 20,000 $ -- $(89,924,553) $ (7,471,602)
========= ========= ============ =========== =========== =========== ============ ============ ============
Common stock
issued in
exchange for
services at
$0.50 per share
in October 2005 -- -- 400,000 400 199,600 -- -- -- 200,000
Common Stock
issued in
exchange for
consulting
services at
$0.75 per share
in October 2005 -- -- 100,000 100 74,900 -- -- -- 75,000
Common Stock
returned in
October 2005,
previously
issued for
services
rendered at
$0.60 per share -- -- (350,000) (350) (209,650) -- -- -- (210,000)
Common stock
issued pursuant
to subscription
at $0.50 per
share in
December 2005 -- -- 40,000 40 19,960 (20,000) -- -- --
Common Stock to
investors
pursuant to
registration
rights
agreement at
$0.51 per
share in
December 2005 -- -- 505,854 506 257,480 -- -- -- 257,986
Common Stock
returned in
January 2006,
previously
issued for
services
rendered at
$0.60 per share -- -- (250,000) (250) (149,750) -- -- -- (150,000)
Common Stock
issued to
investors
pursuant to
registration
rights
agreement at
$0.32 per share
in January 2006 -- -- 806,212 806 257,182 -- -- -- 257,988
Common Stock
issued to
investors
pursuant to
registration
rights
agreement at
$0.20 per share
in January 2006 -- -- 1,289,927 1,290 256,695 -- -- -- 257,985
Fair value of
200,000
warrants issued
to consultants
for services
at $0.22 per
warrant in
January 2006 -- -- -- -- 43,098 -- -- -- 43,098
F-17
APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2006
Deficit
Additional Accumulated
Preferred Common Paid in Common Stock During
Preferred Shares Common Stock Capital Stock Subscription Development
Shares Amount Shares Amount Amount Subscribed Receivable Stage Total
--------- --------- ------------ ----------- ----------- ---------- ------------ ------------ ------------
Common Stock
issued in
exchange for
consulting
services at
$0.17 per share
in February
2006 -- -- 160,000 160 27,040 -- -- -- 27,200
Common Stock
issued in
exchange for
consulting
services at
$0.16 per share
in February
2006 -- -- 3,800,000 3,800 604,200 -- -- -- 608,000
Common Stock
returned in
March 2006,
previously
issued for
services
rendered at
$0.80 per share -- -- (150,000) (150) (119,850) -- -- -- (120,000)
Previously
issued
warrants
reclassed to
warrant
liability -- -- -- -- (1,584,614) -- -- -- (1,584,614)
Common Stock
issued in
exchange for
consulting
services at
$0.20 per share
in July 2006 -- -- 2,400,000 2,400 477,600 -- -- -- 480,000
Fair value of
stock options
granted to
employees in
exchange for
services
rendered in
September 2006 -- -- -- -- 153,000 -- -- -- 153,000
Net loss -- -- -- -- -- -- -- (2,410,237) (2,410,237)
--------- --------- ------------ ----------- ----------- ----------- ------------ ------------ ------------
Balance as of
September
30, 2006 60,000 $ 6 $120,982,385 $ 120,982 $82,627,606 $ -- $ -- $(92,334,791) $ (9,586,197)
========= ========= ============ =========== =========== =========== ============ ============ ============
See accompanying notes to consolidated financial statements
F-18
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period
September 16, 2002
(Date of Inception)
For the year ended September 30, through
2005 September 30, 2006
------------ --------------
2006 (RESTATED) (RESTATED)
----------- ------------ --------------
Cash flows from operating activities:
Net loss $(2,410,237) $(67,109,519) $ (92,334,791)
Adjustments to reconcile net loss to net used in operating activities:
Depreciation and amortization 1,370,299 356,266 1,729,726
Organization expenses - - 88,500
Impairment of intangible assets 5,655,011 - 5,655,011
Preferred shares issued in exchange for services - - 1,500,000
Options and warrants issued in exchange for services rendered 1,622,825 7,358,568 11,001,255
Income attributable to re pricing of warrants and debt derivatives (16,844,837) (16,700,991) (33,545,828)
Financing costs attributable to issuance of warrants 2,271,000 23,148,214 25,419,214
Amortization of beneficial conversion feature-convertible notes - 8,836,000 10,461,000
Amortization of capitalized financing costs 636,013 - 636,013
Amortization of debt discount attributable to convertible debentures 731,490 - 731,490
Debt in exchange for common stock at fair market price - 1,365,000 1,365,000
Common stock issued in exchange for services rendered 1,390,200 18,176,641 31,964,573
Common stock exchanged for intellectual property in connection with
costs of acquiring intangible assets - 14,689,100 14,689,100
Common stock issued in connection with penalties pursuant to
registration 773,958 776,529 1,550,487
Common stock canceled-previously issued for services rendered (480,000) (578,270) (1,343,845)
Change in assets and liabilities:
Increase in accounts receivable (5,621) (12,429) (18,050)
Increase in prepaid expenses and deposits (106,667) 9,297 (120,929)
Decrease in other assets 440 - (13,450)
Decrease in due related parties - (111,943) 40,753
Increase (decrease) in accounts payable and accrued liabilities 2,512,312 657,589 4,925,610
----------- ------------ --------------
Net cash used in operating activities (2,883,815) (9,139,948) (15,619,161)
Cash flows from investing activities:
Payments for patent filing - (4,347) (25,698)
Acquisition (disposal) of property and equipment, net (164,571) 16,757 (177,321)
----------- ------------ --------------
Net cash provided by (used in) investing activities (164,571) 12,410 (203,019)
See the accompanying notes to the consolidated financial statements
F-19
APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period
September 16, 2002
(Date of Inception)
For the year ended September 30, through
2005 September 30, 2006
------------ ---------------
2006 (RESTATED) (RESTATED)
----------- ------------ ---------------
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost - - 432,000
Proceeds from issuance of convertible notes 4,242,500 9,079,000 13,446,500
Proceeds from sale of options - 102,750 343,750
Repayment of debt - (24,854) (24,854)
Proceeds from loans - - 2,750,000
Advances from shareholders - - 100,088
----------- ------------ ---------------
Net cash provided by financing activities 4,242,500 9,156,896 17,047,484
Net increase in cash and cash equivalents 1,194,114 29,358 1,225,304
Cash and cash equivalents at beginning of period 31,190 1,832 -
----------- ------------ ---------------
Cash and cash equivalents at end of period $ 1,225,304 $ 31,190 $ 1,225,304
=========== ============ ===============
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 1,390,200 18,176,641 31,964,573
Common stock issued in exchange for intellectual property - 9,430,900
Common stock issued in exchange for previously incurred debt - 3,109,533 2,313,500
Common stock canceled-previously issued for services rendered (480,000) (578,270) (1,343,845)
Common stock issued for ESOP shares 3,960,000
Common stock penalty shares issued pursuant to Pending SB-2
registration 776,529
Amortization of beneficial conversion feature 8,836,000 10,461,000
Preferred shares in exchange for service at $25 per share in
September 2004 - - 1,500,000
Fair value of options and warrants issued to consultants for
services 1,622,825 7,358,568 10,848,255
Acquisition:
Common stock retained - 1,015 1,015
Assets acquired - (135) (135)
----------- ------------ ---------------
Total consideration paid - 880 880
----------- ------------ ---------------
Organizational expenses-note issued in exchange for shares retired 88,500
Common stock issued in exchange for note payable 88,500
See the accompanying notes to the consolidated financial statements
F-20
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
Business and Basis of Presentation
On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was
incorporated under the laws of the State of Nevada. The Company is in the
development stage, as defined by Statement of Financial Accounting Standards No.
7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA
embedded biotechnology security solutions in the United States. To date, the
Company has generated nominal sales revenues, has incurred expenses and has
sustained losses. Consequently, its operations are subject to all the risks
inherent in the establishment of a new business enterprise. For the period from
inception through September 30, 2006, the Company has accumulated losses of
$92,334,791.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Applied DNA Operations Management, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Estimates
The preparation of the financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
requires that four basic criteria must be met before revenue can be recognized
:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred;
(3) the selling price is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the selling prices of the
products delivered and the collectibility of those amounts. Provisions for
discounts and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
On December 17, 2003, the SEC staff released Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. The staff updated and revised the existing revenue
recognition in Topic 13, Revenue Recognition, to make its interpretive guidance
consistent with current accounting guidance, principally EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." Also, SAB 104 incorporates
portions of the Revenue Recognition in Financial Statements - Frequently Asked
Questions and Answers document that the SEC staff considered relevant and
rescinds the remainder. The company's revenue recognition policies are
consistent with this guidance; therefore, this guidance will not have an
immediate impact on the company's consolidated financial statements.
Cash Equivalents
For the purpose of the accompanying financial statements, all highly liquid
investments with a maturity of three months or less are considered to be cash
equivalents.
F-21
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Income Taxes
The Company has adopted Financial Accounting Standard No. 109 (SFAS 109) which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets
are determined based on the difference between financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Temporary differences between
taxable income reported for financial reporting purposes and income tax purposes
are insignificant.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated
useful lives of 3 to 5 years using the straight line method. At September 30,
2006 property and equipment consist of:
2006
----------
Computer equipment $20,065
Lab equipment 51,273
Furniture 105,984
--------
177,322
Accumulated Depreciation (20,885)
--------
Net $156,437
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted undercounted cash flows. Should impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset. SFAS No. 144 also requires assets to be disposed of be reported at
the lower of the carrying amount or the fair value less costs to sell.
During the year ended September 30, 2006, the Company management performed an
evaluation of its intangible assets (intellectual property) for purposes of
determining the implied fair value of the assets at September 30, 2006. The test
indicated that the recorded remaining book value of its intellectual property
exceeded its fair value, as determined by discounted cash flows. As a result,
upon completion of the assessment, management recorded a non-cash impairment
charge of $5,655,011, net of tax, or $0.05 per share during the year ended
September 30, 2006 to reduce the carrying value of the patents to $2,091,800.
Considerable management judgment is necessary to estimate the fair value.
Accordingly, actual results could vary significantly from management's estimates
(See Note B).
Comprehensive Income
The Company does not have any items of comprehensive income in any of the
periods presented.
F-22
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Segment Information
The Company adopted Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosures about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions how to allocate resources and assess
performance. The information disclosed herein, materially represents all of the
financial information related to the Company's principal operating segment.
Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," specifying the computation, presentation and disclosure
requirements of earnings per share information. Basic earnings per share has
been calculated based upon the weighted average number of common shares
outstanding. Stock options and warrants have been excluded as common stock
equivalents in the diluted earnings per share because they are either
antidilutive, or their effect is not material. Fully diluted shares outstanding
were 199,930,486 and 112,230,392 for the years ended September 30, 2006 and
2005, respectively.
Stock Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based 3employee compensation and the effect of
the method used on reported results. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in APB Opinion No. 25 and related interpretations. Accordingly, compensation
expense for stock options is measured as the excess, if any, of the fair market
value of the Company's stock at the date of the grant over the exercise price of
the related option. The Company has adopted the annual disclosure provisions of
SFAS No. 148 in its financial reports for the year ended September 30, 2006 and
for the subsequent periods. The Company issued employee unvested employee
options as stock-based compensation during the year ended September 30, 2006 and
therefore has no unrecognized stock compensation related liabilities ended
September 30, 2006. On January 1, 2006, we adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock Based
Compensation, to account for compensation costs under our stock option plans. We
previously utilized the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (as amended) ("APB
25"). Under the intrinsic value method prescribed by APB 25, no compensation
costs were recognized for our employee stock options because the option exercise
price equaled the market price on the date of the grant. Prior to January 1,
2006 we only disclosed the pro forma effects on net income and earnings per
share as if the fair value recognition provisions of SFAS 123(R) had been
utilized.
F-23
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
In adopting SFAS No. 123(R), we elected to use the modified prospective method
to account for the transition from the intrinsic value method to the fair value
recognition method. Under modified prospective method, compensation cost is
recognized from the adoption date forward for all new stock options granted and
for any outstanding unvested awards as if the fair value method had been applied
to those awards as of the date of the grant. In the year ended September 30,
2006; the Company granted employee stock options vesting from the date of
service.. The fair value of $153,000 was recorded as a charge to operations.
The following table shows the effect on net earnings and earnings per share had
compensation cost been recognized based upon the estimated fair value on the
grant date of stock options for year ended September 30, 2005, in accordance
with SFAS 123, as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure":
For the Period
September, 16
2002 (Date of
For The Year Inception
ended Sept 30 through
2005 Sept 30,2005
(RESTATED) (RESTATED)
---------------- ---------------- ----------------
Net loss - as reported $ (67,109,519) $ (92,334,791)
Add: Total stock based employee
compensation expense as reported under
intrinsic value method ( APB No. 25) - -
Deduct: Total stock based employee
compensation expense as reported under
fair value method ( APB No. 123) (1,406,350) (1,406,350)
---------------- ---------------- ----------------
Net loss - Pro Forma $ (68,515,869) $ (93,741,141)
================ ================ ================
Net loss attributable to common
stockholders - Pro Forma $ (68,515,869) $ (93,741,141)
================ ================ ================
Basic (and assuming dilution) loss
per share - as reported $ (1.05)
================ ================ ================
Basic (and assuming dilution) loss
per share - Pro Forma $ (1.08)
================ ================ ================
Liquidity
As shown in the accompanying financial statements, the Company incurred a net
loss of $92,334,791 during the period September 16, 2002 (date of inception)
through September 30, 2006. The Company's current liabilities exceeded its
current assets by $8,382,211 as of September 30, 2006.
F-24
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company
to concentrations of credit risk, consist primarily of cash, cash equivalents
and trade receivables. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such investments
may be in excess of the FDIC insurance limit. The Company periodically reviews
trade receivables in determining its allowance for doubtful accruals. The
allowance for doubtful accruals at September 30, 2006 was $0.
Research and Development
The Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs.
Under SFAS 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and development costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. The Company incurred
research and development expenses of $153,191, $638,873 and $1,030,599 for the
years ended September 30, 2006, September 30, 2005 and from September 16, 2002
(date of inception) through September 30, 2006, respectively. On July 12, 2005,
the Company exchanged 36 million shares of stock with a value of $24,120,000 for
intellectual property acquired from Biowell Technology, Inc.(see Note B). The
Company capitalized $9,430,900 as an intangible asset and expensed $14,689,100
to acquisition costs in the year ended September 30, 2005.
Advertising
The Company follows the policy of changing the cost of advertising to expenses
as accrued. For the years ended September 30, 2005 and 2005, advertising costs
were not material to the statement of losses.
Reclassifications
Certain reclassifications have been made in prior year's financial statements to
conform to classifications used in the current year.
Intangible Assets
The Company amortized its intangible assets using the straight-line method over
their estimated period of benefit. The estimated useful life for patents is five
years while intellectual property uses a seven year useful life. We periodically
evaluate the recoverability of intangible assets and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that impairment exists. All of our intangible assets are subject to
amortization.
F-25
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Derivative Financial Instruments
The Company's derivative financial instruments consist of embedded derivatives
related to the 10% Secured Convertible Promissory Notes (the "Serial Notes")
entered into in 2006 (see Note D). These embedded derivatives include certain
conversion features, variable interest features, call options and default
provisions. The accounting treatment of derivative financial instruments
requires that the Company recorded the derivatives and related warrants at their
fair values as of the inception date of the Note Agreement (estimated at
$2,419,719) and at fair value as of each subsequent balance sheet date. In
addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the Notes, the Company is
required to classify all other non-employee stock options and warrants as
derivative liabilities and mark them to market at each reporting date. The fair
value of such options and warrants that were reclassified as liabilities from
additional paid-in capital in the year ended September 30, 2006 totaled
$730,111. Any change in fair value will be recorded as non-operating, non-cash
income or expense at each reporting date. If the fair value of the derivatives
is higher at the subsequent balance sheet date, the Company will record a
non-operating, non-cash charge. If the fair value of the derivatives is lower at
the subsequent balance sheet date, the Company will record non-operating,
non-cash income. Conversion-related derivatives were valued using the Binomial
Option Pricing Model with the following assumptions: dividend yield of 0%;
annual volatility of 111 to 112%; and risk free interest rate of 4.96 to 5.15%
as well as probability analysis related to trading volume restrictions. The
remaining derivatives were valued using discounted cash flows and probability
analysis. The derivatives are classified as long-term liabilities (see Note F).
In June 2005, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 05-04, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock". Under EITF 05-04, liquidated damages clauses may qualify
as freestanding financial instruments for treatment as a derivative liability.
Furthermore, EITF 05-04 addresses the question of whether a registration rights
agreement should be combined as a unit with the underlying financial instruments
and be evaluated as a single instrument. EITF 05-04 doesn't reach a consensus on
this question and allows for treatment as a combined unit (Views A and B) as
well as separate freestanding financial instruments (View C). On September 15,
2005, the FASB staff postponed further discussion of EITF 05-04. As of September
30, 2006, the FASB has still not rescheduled EITF 05-04 for discussion.
In connection with the issuance of the convertible notes and related warrants
(see Note D), we granted liquidated damages pursuant to a separate registration
rights agreement. The Company adopted View C of EITF 05-04. Accordingly, the
liquidated damages pursuant to this registration rights agreement were evaluated
as a stand alone financial instrument. This treatment did not have a significant
different effect than if the Company would have adopted View A or B, because the
warrants were classified as derivative liabilities. The Company believes that
should the FASB staff reach a consensus on EITF 05-04 and select combined
treatment (View A or B), the warrants will have to be evaluated as a combined
unit with the liquidated damages pursuant to the registration rights agreement,
and accordingly, be evaluated as derivative liabilities. The Company does not
believe that its measurement of the derivative liabilities under View A or View
B would significantly differ from its measurement of the derivative liabilities
under View C in these circumstances.
F-26
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
New Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155. "Accounting for certain Hybrid
Financial Instruments an amendment of FASB Statements No. 133 and 140," or SFAS
No. 155. SFAS No. 155 permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of Statement No. 133, establishes a requirement
to evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS 155 is effective for all financial instruments acquired or
issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. We do not expect the adoption of SFAS 155 to have a material
impact on our consolidated financial position, results of operations or cash
flows.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing
of Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The adoption of SFAS No.156 did
not have a material impact on the Company's financial position and results of
operations.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48). "Accounting for
uncertainty in Income Taxes". FIN 48 clarifies the accounting for Income Taxes
by prescribing the minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. It also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition and clearly scopes
income taxes out of SFAS 5, "Accounting for Contingencies". FIN 48 is effective
for fiscal years beginning after December 15, 2006. We have not yet evaluated
the impact of adopting FIN 48 on our consolidated financial position, results of
operations and cash flows.
In September 2006 the Financial Account Standards Board (the "FASB") issued its
Statement of Financial Accounting Standards 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. FAS 157 effective date is for fiscal
years beginning after November 15, 2007. The Company does not expect adoption of
this standard will have a material impact on its financial position, operations
or cash flows.
In September 2006 the FASB issued its Statement of Financial Accounting
Standards 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans". This Statement improves financial reporting by requiring
an employer to recognize the overfunded or underfunded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting by
requiring an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. The
effective date for an employer with publicly traded equity securities is as of
the end of the fiscal year ending after December 15, 2006. The Company does not
expect adoption of this standard will have a material impact on its financial
position, operations or cash flows
F-27
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE B - ACQUISITION OF INTANGIBLE ASSETS
The Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets,
whereby the Company periodically test its intangible assets for impairment. On
an annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.
Biowell Technology, Inc.
On July 12, 2005, the Company acquired certain intellectual properties from
Bowell Technology, Inc. ("Biowell") through an Asset Purchase Agreement
("Agreement") in exchange for 36 million shares of the Company's restricted
common stock having an aggregate fair value at the date of issuance of
$24,120,000. The intangible assets acquired consist of proprietary DNA
anti-counterfeit trade secrets created by Biowell that are intended to protect
intellectual property from counterfeiting, fraud, piracy, product diversion and
unauthorized intrusion.
The purchase price has been allocated as follows:
Amortizable intangible assets acquired are comprised of:
Developed core technologies $ 2,260,900
Developed product technologies 7,170,000
-----------
Total amortizable intangible assets $ 9,430,900
Transaction costs 14,869,100
-----------
Total purchase price $24,120,000
===========
In Process Research & Development
The Company concluded as of the date of acquisition, the acquired intangible
assets, consisting of developed core and product technologies had reached full
development and that it was not the intention of the Company's management to
utilize the assets in specific research and development activities as defined in
SFAS No. 2 Accounting for Research & Development Costs, As a result, the Company
determined there was no in-process research and development ("IPR& D") projects
in place related to the technology acquired, nor any future research and
development activities planned. Accordingly, there is no charge to operations
during the year ended September 30, 2005 for IPR&D in connection with the
acquisition of the assets.
Transaction costs
The amount of the purchase price that could not be allocated to acquired
identifiable intangible assets or IPR & D was $14,689,100 and was charged to
operations as a cost of the transaction during the year ended September 30,
2005.
F-28
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE B - ACQUISITION OF INTANGIBLE ASSETS (continued)
The identifiable intangible assets acquired and their carrying value at
September 30, 2006 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 (1,702,683)
Impairment (See below) (5,655,011)
-----------
Net: $ 2,107,463
Residual value: $ 0
During the year ended September 30, 2006, the Company management performed an
evaluation of its intangible assets (intellectual property) for purposes of
determining the implied fair value of the assets at September 30, 2006. The test
indicated that the recorded remaining book value of its intellectual property
exceeded its fair value, as determined by discounted cash flows. As a result,
upon completion of the assessment, management recorded a non-cash impairment
charge of $5,655,011, net of tax, or $0.05 per share during the year ended
September 30, 2006 to reduce the carrying value of the patents to $2,091,800.
Considerable management judgment is necessary to estimate the fair value.
Accordingly, actual results could vary significantly from management's
estimates.
Total amortization expense charged to operations for the year ended September
30, 2006 and 2005 were $1,354,101 and $346,825 respectively.
Estimated amortization expense as of September 30, 2006 is as follows:
2007 $ 370,643
2008 370,643
2009 365,753
2010 363,792
2011 and after 636,632
------------
Total $ 2,107,463
============
NOTE C - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30, 2006 are as follows:
Accounts payable $ 334,675
Accrued consulting fees 30,000
Accrued payable taxes -
Accrued interest payable 221,390
Other accrued expenses 4,973,967
-----------
Total $ 5,560,032
===========
F-29
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES
Convertible notes payable as of September 30, 2006 are as follows:
September 30, 2006
------------------
10% Secured Convertible Notes Payable dated March 8, 2006,
net of unamortized debt discount of $537,010 (see below) $ 962,990
10% Secured Convertible Notes Payable dated May 2, 2006,
net of unamortized debt discount of $303,958 (see below) 696,042
10% Secured Convertible Notes Payable dated June 15, 2006,
net of unamortized debt discount of $847,261 (see below) 2,102,739
Subtotal 3,761,771
Less, current $(3,761,771)
------------
Convertible notes payable -long-term --
============
10% Secured Convertible Promissory Notes dated March 8, 2006
On March 8, 2006, in connection with a private placement, the Company issued 10%
Secured Convertible Promissory Notes in the aggregate principal amount of
$1,500,000 (the "Serial Notes") and warrants to purchase 3,000,000 shares of the
Company's common stock to accredited investors. The Serial Notes bear interest
at 10%, mature on September 7, 2007 and are convertible into the Company's
common stock, at the holder's option, at fifty cents ($0.50) per share during
the period from the date of issuance (March 8, 2006) through March 7, 2007.
Should the holder of the Serial Note elect not to convert to the Company's
common stock on or before March 7, 2007, the outstanding principal, along with
accrued and unpaid interest automatically converts to the Company's common stock
at an amount equal to 80% of the average bid price of the Company's common stock
on the Over-The-Counter Bulletin Board for a period equal to ten (10) days prior
to conversion on the maturity date of September 7, 2007. The full principal
amount of the Serial Notes is due upon a default under the terms of the Note
Agreement. In addition, the Company granted the Investors a security interest in
all of its assets (see Note B). The Company agreed to file a registration
statement with the SEC to effect the registration of the shares of its common
stock underlying the Serial Notes and the warrants within 30 days of the
effective date of the Company's pending Registration Statement (SEC File 333 -
122848) being declared effective. The Company also agreed to use its reasonable
best efforts to cause the registration statement to be declared effective no
later than 180 days after its filing. If the Registration Statement is not filed
and declared effective as described above, the Company will be required to pay
liquidated damages in the form of cash to the holders of the Serial Notes, in an
amount equal to 2% of the unpaid principal balance per month if the above
deadlines are not met. In the event of a default on the Serial Notes, the Serial
Notes will bear interest at twelve percent (12%) per annum until paid.
The warrants are exercisable until five years from March 8, 2006 until March 7,
2011 at a price of $0.50 per share. The Company has the right, but not the
obligation, to call these warrants for $1.25 per share at the earlier of (i) one
year from issuance or (ii) the date that shares of common stock issuable upon
conversion of the Serial Notes and exercise of the warrants are registered for
resale and the Company's common stock trades at or above $1.25 per share for
twenty (20) consecutive trading days. The Notes include certain features that
are considered embedded derivative financial instruments, such as a variety of
conversion options, a variable interest rate feature, events of default and a
variable liquidated damages clause.
The initial relative fair value assigned to the embedded derivatives was
$346,500.
In conjunction with the Notes, the Company issued warrants to purchase 3,000,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values as of the
inception date of the debt issuance, which totaled $512,100.
F-30
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
The Company recorded the fair value of the derivatives ($346,500) and warrants
($ 512,100) to debt discount, aggregating $858,600, which will be amortized to
interest expense over the term of the Notes. Amortization of $321,590 was
recorded for the year ended September 30, 2006.
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the Serial
Notes into shares of the Company's common stock. The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the principal and interest payments
then due on the Notes.
10% Secured Convertible Promissory Notes dated May 2, 2006
On May 2, 2006, in connection with a private placement, the Company issued 10%
Secured Convertible Promissory Notes in the aggregate principal amount of
$1,000,000 (the "Serial Notes") and warrants to purchase 2,000,000 shares of the
Company's common stock to accredited investors. The Serial Notes bear interest
at 10%, mature on August 2, 2007 and are convertible into the Company's common
stock, at the holder's option, at fifty cents ($.50) per share during the period
from the date of issuance (May 2, 2006) through May 2, 2007. Should the holder
of the Serial Note elect not to convert to the Company's common stock on or
before May 2, 2007, the outstanding principal, along with accrued and unpaid
interest automatically converts to the Company's common stock at an amount equal
to 80% of the average bid price of the Company's common stock on the
Over-The-Counter Bulletin Board for a period equal to ten (10) days prior to
conversion on the maturity date of May 2, 2007. The full principal amount of the
Serial Notes is due upon a default under the terms of the Note Agreement. In
addition, the Company granted the Investors a security interest in all of its
assets (see Note B). The Company agreed to file a registration statement with
the SEC to effect the registration of the shares of its common stock underlying
the Serial Notes and the warrants within 30 days of the effective date of the
Company's pending Registration Statement (SEC File 333 - 122848) being declared
effective. The Company also agreed to use its reasonable best efforts to cause
the registration statement to be declared effective no later than 180 days after
its filing. In the event of a default on the Serial Notes, the Serial Notes will
bear interest at twelve percent (12%) per annum until paid.
The warrants are exercisable until four years from May 2, 2007 until May 2, 2011
at a price of $0.50 per share. The Company has the right, but not the
obligation, to call these warrants for $0.001 per share at the earlier of (i)
one year from issuance and (ii) the date that shares of common stock issuable
upon conversion of the Serial Notes and exercise of the warrants are registered
for resale and the Company's common stock trades at and above $1.00 per share
for twenty (20) consecutive trading days. The Notes include certain features
that are considered embedded derivative financial instruments, such as a variety
of conversion options, a variable interest rate feature, events of default and a
variable liquidated damages clause.
The initial relative fair value assigned to the embedded derivatives was
$82,358.
In conjunction with the Notes, the Company issued warrants to purchase 2,000,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values as of the
inception date of the debt issuance, which totaled $373,600.
The Company recorded the fair value of the derivatives ($82,358) and warrants
($373,600) to debt discount, aggregating $455,958, which will be amortized to
interest expense over the term of the Notes. Amortization of $152,000 was
recorded for the year ended September 30, 2006.
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the Serial
Notes into shares of the Company's common stock. The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the principal and interest payments
then due on the Notes.
F-31
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
10% Secured Convertible Promissory Notes dated June 15, 2006
On June 15, 2006, in connection with a private placement, the Company issued 10%
Secured Convertible Promissory Notes in the aggregate principal amount of
$2,950,000 (the "Serial Notes") and warrants to purchase 5,900,000 shares of the
Company's common stock to accredited investors. The Serial Notes bear interest
at 10%, mature on August 2, 2007 and are convertible into the Company's common
stock, at the holder's option, at fifty cents ($.50) per share during the period
from the one years from the date of issuance (June 15, 2006) through June 15,
2007. Should the holder of the Serial Note elect not to convert to the Company's
common stock on or before June 15, 2007, the outstanding principal, along with
accrued and unpaid interest automatically converts to the Company's common stock
at an amount equal to 80% of the average bid price of the Company's common stock
on the Over-The-Counter Bulletin Board for a period equal to ten (10) days prior
to conversion on the maturity date of June 15, 2007. The full principal amount
of the Serial Notes is due upon a default under the terms of the Note Agreement.
In addition, the Company granted the Investors a security interest in all of its
assets (see Note B). The Company agreed to file a registration statement with
the SEC to effect the registration of the shares of its common stock underlying
the Serial Notes and the warrants within 30 days of the effective date of the
Company's pending Registration Statement (SEC File 333 - 122848) being declared
effective. The Company also agreed to use its reasonable best efforts to cause
the registration statement to be declared effective no later than 180 days after
its filing. In the event of a default on the Serial Notes, the Serial Notes will
bear interest at twelve percent (12%) per annum until paid.
The warrants are exercisable until four years from June 15, 2007 until June 15,
2011 at a price of $0.50 per share. The Company has the right, but not the
obligation, to call these warrants for $0.001 per share at the earlier of (i)
one year from issuance and (ii) the date that shares of common stock issuable
upon conversion of the Serial Notes and exercise of the warrants are registered
for resale and the Company's common stock trades at and above $1.00 per share
for twenty (20) consecutive trading days. The Notes include certain features
that are considered embedded derivative financial instruments, such as a variety
of conversion options, a variable interest rate feature, events of default and a
variable liquidated damages clause.
The initial relative fair value assigned to the embedded derivatives was
$175,321.
In conjunction with the Notes, the Company issued warrants to purchase 5,900,000
shares of common stock. The accounting treatment of the derivatives and warrants
requires that the Company record the warrants at their fair values as of the
inception date of the debt issuance, which totaled $929,840.
The Company recorded the fair value of the derivatives ($175,321) and warrants
($929,840) to debt discount, aggregating $1,105,161, which will be amortized to
interest expense over the term of the Notes. Amortization of $257,900 was
recorded for the year ended September 30, 2006.
The market price of the Company's common stock significantly impacts the extent
to which the Company may be required or may be permitted to convert the Serial
Notes into shares of the Company's common stock. The lower the market price of
the Company's common stock at the due date of September 7, 2007, the more shares
the Company will need to issue to convert the principal and interest payments
then due on the Notes.
$ 1,675,000 Convertible Notes
Convertible notes payable ("Bridge Unit Offering") in quarterly installments of
interest only at 10% per annum, secured by all assets of the Company and due on
the earlier of the 9 month anniversary date of the initial closing of the
offering or the completion of any equity financing of $3,000,000 or more; the
Company, at its sole discretion may prepay principal at any time without
penalty. The Bridge Unit Offering Notes unpaid principal along with accrued and
unpaid interest were converted to an aggregate of 4,988,051 shares of the
Company's common shares at a price equal to approximately $0.33 per share during
the quarter ended March 31, 2005.
F-32
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
$ 1,465,000 Convertible Notes
Beginning in December, 2004, the Company sold a 10% convertible debenture in the
aggregate amount of $ 1,465,000 in a private placement and exempt offerings to
sophisticated investors, net of costs and fees.
The Convertible Note's terms called for the debt to automatically convert at
$0.50 per share upon the filing a of a registration statement with the
Securities and Exchange Commission.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 2,930,000 shares of the
Company's common stock in February 2005.
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 2,930,000
common shares of the Company's common stock at the price of $0.75 per share.
These warrants were issued in February, 2005 and lapse if unexercised by
February, 2010. A registration rights agreement was executed in December 2004
and consummated in February, 2005 requiring the Company to register the shares
of its common stock underlying the Convertible Notes and warrants so as to
permit the public resale thereof. The registration rights agreement provided for
the payment of liquidated damages of 3.5% of the aggregate Convertible Note
financing per month if the stipulated registration deadlines were not met. The
liquidated damages, which approximate $ 51,275 per month, may be paid, at the
Company's option, in cash or unregistered shares of the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an embedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $1,465,000 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in February 2005, the debt discount
attributed to the beneficial conversion feature of $ 1,465,000 was charged to
interest expense in its entirety during the year ended September 30, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued a warrant in February, 2005 that has registration rights
for the underlying shares. As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet $3,845,039 and charged to operations as interest
expense. Upon the registration statement being declared effective, the fair
value of the warrant on that date will be reclassified to equity. The Company
initially valued the warrants using the Black-Scholes pricing model with the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of
148.66%, (3) risk-free interest rate of 3.21%, and (4) expected life of 3 years.
In connection with the placement of the $1,465,000 of convertible notes as
described above, the Company agreed to registered shares of the Company's common
stock underlying certain previously issued and outstanding warrants that were
not subject to a registration rights agreement at the time the warrants were
issued. These warrants consist of following:
105,464 warrants entitling the holder to purchase 105,464 shares of the
Company's common stock at the price of $0.10 per share. These warrants were
issued in July, 2004 and lapse if unexercised by July, 2009.
F-33
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
1,602,500 warrants entitling the holder to purchase 1,602,500 shares of the
Company's common stock at the price of $0.60 per share. These warrants were
issued in October, 2003 and lapse if unexercised by October, 2008.
As a result, the Company is required to classify the warrants as derivative
liabilities and mark then to market at each reporting date. The fair value of
the warrants that were subject to registration reclassified as liabilities from
additional paid in capital at February 2005 totaled $3,108,851. Upon the
registration statement being declared effective, the fair value of the warrants
on that date will be reclassified to equity. The Company initially valued the
warrants using the Black-Scholes pricing model with the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 148.66%, (3) risk-free
interest rate of 3.21%, and (4) expected life of 3 years.
$ 7,371,000 Convertible Notes
In January and February, 2005, the Company sold a 10% convertible debenture in
the aggregate amount of $7,371,000 in a private placement and exempt offerings
to sophisticated investors, net of costs and fees.
The Convertible Note's terms called for the debt to automatically convert at
$0.50 per share upon the filing of a registration statement with the Securities
and Exchange Commission.
The Company filed the registration statement on February 15, 2005 and the
Convertible Notes were converted to an aggregate of 14,742,000 shares of the
Company's common stock.
As additional consideration for the purchase of the Convertible Notes, the
Company granted to the holders warrants entitling it to purchase 14,742,000
common shares of the Company's common stock at the price of $0.75 per share.
These warrants lapse if unexercised by February, 2010. A registration rights
agreement was executed and consummated in January, 2005 requiring the Company to
register the shares of its common stock underlying the Convertible Notes and
warrants so as to permit the public resale thereof. The registration rights
agreement provided for the payment of liquidated damages of 3.5% of the
aggregate Convertible Note financing per month if the stipulated registration
deadlines were not met. The liquidated damages, which approximate $ 257,985 per
month, may be paid, at the Company's option, in cash or unregistered shares of
the Company's common stock.
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an embedded
beneficial conversion feature present in the Convertible Notes. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid-in capital. The Company recognized and measured an aggregate
of $ 7,731,000 of the proceeds, which is equal to the intrinsic value of the
embedded beneficial conversion feature, to additional paid-in capital and a
discount against the Convertible Notes. Since the Convertible Notes were
converted to the Company's common stock in February 2005, the debt discount
attributed to the beneficial conversion feature of $ 7,371,000 was charged to
interest expense in its entirety during the year ended September 30, 2005.
In conjunction with raising capital through the issuance of Convertible Notes,
the Company has issued warrants that have registration rights for the underlying
shares. As the contract must be settled by the delivery of registered shares and
the delivery of the registered shares is not controlled by the Company, pursuant
to EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock", the net value of the warrants at
the date of issuance was recorded as a warrant liability on the balance sheet
$19,303,175 and charged to operations as interest expense. Upon the registration
statement being declared effective, the fair value of the warrant on that date
will be reclassified to equity. The Company initially valued the warrants using
the Black-Scholes pricing model with the following assumptions: (1) dividend
yield of 0%; (2) expected volatility of 152.59%, (3) risk-free interest rate of
3.67%, and (4) expected life of 5 years.
F-34
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE D - PRIVATE PLACEMENT OF CONVERTIBLE NOTES (continued)
Revaluation of Warrant Liability
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company revalued the warrants issued subject to registration
rights as of September 30, 2006 using the Black-Scholes option pricing model
(see Note G). Assumptions were as follows: risk free rate- 4.57 to 4.90%, a
volatility of 127.02% and a deemed fair value of common stock of $0.10, which
was the closing price of the Company's common stock on September 30, 2006. The
difference of $16,844,837 between the fair value of the warrants as of September
30, 2006 and the previous valuation as of September 2005 has been recorded as a
gain on revaluation of warrant liability, and included in the accompanying
consolidated financial statements.
NOTE E - RELATED PARTY TRANSACTIONS
At September 30, 2006, notes payable are as follows:
Note payable, unsecured, related party, payable from August 1, 2005, $ 410,429
right to convert to restricted stock in lieu of cash, rate of interest
2%, 160,000 shares prior to October 31, 2005 or 180,000 shares after
that date. Since September 2005, the Company has made no payments and --------------
is now in default. (See Note N)
Less: current portion (410,429)
---------------
Note payable - long-term $ -
In February, 2005 the Company issued 1,500,000 shares of its restricted common
stock to a Company officer and Director in exchange for $600,000 of previously
incurred debt. The debt was in the form of a promissory note.
The Company valued the shares at $1.31 per share for a total of $1,965,000,
which represents the fair value of the common stock on the date of the exchange.
The difference between the fair value of the common stock of $1,965,000 and the
face value of the debt of $600,000 or $1,365,000 has been charged to current
period interest expense.
On July 15, 2005, the Company entered into a consulting agreement with Timpix
International Limited ("Timpix") for the consulting services of three former
Biowell employees, Drs. Jun-Jei Sheu, Ben Liang and Johnson Chen. The consulting
agreement is for the shorter of two years, or until all of the consultants have
obtained a visa to work in the United States and execute employment agreements
with the Company. The consulting agreement shall automatically renew for one
year periods until terminated. Pursuant to the consulting agreement, the Company
is obligated to pay $47,000 per month, which is apportioned at $20,000 per month
for Mr. Sheu, $15,000 per month for Mr. Liang and $12,000 per month for Mr.
Chen. In the event that either of Messrs. Sheu, Liang or Chen becomes employed
by us, the monthly consulting fee shall be reduced accordingly. The Company has
negotiated an agreement to restructure the Consulting Agreement, whereby, fees
owed to Timpix from July 2005 through September 2006 will be waived. (See Note
N)
F-35
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE E - RELATED PARTY TRANSACTIONS (continued)
In July 2005, the Company entered into a license agreement with Biowell, whereby
the Company granted Biowell an exclusive license to sell, market, and
sub-license the Company's products in selected Asian countries. The exclusive
license for such selected territories is for an initial period of until December
31, 2010, and if Biowell meets its performance goals, the license agreement will
extend for an additional five year term. The license agreement gives Biowell the
initial rights to future anti-fraud biotechnologies developed by the Company and
also new applications for the existing technology that may be developed for the
marketplace as long as the license agreement remains in effect. In the event
that Biowell shall sub-license the products within its territories, Biowell
shall pay the Company 50% of all fees, payments or consideration or any kind
received in connection with the grant of the sublicense. Biowell is required to
pay a royalty of 10% on all net sales made and is required to meet certain
minimum annual net sales in its various territories. Cumulative royalties earned
from the period July 2005 through September 30, 2006 totaled $36,851 and is
included in other income. Net amounts owed to the Company by Biowell in
connection with the royalty agreement as of September 30, 2006 are $ 8,419.
On March 29, 2006, and April 13, 2006, the Company borrowed $200,000 in the
aggregate, at a rate of 7.5% per annum, from BioCogent, Ltd., ("BioCogent"), an
entity controlled by the Company's President and Chief Executive Officer. These
loans were due and payable upon the earlier to occur of (1) the close of
business on June 30, 2006, or (2) the closing of the issuance and sale by the
Company of its securities for gross proceeds of at least $250,000. These loans
were paid in full as of September 30, 2006.
The Company's current and former officers and shareholders have advanced funds
to the Company for travel related and working capital purposes. No formal
repayment terms or arrangements exist. There were no advances due at September
30, 2006. $-0-.
During the year ended September 30, 2006, $18,900 of the Company's sales of
products , or 100% of total sales, were made to Dr. Suwelack Skin & Health Care
AG ("Dr. Suwelack"), a German corporation. James A. Hayward, a director and
Chief Executive Officer of the Company, is Dr. Suwelack's President and serves
on its board of directors. As of September 30, 2006, amounts owed to the Company
by Dr. Suwelack are $9,630, which amount is included in accounts receivable.
NOTE F - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock with a
$0.001 par value per share. The Company is authorized to issue 250,000,000
shares of common stock, with a $0.001 par value per share as the result of a
shareholder meeting conducted on February 14, 2005. Prior to the February 14,
2005 share increase and par value change, the Company had 100,000,000 authorized
shares with a par value of $0.50. In February 2005, the Company passed a
resolution authorizing change in the par value per common shares from $0.50 per
share to $0.001 per share.
The preferred stock is convertible at the option of the holder into common stock
at the rate of twenty-five (25) shares of common for every one share of
preferred at the option of the holder.
Preferred and Common Stock Transactions During the Year Ended September 30, 2003
During the period September 16, 2002 through September 30, 2003, the Company
issued 100,000 shares of common stock in exchange for reimbursement of services
provided by the founders of the Company. The Company valued the shares issued at
approximately $1,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
In October, 2002, the Company issued 10,178,352 shares of common stock in
exchange for the previously issued 100,000 shares to the Company's founders in
connection with the merger with Prohealth Medical Technologies, Inc.
In October, 2002 the Company canceled 100,000 shares of common stock issued to
the Company's founders.
F-36
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE F - CAPITAL STOCK (continued)
During the fiscal year ended September 30, 2003, the Company issued 2,369,130
shares of common stock, net of cancellation of 860,000 shares in exchange for
consulting services. The Company valued the shares issued at $2,191,227, net of
cancellation of $60,008, which represents the fair value of the services
received which did not differ materially from the value of the stock issued.
In November 2003, the Company issued 876,000 shares of common stock in exchange
for subscription at approximately $ 0.065 per share.
In January 2003, the Company issued 1,500,000 shares of common stock in exchange
for a licensing agreement (see Note I). The Company valued the shares issued at
approximately $0.065 per share, which represents the fair value of the license
received which did not differ materially from the value of the stock issued. The
Company charged the cost of the license to operations.
In March 2003, the Company issued 10,140,000 shares of common stock to Company's
founders in exchange for services. In accordance with EITF 96-18 the measurement
date to determine fair value was in September 2002. This was the date at which a
commitment for performance by the counter party to earn the equity instrument
was reached. The Company valued the shares issued at approximately $0.0001 per
share, which presents the fair value of the services received which did not
differ materially from the value of the stock issued.
In connection with the Company's acquisition of ProHealth, the controlling owner
of ProHealth granted the Company an option to acquire up to 8,500,000 shares of
the Company's common stock in exchange for $100,000 (see Note C). The option
expires on December 10, 2004. On June 30, 2003, the Company exercised its option
and acquired 7,500,000 common shares under this agreement in exchange for an
$88,500 convertible promissory note payable to the former controlling owner. The
Company has an option through December 10, 2004 to acquire the remaining
1,000,000 shares from the former controlling owner in exchange for $11,500. On
June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant
to the option agreement.
In September 2003, the Company issued 19,200 shares of common stock for cash
previously subscribed at $2.50 per share.
During the fiscal year ended September 30, 2003, the Company issued 154,000
shares of common stock in exchange for previously issued options to purchase the
Company's common stock at $1.00 per share.
During the fiscal year ended September 30, 2003, the Company issued 74,400
shares of common stock in exchange for cash at approximately $0.89 per share.
Preferred and Common Stock Transactions During the Year Ended September 30, 2004
In October 2003, the Company issued 15,000 shares of convertible preferred stock
in exchange for services. The Company valued the shares issued at the $15 par
value and recorded the value for services when the shares were converted into
common shares as identified below.
During the fiscal year ended September 30, 2004, the Company issued 5,149,472
shares of common stock, net of cancellation of 155,000 shares, in exchange for
consulting services. The Company valued the shares issued at $8,787,315, net of
cancellation of $408,575, which represents the fair value of the services
received which did not differ materially from the value of the stock issued
During the fiscal year ended September 30, 2004, the Company issued 340,500
shares of common stock for shares previously subscribed at approximately $2.04
per share.
In March 2004, the Company issued 55,000 of common stock for options exercised
at $1.00 per share.
F-37
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE F - CAPITAL STOCK (continued)
During the fiscal year ended September 30 2004, the Company converted 15,000
preferred shares into 375,000 shares of common stock at $1.47 per share in
exchange for employee services valued at $549,750.
In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share
for total proceeds of $250,000 pursuant to private placement.
In September 2004, the Company issued 60,000 convertible preferred shares at
$25.00, in exchange for consulting services valued at $1,500,000.
Preferred and Common Stock Transactions During the Year Ended September 30, 2005
During the fiscal year ended September 30, 2005, the Company issued 11,040,647
shares of common stock, net of cancellation of 2,329,600 shares, in exchange for
consulting and employee services. The Company valued the shares issued at
$13,008,371, net of cancellation of $1,328,269, which represents the fair value
of the services received which did not differ materially from the value of the
stock issued
During the fiscal year ended September 30, 2005, the Company issued 1,500,000
shares of common stock for shares previously subscribed at approximately $0.54
per share.
During the fiscal year ended September 30, 2005, the Company issued 267,500
shares of common stock for warrants and options exercised at approximately $0.39
per share
During the fiscal year ended September 30, 2005, the Company retired $1,796,057
of convertible notes payable for 5,363,809 shares of common stock. The Notes are
convertible into shares of common stock at a price of $0.34 per share.
During the fiscal year ended September 30, 2005, the Company issued 14,442,000
shares of common stock at $0.50 per share pursuant to the exercise terms of
notes payable. This issuance is considered exempt under Regulation D of the
Securities Act of 1933 and Rule 506 promulgated thereunder.
In October 2004, the Company issued 500,000 shares of common stock in exchange
for debt at $0.50 per share.
In December 2004, the Company issued net 5,500,000 shares of common stock for
default as per terms of notes payable for $88,500. Out of total, 3,500,000
shares were retained in escrow on behalf of another party for future deferred
compensation.
In February 2005, the Company in exchange for a related party note in the
outstanding principal amount of $600,000 and as settlement for certain claims
related thereto issued 1,500,000 shares of common stock using a price of $1.31
per share. (See note E)
In July 2005, the Company issued 36 million shares in exchange for intellectual
property at approximately $0.67 per share for a total of $24,120,000. The value
of the acquired intangible assets was established at $9,430,900, with the
balance of the purchase price, or $14,689,100, charged to operations as a cost
of the transaction. (See Note B)
F-38
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE F - CAPITAL STOCK (continued)
In July 2005, the Company issued 8,550,000 shares of its common stock without
restriction to employees in exchange for services rendered. The Company valued
the shares issued at approximately $0.48 per share for a total of $3,840,000,
which represents the fair value of the services received which did not differ
materially from the value of the stock issued. The Company is investigating the
circumstances surrounding the issuance of the shares and the possible subsequent
resale of certain of the shares on the open market and the possibility of
violations of securities laws (see Note H).
In September 2005, the Company issued 814,158 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of July and August 2005. The
Company valued the shares issued at approximately $0.62 per share for a total of
$502,672.
In September 2005, the Company issued 391,224 penalty shares pursuant to the
pending SB-2 registration terms. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 30, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
was not effective by July 2005, the Company paid the required $257,985 of
liquidated damages in shares of Company stock accruing at the rate of 3.5% per
month on the face value of the Notes for the month of September 2005. The
Company valued the shares issued at approximately $0.70 per share for a total of
$273,857.
Preferred and Common Stock Transactions During the Year Ended September 30, 2006
In October 2005, the Company issued 100,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.75 per share for a total of $75,000, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued.
In October 2005, the Company cancelled 350,000 shares previously issued for
services valued at $210,000.
In October 2005, the Company issued 400,000 shares of common stock for services
rendered at $0.50 per share for a total of $200,000 which represents the fair
value of the services received which did not differ materially from value of the
stock issued.
In December, 2005, the Company issued 40,000 shares of common stock subscribed
for cash at $0.50 per share for a total of $20,000 pursuant to the terms of a
subscription payable. This issuance is considered exempt under Regulation D of
the Securities Act of 1933 and Rule 506 promulgated thereunder.
In December 2005, in connection with debt financing, the Company issued
5,500,000 warrants to purchase the Company's common stock at an exercise price
of $0.50 for five years. The fair value attributable to the warrants of $563,750
was recorded as to current period operations with an offsetting adjustment to
additional paid in capital.
In January, 2006, the Company cancelled 250,000 shares previously issued for
services valued at $150,000.
In January 2006, the Company issued 2,096,139 penalty shares pursuant to a
registration rights agreement. In connection with the 7,371,000 million
convertible debt financing in the quarter ended March 31, 2005, the Company was
obligated to complete a stock registration by July 2005. Since the registration
statement was not effective by July 2005, the Company paid the required $257,985
of liquidated damages in shares of Company stock accruing at the rate of 3.5%
per month on the face value of the Notes for the month of November and December
2005. The Company valued the shares issued at approximately $0.25 per share for
a total of $515,973. The Company continues to accrue the penalties relating to
the pending registration statement.
F-39
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE F - CAPITAL STOCK (continued)
In February 2006, the Company issued 160,000 shares of common stock in exchange
for consulting services. The Company valued the shares issued at approximately
$0.17 per share for a total of $27,200, which represents the fair value of the
services received which did not differ materially from the value of the stock
issued
In February 2006, the Company issued 3,800,000 shares of common stock in
exchange for consulting services. The Company valued the shares issued at
approximately $0.16 per share for a total of $608,000, which represents the fair
value of the services received which did not differ materially from the value of
the stock issued
In March 2006, the Company cancelled 150,000 shares previously issued for
services valued at $120,000.
In July 2006, the Company issued 2,400,000 shares of common stock in exchange
for consulting services. The Company valued the shares at $0.20 per share for a
total of $480,000, which represents the fair value of the services received
which did not differ materially from the value of the stock issued.
NOTE G - STOCK OPTIONS AND WARRANTS
Warrants
The Company issued options and warrants during the years ended September 30,
2006 and 2005 for consulting and employee services, fees in connection with
obtaining financing and various other services. The following table summarizes
the changes in options and warrants outstanding and the related prices for the
shares of the Company's common stock issued to shareholders of the Company.
These warrants were granted in lieu of cash compensation for services performed
or financing expenses in connection with the sale of the Company's common stock.
Warrants
Warrants Outstanding Exercisable
Weighted Average Weighed Weighted
Number Remaining Contractual Average Number Average
Exercise Exercise Exercise
Prices Outstanding Life (Years) Price Exercisable Price
------------- --------------- ------------------------- ----------- -------------- --------------
0.09 18,900,000 4.92 $ 0.09 18,900,000 $ 0.09
$0.10 105,464 2.76 $ 0.10 105,464 $ 0.10
$0.20 5,000 2.88 $ 0.20 5,000 $ 0.20
$0.50 16,450,000 3.77 $ 0.50 8,550,000 $ 0.50
$0.55 9,000,000 2.47 $ 0.55 9,000,000 $ 0.55
$0.60 9,132,000 3.38 $ 0.60 9,132,000 $ 0.60
$0.70 950,000 1.59 $ 0.70 950,000 $ 0.70
$0.75 17,727,000 3.75 $ 0.75 17,727,000 $ 0.75
$1.00 100,000 0.79 $ 1.00 100,000 $ 1.00
---------- ----------
72,369,464 64,469,464
F-40
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
Transactions involving warrants are summarized as follows:
Weighted Average Price
Number of Shares Per Share
Balance, September 30, 2004 4,870,253 $ 0.63
------------------ ---------------
Granted 32,873,000 0.71
Exercised (142,500) 0.34
Canceled or expired (731,289) 0.65
------------------ ---------------
Balance, September 30, 2005 36,869,464 $ 0.67
------------------ ---------------
Granted 35,250,000 0.29
Exercised - -
Canceled or expired - -
------------------ ---------------
Balance, September 30, 2006 72,119,464 $ 0.48
------------------ ---------------
In July 2005, the Company consummated an agreement with Trilogy Capital
Partners, Inc. and Joff Pollon ("Trilogy" and "Pollon") to provide marketing
services to the Company for a term of one year, and terminable thereafter by
either party upon 30 days prior written notice. In connection with the
agreement, the Company agreed to pay Trilogy a monthly fee of $12,500. The
Company also issued to Trilogy and Pollon warrants to purchase an aggregate of
9,000,000 shares of common stock at $0.55 per share, exercisable for a period
of three years from issuance. As the contract must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
net value of the warrants at the date of issuance was recorded as a warrant
liability of $4,117,500 and charged to operations as consulting fees. Upon the
registration statement being declared effective, the fair value of the warrants
on that date will be reclassified to equity. The Company initially valued the
warrants using the Black-Scholes pricing model with the following assumptions:
(1) dividend yield of 0%; (2) expected volatility of 155.03%, (3) risk-free
interest rate of 3.82%, and (4) expected life of 3 years.
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities", the Company revalued the warrants as of September 30, 2006 using
the Black-Scholes option pricing model. The difference between the fair value of
the warrants as of September 30, 2006 and the previous valuation as of July,
2005 has been recorded as a gain on revaluation of warrant liability, and
included in the accompanying consolidated financial statements (see Note H)
In the year ended September 30, 2006, the Company granted 5,500,000 warrants to
holders of the Company's $550,000 notes payable with a $0.50 exercise price and
a five year life. For the first 36 months, the warrants include anti-dilution
protection assuming no adjustment in the exercise price per share of common
stock upon any reverse split of the Company's common stock.
In the year ended September 30, 2006, the Company granted 200,000 warrants as
settlement to bridge financing with a $0.70 exercise price and a three year
life.
In the year ended September 30, 2006, the Company granted 10,900,000 warrants to
holders of the Company's convertible notes (See Note D). The warrants have an
exercise price of $0.50 per with a five year life. Under certain conditions, as
described in Note D, the Company as the option to redeem these warrants.
F-41
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
During the year ended September 30, 2006, the Company granted 18,900,000
warrants to directors and advisors in exchange for services.. The estimated fair
value of the compensatory warrants granted to the non-employees in exchange for
services was determined using the Black-Scholes pricing model and the following
assumptions: contractual term of 5 years, a risk free interest rate of 4.68%, a
dividend yield of 0% and volatility of 123%. The amount of the expense charged
to operations for compensatory warrants granted in exchange for services was
$1,426,725 for the year ended September 30, 2006.
The aggregate amounts of the expense charged to operations for compensatory
warrants granted in exchange for services and financing expenses was $1,426,725
and $7,358,569, respectively, for the years ended September 30, 2006 and 2005.
Employee Stock Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
$ 0.68 3,660,000 4.75 $ 0.68 2,745,000 $ 0.68
0.09 2,000,000 4.91 0.09 - 0.09
--------- ------------
5,660,000 2,745,000 0.47
Transactions involving stock options issued to employees are summarized as
follows:
Number of Weighted Average Exercise
Shares Price Per Share
Outstanding at October 1, 2004 - $ -
Granted 3,660,000 0.68
Exercised - -
Cancelled or expired - -
----------- --------------
Outstanding at September 30, 2005 3,660,000 $ 0.68
Granted 2,000,000 0.09
Exercised - -
Canceled or expired - -
------------ --------------
Outstanding at September 30, 2006 5,660,000 $ 0.47
Effective January, 2006, the Company adopted SFAS 123R and recognized
compensation expense in its financial statements in fiscal 2006. Prior to the
adoption of SFAS 123R, the Company accounted for its stock option plans
according to Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, no compensation costs were recognized upon
issuance or exercise of stock options for fiscal 2005.
SFAS No. 123, "Accounting for Stock-Based Compensation," required the disclosure
of the estimated fair value of employee option grants and their impact on net
income using option pricing models that are designed to estimate the value of
options that, unlike employee stock options, can be traded at any time and are
transferable. In addition to restrictions on trading, employee stock options
F-42
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
may include other restrictions such as vesting periods. Further, such models
require the input of highly subjective assumptions, including the expected
volatility of the stock price.
The weighted-average fair value of stock options granted to employees during the
year ended September 30, 2006 and the weighted-average significant assumptions
used to determine those fair values, using a Black-Scholes option pricing model
are as follows:
F-43
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
2006
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 4.68%
Expected stock price volatility 123%
Expected dividend payout -
Expected option life (in years) 5
If the Company recognized compensation cost for the non-qualified employee stock
option plan in accordance with SFAS No. 123, the Company's pro forma net loss
and net loss per share would have been $ 68,515,869 and $1.08, respectively, for
the year ended September 30, 2005.
During the quarter ended March 31, 2005, the Company granted an aggregate of
300,000 stock options to directors that vested immediately. The exercise prices
of the stock options granted were below the fair value of the Company's common
stock at the grant date. Compensation expense of $180,000 was charged to
operations during the period ended March 30, 2005. In the quarter ended June 30,
2005, the Company canceled the unexercised 300,000 stock options and credited
expense for the previously recorded $180,000 in compensation.
In September 2006, the Company granted an aggregate of 2,000,000 stock options
to employees vesting based on future service. The exercise price of the stock
options granted was at the fair value of the Company's common stock at the grant
date and expires five years from date of issuance.
At September 30, 2006, the exercise price of the 5,660,000 options was higher
than the closing price of the Company's common stock on the NASD Over the
Counter Bulletin Board (the "OTC BB") on September 30, 2006.
The intrinsic value of options outstanding and exercisable is the difference
between the fair market value of the Company's common stock on the applicable
date ("Measurement Value") and the exercise price of those options that had an
exercise price that was less than the Measurement Value. The intrinsic value of
options exercised is the difference between the fair market value of the
Company's common stock on the date of exercise and the exercise price.
Information pertaining to the intrinsic value of options outstanding and
exercisable at September 30, 2006 and 2005 is provided below:
2006 2005
------------ ------------
Intrinsic value of options
Outstanding $ - $ -
Exercisable $ - $ -
Information pertaining to the intrinsic value of options exercised and the fair
value of options which became vested in each of the years ended September 30,
2006 and 2005 is provided below:
2006 2005
------------ ------------
Intrinsic value of options exercised $ - $ -
Fair value of options vested $ 153,000 $ 1,406,350
F-44
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE H - DEBT DERIVATIVE AND WARRANT LIABILITY
In accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities and EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock", the Company
accounted for identified embedded derivatives (See Note A) and warrants to
purchase its common stock that provide for the payment of liquidated damages if
the stipulated registration deadlines were not met as liabilities.
As of the date of this filing, the registration statement has not yet been
declared effective by the SEC. The Company determined the fair value of the
warrants using the Black-Scholes option pricing model. Assumptions regarding the
life were one to five years, expected dividend yield of 0%, a risk free rate of
4.57 to 4.90%, and a volatility of 127.02%. The determined value of both the
warrants and the underlying embedded derivatives as of September 30, 2006 was
$4,530,795. The net change in the fair value of the derivative and warrant
liability values from September 30, 2005 has been recorded as a gain from change
in debt derivative and warrant liabilities in the consolidated condensed
statement of operations.
NOTE I - INCOME TAXES
The Company has adopted Financial Accounting Standard No. 109 which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statement or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant.
F-45
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE I - INCOME TAXES (continued)
At September 30, 2006, the Company has available for federal income tax purposes
a net operating loss carryforward of approximately $90,000,000, expiring in the
year 2026, that may be used to offset future taxable income. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, since in the opinion of management based upon the earnings history of
the Company; it is more likely than not that the benefits will not be realized.
Due to significant changes in the Company's ownership, the future use of its
existing net operating losses may be limited. Components of deferred tax assets
as of September 30, 2006 are as follows:
Non current:
Net operating loss carryforward $32,172,000
-------------
Valuation allowance (32,172,000)
-------------
Net deferred tax asset $ --
-------------
NOTE J-LOSS PER SHARE
The following table presents the computation of basic and diluted losses per
share:
For the Year Ended For the Year Ended
September 30, 2006 September 30, 2005
---------------------------- --------------------------
Loss available for common shareholders $ (2,410,237) $ (67,109,519)
--------------------------- --------------------------
Basic and fully diluted loss per share $ (0.02) $ (1.05)
--------------------------- --------------------------
Weighted average common shares outstanding 116,911,022 63,917,009
Net loss per share is based upon the weighted average of shares of common stock
outstanding
NOTE K- COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases office space under operating lease in Stony Brook, New York
for its corporate use from an entity controlled by significant former
shareholder, expiring in November 2007. In November 2005, the Company vacated
the Los Angeles facility to relocate to the new Stony Brook New York address
(see Note K). Total lease rental expenses for the years ended on September 30,
2006 and 2005, was $50,812 and $138,661, respectively.
Commitments for minimum rentals under non-cancelable lease at September 30, 2006
are as follows:
Year ended September 30, 2007 $ 50,000
2008 4,167
---------------
$ 54,167
Employment and Consulting Agreements
The Company has consulting agreements with outside contractors, certain of whom
are also Company stockholders. The Agreements are generally month to month.
F-46
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE K- COMMITMENTS AND CONTINGENCIES (continued)
On July 15, 2005, we entered into a consulting agreement with Timpix for the
consulting services of three former Biowell employees, Drs. Jun-Jei Sheu, Ben
Liang and Johnson Chen. The consulting agreement is for the shorter of two
years, or until all of the consultants have obtained a visa to work in the
United States and execute employment agreements with us. Such consulting
agreement shall automatically renew for one year periods until terminated.
Pursuant to the consulting agreement, we shall pay $47,000 per month, which is
apportioned at $20,000 per month for Mr. Sheu, $15,000 per month for Mr. Liang
and $12,000 per month for Mr. Chen. In the event that either of Messrs. Sheu,
Liang or Chen becomes employed by us, the monthly consulting fee shall be
reduced accordingly. The Company has negotiated an agreement to restructure the
Consulting Agreement, whereby, fees owed to Timpix from July 2005 through
September 2006 will be waived. (See Note N).
Litigation
On or about November 24, 2004, Oceanic Consulting, S.A. filed a complaint
against the Company in the Superior Court of the State of New York. The
Complaint alleges a breach of contract. The Company and the Plaintiff settled
the dispute and the Company recorded the settlement amount as of September 30,
2006.
On or about January 10, 2005, Stern & Co. filed a complaint against the Company
in the United States District Court for the Southern District of New York. The
Complaint alleges a breach of contract. Subsequent to the date of the financial
statements, the Company and the Plaintiff settled the dispute and the Company
recorded the settlement amount as of September 30, 2006.
On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment
against us for $13,000 in the Superior Court of New Jersey, Middlesex County.
The Company settled this matter in May 2006.
On or about January 12, 2006, James Paul Brown, a former consultant to the
Company filed a complaint against the Company in the Superior Court of the State
of California. The Complaint alleges a breach of contract. Subsequent to the
date of the financial statements, the Company and the Plaintiff settled the
dispute and the Company recorded the settlement amount as of September 30, 2006.
In January 2006, a former employee of the Company filed a complaint alleging
wrongful termination against the Company. The former employee is seeking
$230,000 in damages. The Company believes that it has meritorious defenses to
the plaintiff's claims and intends to vigorously defend itself against the
Plaintiff's claims. Management believes the ultimate outcome of this matter will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
On or about April 4, 2006, the Company filed a complaint against Paul Reep,
Adrian Butash, John Barnett, Chanty Cheang, Jaime Cardona (former Company
employees and officers), and Angela Wiggins ( a former consultant to the
Company) in the United States District Court for the Central District of
California. The Company has asked the court to make a judicial determination
that an agreement, which the Company did not authorize and which is the basis of
previously disclosed litigation against the Company by Paul Reep, a former
employee of the Company, and a new action filed by former employees of the
Company as set forth in the subsequent paragraph, is invalid and unenforceable.
This matter is in its early stages.
F-47
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE K- COMMITMENTS AND CONTINGENCIES (continued)
On or about April 17, 2006, former employees of the Company filed a complaint
against the Company and certain of its current officers and Directors in Los
Angeles County Superior Court. The Complaint alleges a breach of contract,
violations of California Labor Code and wrongful termination and is seeking
$950,000 in specified damages, plus fees and costs. The complaint alleges a
breach of contract. The Company believes that it has meritorious defenses to the
plaintiff's claims and intends to vigorously defend itself against the
Plaintiff's claims. Management believes the ultimate outcome of this matter will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity.
Registration of Company's Shares of Common Stock
Until the Company successfully completes its pending registration statement on
SEC Form SB-2, the Company is subject to liquidated damages (see Notes D and H).
In connection with the $ 1,465,000 and $ 7,371,000 million convertible debt
financing during the quarters ended December 31, 2004 and March 31, 2005,
respectively, the Company was obligated to deliver registered shares underlying
the convertible notes and warrants by July 2005 (see Note C). Since the
registration was not effective by July 2005, the Company has been accruing and
charging to operations the stipulated liquidated damages in shares of Company
stock accruing at the rate of 3.5% per month on the face value of the previously
issued convertible notes. During the year ended September 30, 2006, the Company
has paid and charged to operations penalties of $773,958 in the form of
unregistered shares of its common stock to the former note holders, and has
accrued and charged to operations an additional $4,025,356 representing unpaid
penalties as of September 30, 2006
Matters Voluntarily Reported to the SEC and Securities Act Violations
We previously disclosed that we were investigating the circumstances surrounding
certain issuances of 8,550,000 shares to employees and consultants in July 2005
(see Note G), and have engaged our new outside counsel to conduct this
investigation. We have voluntarily reported our current findings from the
investigation to the SEC, and we have agreed to provide the SEC with further
information arising from the investigation. We believe that the issuance of
8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of the Board of Directors. These former officers received a total of
3,000,000 of these shares. In addition, it appears that the 8,000,000 shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance with the Securities Act of 1933, as amended. Our investigation is
continuing. The members of our management who effectuated the stock issuances
that are being examined in the investigation no longer work for us. We believe
that we may incur significant costs and expenses in continuing this
investigation. In the event that any of the exemptions from registration with
respect to the issuance of the Company's common stock under federal and
applicable state securities laws were not available, the Company may be subject
to claims by federal and state regulators for any such violations. In addition,
if any purchaser of the Company's common stock were to prevail in a suit
resulting from a violation of federal or applicable state securities laws, the
Company could be liable to return the amount paid for such securities with
interest thereon, less the amount of any income received thereon, upon tender of
such securities, or for damages if the purchaser no longer owns the securities.
As of the date of these financial statements, the Company is not aware of any
alleged specific violation or the likelihood of any claim. There can be no
assurance that litigation asserting such claims will not be initiated, or that
the Company would prevail in any such litigation.
F-48
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE K- COMMITMENTS AND CONTINGENCIES (continued)
The Company is unable to predict the extent of its ultimate liability with
respect to any and all future securities matters. The costs and other effects of
any future litigation, government investigations, legal and administrative cases
and proceedings, settlements, judgments and investigations, claims and changes
in this matter could have a material adverse effect on the Company's financial
condition and operating results
NOTE L - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements during the period September 16, 2002 through September 30,
2006, the Company incurred a loss of $92,334,791. These factors among others may
indicate that the Company will be unable to continue as a going concern for a
reasonable period of time.
The Company's existence is dependent upon management's ability to develop
profitable operations. Management is devoting substantially all of its efforts
to developing DNA embedded biotechnology security solutions in the United States
and there can be no assurance that the Company's efforts will be successful.
However, the planned principal operations have not commenced and no assurance
can be given that management's actions will result in profitable operations or
the resolution of its liquidity problems. The accompanying statements do not
include any adjustments that might result should the Company be unable to
continue as a going concern.
In order to improve the Company's liquidity, the Company's management is
actively pursuing additional equity financing through discussions with
investment bankers and private investors. There can be no assurance the Company
will be successful in its effort to secure additional equity financing
NOTE M - RESTATEMENT
The Company has restated its financial statements for the year ended September
30, 2005 and the period from September 16, 2002 (date of inception) through
September 30, 2005 by filing an amended Form 10-KSB for the fiscal year ended
September 30, 2005 to correct the following errors in the financial statements
previously filed:
The Company did not recognize and record as a current period expense, warrants
issued to consultants and non-employees having a fair value of $7,358,568 (see
Note F).
The Company erroneously recorded the value of shares issued to a former Director
in exchange for previously incurred debt of $1,365,000 (see Note E).
The Company did record the fair value of warrants issued to note holders and
consultants having registration rights, $23,148,214 in the aggregate, as a
charge of operations and a liability in accordance with EITF 00-19 (see Note D).
The Company did not record the gain of $16,700,991 on revaluation for the
warrant liability as of September 30, 2005 (see Note D).
The results of the correction of these errors include:
o Increase in the Company's reported net loss for the year ended September
30, 2005 by $14,499,139 from $52,610,380 to $67,109,529.
o Increase in the Company's current liabilities as of September 30, 2005
by $384,651 from $2,595,897 to $2,980,548.
F-49
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE M - RESTATEMENT (continued)
o Increase in the Company's other liabilities, representing warranty
liabilities, as of September 30, 2005 by $13,673,574 from $0 to
$13,673,574.
The result of the Consolidated Balance Sheet restatement is:
Increase in accounts payable and accrued expenses as of September 30, 2005 from
$2,185,468 to $2,570,119, or $384,651. The increase is a result of an error in
recognizing, recording and accruing the fair value of warrants issued to
non-employees and consultants of $384,651 as of September 30, 2005.
Increase in warrant liability as of September 30, 2005 $0 to $13,673,574. The
increase is a result of an error in accounting for the issuance of warrants
subject to a registration rights agreement that provides for the payment of
liquidated damages if the stipulated registration deadlines were not met (see
Note D). In accordance with SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities," the Company revalued the warrants issued subject to
registration rights as of September 30, 2005 (see Note G). The fair value of the
warrants as of September 30, 2005 was $13,673,574 and has been recorded as a
warrant liability.
The following chart sets forth reconciliations of the Company's restatement of
the Consolidated Balance Sheet as of September 30, 2005.
September 30, 2005
(As Restated) (As Reported)
ASSETS
Current Assets:
Cash $ 31,190 $ 31,190
Accounts receivable and advances 12,429 12,429
----------- -----------
Total current assets 43,619 43,619
Property, plant and equipment 12,750 12,750
Less: accumulated depreciation (4,686) (4,686)
----------- -----------
8,064 8,064
Other Assets:
Deposits 14,262 14,262
Intangible assets:
Patents, net of accumulated amortization 22,493 22,493
Intellectual Property ,net of accumulated amortization 9,094,082 9,094,082
----------- -----------
9,130,837 9,130,837
----------- -----------
$ 9,182,520 $ 9,182,520
=========== ===========
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 2,570,119 $ 2,185,468
Note payable - Related Party 410,429 410,429
----------- -----------
Total Current Liabilities 2,980,548 2,595,897
Warrant liability 13,673,574 -
Deficiency in Stockholders' Equity:
Preferred Stock 6 6
Common Stock 112,230 112,230
Common stock subscribed 20,000 20,000
Additional Paid-In-Capital 82,320,715 81,879,801
Deficit Accumulated During Development Stage (89,924,553) (75,425,414)
Total (Deficiency) in Stockholders' Equity (7,471,602) 6,586,623
$ 9,182,520 $ 9,182,520
F-50
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE M - RESTATEMENT (continued)
The result of the Consolidated Statement of Losses restatement is:
Increase in selling, general and administrative expenses for the year ended
September 30, 2005 from $42,662,152 to $50,714,015, or $8,051,863. The increase
is a result of an error in recognizing and recording the fair value of warrants
issued to non-employees and consultants of $6,402,264, an error in recognizing
and recording the fair value of stock issued in settlement of debt of $1,365,000
and an error in recognizing and recording additional compensation expense of
$284,599.
Increase in selling, general and administrative expenses for the period from
September 16, 2002 (date of inception) through September 30, 2005 from
$63,483,689 to $71,535,604, or $8,051,915. The increase is a result of an error
in recognizing and recording the fair value of warrants issued to non-employees
and consultants of $6,402,264, an error in recognizing and recording the fair
value of stock issued in settlement of debt of $1,365,000 and an error in
recognizing and recording of additional compensation expense of $284,599.
Increase in the net gain on the revaluation of warrant liability for the year
ended September 30, 2005 from $0 to $16,700,990, or $16,700,990. The increase is
a result of an error in accounting for the issuance of warrants subject to a
registration rights agreement that provides for the payment of liquidated
damages if the stipulated registration deadlines were not met (see Note D). In
accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities," the Company revalued the warrants issued subject to registration
rights as of September 30, 2005 (see Note G). The difference of $16,700,991
between the fair value of the warrants as of September 30, 2005 and the previous
valuation has been recorded as a gain on revaluation of warrant liability.
Increase in the net gain on the revaluation of warrant liability for the period
September 16, 2002 (date of inception) through September 30, 2005 from $0 to
$16,700,990, or $16,700,990. The increase is a result of an error in accounting
for the issuance of warrants subject to a registration rights agreement that
provides for the payment of liquidated damages if the stipulated registration
deadlines were not met (see Note D). In accordance with SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities," the Company revalued the
warrants issued subject to registration rights as of September 30, 2005 (see
Note G). The difference of $16,700,991 between the fair value of the warrants as
of September 30, 2005 and the previous valuation has been recorded as a gain on
revaluation of warrant liability.
Increase in the interest expense for the year ended September 30, 2005 from
$8,958,046 to $32,106,310, or $23,148,264. The increase is a result of an error
in recording and recognizing the recording of the initial valuation of warrants
issued in conjunction with financing as a liability subject to registration
rights.
Increase in the interest expense for the period September 16, 2002 (date of
inception) through September 30, 2005 from $10,736,232 to $33,884,446, or
$23,148,214. The increase is a result of an error in recording and recognizing
the initial valuation of warrants issued in conjunction with financing as a
liability subject to registration rights.
The following chart sets forth reconciliations of the Company's restatement of
the Consolidated Statement of Losses for the year ended September 30, 2005 as
well as the period from September 16, 2002 (date of inception of development
stage) through September 30, 2005.
F-51
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE M - RESTATEMENT (continued)
For the Period September 16, 2002
(date of Inception of Development
For the Year Ended September 30, 2005 Stage) through September 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
Operating Expenses:
Selling general and
administrative $ 50,714,017 $ 42,662,152 $ 71,535,604 $ 63,483,689
Research and
Development 638,873 638,873 877,408 877,408
Depreciation and
amortization 356,266 356,266 359,427 359,427
Total Operating
Expenses 51,709,156 43,657,291 72,772,439 64,720,524
Operating Income
(Loss) (51,709,156) (43,657,291) (72,772,439) (64,720,524)
Net gain (loss) in
fair value of debt
derivative and
warrant liabilities 16,700,990 - 16,700,990 -
Other income
(expense) 4,957 4,957 31,342 31,342
Interest income
(expense) (32,106,310) (8,958,046) (33,884,446) (10,736,232)
Provision for income
taxes - - - -
Net Income (Loss) $ (67,109,569) $ (52,610,380) $ (89,924,553) $(75,425,414)
Basic and diluted
loss per common
share $ (1.05) $ (0.82) $ (2.53) $ (2.12)
Weighted average
shares outstanding 63,517,009 63,517,009 35,590,871 35,570,559
The results of the restatement of the cash flow include:
Cash Flows From Operating Activities:
Increase in net loss for the year ended September 30, 2005 from $52,610,380 to
$67,109,519, or $14,499,139, resulting from items listed above.
Increase in net loss for the period from September 16, 2002 (date of inception)
through September 30, 2005 from $75,425,414 to $89,924,553, or $14,499,139
resulting from items listed above.
Increase in the non-cash value of warrants issued to consultants for services
rendered for the year ended September 30, 2005 from $956,304 to 7,358,568, or
$6,402,264. The increase is a result of an error in recognizing and recording
the fair value of warrants to acquire our common stock issued to non-employees
and consultants and charged to operations (see Note G).
F-52
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE M - RESTATEMENT (continued)
Increase in the non-cash value of warrants issued to consultants for services
rendered for the period from September 16, 2002 (date of inception) through
September 30, 2005 from $956,304 to 7,358,568, or $6,402,264. The increase is a
result of an error in recognizing and recording the fair value of warrants to
acquire our common stock issued to non-employees and consultants and charged to
operations (see Note G).
Increase in the non-cash income attributable to re-pricing the warrant liability
and debt derivatives for the year ended September 30, 2005 from $0 to
16,700,991, or $16,700,991. The increase is a result of an error in accounting
for the issuance of warrants subject to a registration rights agreement that
provides for the payment of liquidated damages if the stipulated registration
deadlines were not met (see Note D). In accordance with SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities," the Company revalued the
warrants issued subject to registration rights as of September 30, 2005 (see
Note G).
Increase in the non-cash income attributable to re-pricing the warrant liability
and debt derivatives for the period from September 16, 2002 (date of inception)
through September 30, 2005 from $0 to $16,700,991, or $16,700,991. The increase
is a result of an error in accounting for the issuance of warrants subject to a
registration rights agreement that provides for the payment of liquidated
damages if the stipulated registration deadlines were not met (see Note D). In
accordance with SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities," the Company revalued the warrants issued subject to registration
rights as of September 30, 2005 (see Note G).
Increase in the non-cash financing costs attributable to the issuance of
warrants for the year ended September 30, 2005 from $0 to $23,148,214, or
$23,148,264. The increase is a result of an error in recording and recognizing
the recording of the initial valuation of warrants issued in conjunction with
financing as a liability subject to registration rights.
Increase in the non-cash financing costs attributable to the issuance of
warrants for the period from September 16, 2002 (date of inception) through
September 30, 2005 from $0 to $23,148,214, or $23,148,214. The increase is a
result of an error in recording and recognizing the recording of the initial
valuation of warrants issued in conjunction with financing as a liability
subject to registration rights.
Increase in the non-cash cost of the fair value of common stock issued to a
related party in excess of previously incurred debt for the year ended September
30, 2005 from $0 to $1,365,000, or $1,365,000. The increase is a result of an
error in recording and recognizing the fair value of stock issued in settlement
of debt of $1,365,000 to a former Director of the Company (See Note E).
Increase in the non-cash cost of the fair value of common stock issued to a
related party in excess of previously incurred debt for the period from
September 16, 2002 (date of inception) through September 30, 2005 from $0 to
$1,365,000, or $1,365,000. The increase is a result of an error in recording and
recognizing the fair value of stock issued in settlement of debt of $1,365,000
to a former Director of the Company (See Note E). Increase in the non-cash cost
of the fair value of common stock issued in exchange for services for the period
from September 16, 2002 (date of inception) through September 30, 2005 from
$27,202,860 to $30,574,373, or $3,371,513. The increase is a result of an error
in recording and recognizing the fair value of stock issued for services by
employees and non-employees and a reclassification common stock previously
disclosed as stock issued pursuant to a employee stock option plan (See Note F).
Decrease in non-cash cost of common stock issued pursuant to an employee stock
option plan for the year ended September 30, 2005 from $3,960,000 to $0, or
$3,960,000. The decrease is a result of reclassifying common stock issued
pursuant to an employee stock option plan to common stock issued in exchange for
services (See Note F).
F-53
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE M - RESTATEMENT (continued)
Decrease in non-cash cost of common stock issued pursuant to an employee stock
option plan for the period from September 16, 2002 (date of inception) through
September 30, 2005 from $3,960,000 to $0, or $3,960,000. The decrease is a
result of reclassifying common stock issued pursuant to an employee stock option
plan to common stock issued in exchange for services (See Note F).
Decrease in non-cash cost of common stock cancelled-previously issued for
services rendered for the year ended September 30, 2005 from $1,078,270 to
$578,270, or $500,000. The decrease is a result of an error in recording and
recognizing the fair value of stock issued for services by employees and
non-employees that was subsequently cancelled (See Note F).
Decrease in non-cash cost of common stock cancelled-previously issued for
services rendered for the period from September 16, 2002 (date of inception)
through the year ended September 30, 2005 from $1,363,845 to $863,845, or
$500,000. The decrease is a result of an error in recording and recognizing the
fair value of stock issued for services by employees and non-employees that was
subsequently cancelled (See Note F). Decrease in cost of capital expenditures
for the year ended September 30, 2005 from $16,757 to $0, or $16,757.
The decrease is a result of reclassifying disbursement for the acquisition of
equipment from operating activities to investing activities.
Increase in the amount of net proceeds from sale of equipment for the period
from September 16, 2002 (date of inception) through the year ended September 30,
2005 from $12,750 to $0, or $12,750. The increase is a result of reclassifying
net proceeds received the sale of equipment from operating activities to
investing activities.
Increase in change of accounts payable and accrued liabilities for the year
ended September 30, 2005 from $297,755 to $663,748, or $365,993. The increase is
a result of an error in recognizing, recording and accruing the fair value of
warrants issued to non-employees and consultants as of September 30, 2005.
Increase in change of accounts payable and accrued liabilities for the period
from September 16, 2002 (date of inception) through September 30, 2005 from
$2,053,464 to $2,419,457, or $365,993. The increase is a result of an error in
recognizing, recording and accruing the fair value of warrants issued to
non-employees and consultants as of September 30, 2005.
Cash Flows From Investing Activities:
Increase in the cash provided by the sale of equipment for the year ended
September 30, 2005 from $0 to $16,757, or $16,757. The increase is a result of
an error in properly classifying proceeds from the sale of equipment as an
investing activity.
Decrease in the cash used in capital expenditures for the period from September
16, 2002 (date of inception) through September 30, 2005 from $0 to $12,750, or
$12,750. The decrease is a result of an error in properly classifying net
disbursements in connection with acquiring equipment as an investing activity.
Cash Flows From Financing Activities:
Increase in the cash used in repayment of previously incurred debt for the year
ended September 30, 2005 from $0 to $24,854, or $24,854. The increase is a
result of an error in classifying repayment of debt as a financing activity.
Increase in the cash used in repayment of previously incurred debt for the
period from September 16, 2002 (date of inception) through September 30, 2005
from $0 to $24,854, or $24,854. The increase is a result of an error in properly
classifying repayment of debt as a financing activity.
F-54
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE M - RESTATEMENT (continued)
Increase in proceeds from the sale of options to acquire the Company's common
stock for the year ended September 30, 2005 from $70,750 to $102,750, or
$32,000. The increase is a result of an error in recognizing and recording
$32,000 of proceeds from the exercise of options as issuance of common stock
(see Note F).
Increase in proceeds from the sale of options to acquire the Company's common
stock for the period from September 16, 2002 (date of inception) through
September 30, 2005 from $311,750 to $343,750, or $32,000. The increase is a
result of an error in recognizing and recording $32,000 of proceeds from the
exercise of options as issuance of common stock (see Note F).
Decrease in proceeds from subscription of common stock for the year ended
September 30, 2005 from $9,079,000 to $0, or $9,079,000. The decrease is a
result of an error in recognizing and recording the proceeds from the issuance
of convertible notes that were exchanged for the Company's common stock ( see
Note D). Decrease in proceeds from subscription of common stock for the period
September 16, 2002 (date of inception) through September 30, 2005 from
$9,204,000 to $0, or $9,204,000. The decrease is a result of an error in
recognizing and recording the proceeds from the issuance of convertible notes
that were exchanged for the Company's common stock ( see Note D).
The following chart sets forth reconciliations of the Company's restatement of
the Consolidated Statement of Cash Flows for the year ended September 30, 2005
as well as the period September 16, 2002 (date of inception of development
stage) through September 30, 2005.
For the Period September 16, 2002
For the Year Ended September (date of Inception of Development
30, 2005 Stage) through September 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
Cash flows from
Operating Activities:
Net income (loss) $(67,109,519) $(52,610,380) $ (89,924,553) $ (75,425,414)
Adjustment to reconcile
net loss to net cash used
in operating activities:
Amortization and
depreciation 350,107 350,107 353,268 353,268
Organization expenses - - 88,500 88,500
Preferred share issued in
exchange for services - - 1,500,000 1,500,000
Warrants issued to
consultants in exchange
for services rendered 7,358,568 956,304 9,378,430 2,976,166
Income attributable to
repricing of warrant and
debt derivatives (16,700,991) - (16,700,991) -
Financing costs
attributable to issuance
of warrants 23,148,214 - 23,148,214 -
F-55
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE M - RESTATEMENT (continued)
For the Period September 16, 2002
For the Year Ended September (date of Inception of Development
30, 2005 Stage) through September 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
Amortization of beneficial
conversion feature-
convertible notes 8,836,000 8,836,000 10,461,000 10,461,000
Amortization of
capitalized financing costs - - - -
Amortization of debt
discount attributable to
convertible notes - - - -
Fair value of common stock
issued to related party in
excess of previously
incurred debt 1,365,000 - 1,365,000 -
Common stock issued in
exchange for services 18,176,641 14,805,128 30,574,373 27,202,860
Common stock issued to ESOP - 3,960,000 - 3,960,000
Common stock exchanged for
intellectual property in
connection with costs of
acquiring intangible
assets 14,689,100 14,689,100 14,689,100 14,689,100
Common stock issued as
penalty in connection with
financing 776,529 776,529 776,529 776,529
Common stock canceled-
previously issued for
services rendered (578,270) (1,078,270) (863,845) (1,363,845)
Change in assets and
liabilities:
Increase in accounts
receivable (12,429) (12,429) (12,429) (12,429)
Increase in prepaid assets
and deposits 9,297 9,297 (14,262) (14,262)
Decrease in other assets - - (13,890) (13,890)
F-56
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE M - RESTATEMENT (continued)
For the Period September 16, 2002
For the Year Ended September 30, (date of Inception of Development
2005 Stage) through September 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
Capital expenditures - 16,757 - (12,750)
Increase (Decrease) in due
related parties (111,943) (111,943) 40,753 40,753
Increase (decrease) in
accounts payable and
accrued liabilities 663,748 297,755 2,419,457 2,053,464
Net cash used in operating
activities (9,139,948) (9,116,045) (12,735,346) (12,740,950)
Cash flows from investing
activities:
Payments for patent filing (4,347) (4,347) (25,698) (25,698)
Capital expenditures
(disposals) 16,757 - (12,750) -
Net cash used in investing
activities 12,410 (4,347) (38,448) (25,689)
Cash Flows From Financing
Activities:
Proceeds from sale of
common stock, net of
costs - - 432,000 432,000
Proceeds from subscription
of common stock - 9,079,000 - 9,204,000
Proceeds form issuance of
convertible notes 9,079,000 - 9,204,000 -
Proceeds from sale of
options 102,750 70,750 343,750 311,750
Payment of debt (24,854) - (24,854) -
Proceeds from loans - - 2,750,000 2,750,000
Advances from (to)
shareholders - - 100,088 100,088
Cash provided by financing
activities 9,156,896 9,149,750 12,804,984 12,797,838
Net (decrease) increase in
cash and cash equivalents 29,358 29,358 31,190 31,190
Cash, beginning of period 1,832 1,832 - -
Cash and cash equivalents,
end of period $ 31,190 $ 31,190 $ 31,190 $31,190
F-57
APPLIED DNA SCIENCES, INC
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE N - SUBSEQUENT EVENTS
On November 28, 2006, the Company issued 180,000 shares of its common stock as
settlement of the outstanding related party note payable of $410,429 and related
accrued interest of $8,884 (See Note E)
On November 13, 2006, the Company restructured its consulting agreement with
Timpix International Limited ("Timpix" for consulting services of three former
Biowell employees. Drs Jun-Jei Sheu, Ben Liang and Johnson Chen. The
restructured consulting agreement expires on July 15, 2007 or until all of the
consultants have obtained a visa to work in the United States and execute
employment agreements with the Company. The revised consulting agreement shall
automatically renew for one year periods until terminated. Pursuant to the
agreement, the Company is obligated to pay $120,000, $100,000 and $80,000 per
year pro-rated for each week, or part thereof, of time spent in the United
States providing full time services for Drs Jun-Jei Sheu, Ben Liang and Johnson
Chen, respectively. The Company is obligated to provide a corporate house
available for the Consultants while working in the United States. All previous
fees incurred through November 13, 2006 have been waived. (See Notes E and K)
F-58
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements between the Company and its
accountants as to matters which require disclosure.
Item 8A -- Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. As of September
30, 2006, the Company's management carried out an evaluation, under the
supervision of the Company's Chief Executive Officer (who is its principal
executive officer and principal financial officer), of the effectiveness of the
design and operation of the Company's system of disclosure controls and
procedures pursuant to the Securities and Exchange Act and Rules 13a-15(e) and
15d-15(e) thereunder. Based upon that evaluation, the Company's Chief Executive
Officer concluded that the Company's disclosure controls and procedures were not
effective, as of the date of their evaluation, for the purposes of recording,
processing, summarizing and timely reporting material information required to be
disclosed in reports filed by the Company under the Securities Exchange Act of
1934.
As previously disclosed in our Current Reports on Form 8-K, filed on
May 18, 2006 and October 2, 2006, and Note M to our accompanying consolidated
financial statements, as a result of comments raised by the SEC, we determined
that accounting errors were made in connection with
o accounting for and disclosing the fair value of warrants and
options to acquire our common stock issued to non-employees as a
current period expense;
o accounting for and disclosing the fair value of shares issued to a
former Director in exchange for previously incurred debt;
o accounting for and disclosing the fair value of warrants issued to
note holders and consultants having registration rights; and
o accounting for and disclosing the revaluation for warrant
liabilities as of each reporting period.
Based on the impact of the aforementioned accounting errors, we
determined to restate our consolidated financial statements as of September 30,
2005 and the year then ended and the period September 16, 2002 (date of
inception as a development stage company) through September 30, 2005.
b) Changes in internal controls. Except as described below, there were
no changes in internal controls over financial reporting that occurred during
the period covered by this report that have materially affected, or are
reasonably likely to materially effect, our internal control over financial
reporting.
Significant Deficiencies In Disclosure Controls and Procedures or Internal
Controls
In addition to the remedial measures undertaken during the three months
ended June 30, 2006 we previously disclosed in our Current Report on Form 8-K/A
filed on May 18, 2006, that we have subsequently implemented the following
additional measures to address the identified material weaknesses:
o We reviewed all convertible securities to identify any securities
that may have embedded beneficial conversion features or
derivatives; and
o We have improved the supervision and training of our
accounting staff to understand and implement applicable
accounting requirements, policies and procedures applicable to the
accounting and disclosure of convertible securities and
derivatives.
Item 8B -- Other Information
None.
33
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following is a list of our directors, executive officers and
significant employees.
Name Age Title Board of Directors
Jun-Jei Sheu 40 Chairman of the Board Director
James A. Hayward 53 Chief Executive Officer Director
Sanford R. Simon 63 Director
Yacov Shamash 56 Director
Ming-Hwa Benjamin Liang 43 Secretary and Strategic
Technology Development Officer
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are four seats on our board of directors.
Currently, the members of our board of directors do not receive any
fees for being a director or attending meetings. Our directors are reimbursed
for out-of-pocket expenses relating to attendance at meetings. Officers are
elected by the Board of Directors and serve until their successors are appointed
by the Board of Directors. Biographical resumes of each officer and director are
set forth below.
Chairman of the Board - Jun-Jei Sheu
On July 15, 2005, Dr. Jun-Jei Sheu was appointed as a director and
elected Chairman by the board of directors. Since November 2000, Dr. Sheu has
been the Chairman of Biowell Technology Inc. Between November 2000 and August
2005, Dr. Sheu was the Chief Executive Officer of Biowell Technology Inc.
Dr. Sheu received his bachelor's degree in Biology from Fu-Jen Catholic
University in 1988, his Masters degree in Biology from Fu-Jen Catholic
University in 1990, his Ph.D in Life Sciences from Intermural of Academia
Sinica & National Defense Medical Center in 1996 and his MBA from South
Australia University in 2000. Dr. Sheu is also a director of Biowell Technology
(S) Pte Ltd., a Singapore company, Biotechcard International Pte (S) Ltd. a
Singapore company, Yan Zhan Life Technology & Marketing Inc., a Taiwanese
company and Biowell Technology (Suzhou) Co. Ltd., a Chinese company, all of
which are biotechnology companies.
Chief Executive Officer - James A. Hayward
Dr. James A. Hayward has been our Chief Executive Officer since March
17, 2006, prior to which he was acting Chief Executive Officer since October 5,
2005. Since January 2006, Dr. Hayward has served as the part-time President of
Dr. Suwelack Skin and Healthcare, a private company that manufactures biological
matrices for wound care and skin care in Billerbeck, Germany. Since June 2004,
Dr. Hayward has been the Chairman of Evotope Biosciences, Inc., a drug
development company based in Stony Brook, New York. Since 2001, Dr. Hayward has
been a director of Q-RNA, Inc., a biotech company based in New York, New York.
Since 2000, Dr. Hayward has been a General Partner of Double D Venture Fund, a
venture capital firm based in New York, New York. Between 1990 and July 2004,
Dr. Hayward was the Chairman, President and CEO of The Collaborative Group,
Ltd., a provider of products and services to the biotechnology, pharmaceutical
and consumer-product industries based in Stony Brook, New York. Dr. Hayward
received his bachelor's degree in Biology and Chemistry from the State
University of New York at Oneonta in 1976, his Ph.D. in Molecular Biology from
the State University of New York at Stony Brook in 1983, and an honorary Doctor
of Science from Stony Brook in 2000. Dr. Hayward has served on the boards of the
Council on Biotechnology, the Long Island Association, the Stony Brook
Foundation, the Research Foundation of State University of New York Board of
Directors, the New York Biotechnology Association, the Long Island Life Sciences
Initiative and the Ward Melville Heritage Organization.
Director - Yacov Shamash
Dr. Yacov Shamash has been a member of the board of directors since
March 17, 2006. Dr. Shamash is Vice President of Economic Development at the
State University of New York at Stony Brook. Since 1992, he has been the Dean of
Engineering and Applied Sciences and the Harriman School for Management and
Policy at the University, and Founder of the New York State Center for
Excellence in Wireless Technologies at the University. Dr. Shamash developed and
directed the NSF Industry/University Cooperative Research Center for
the Design of Analog/Digital Integrated Circuits from 1989 to
1992 and also served as Chairman of the Electrical and Computer
34
Engineering Department at Washington State University from 1985
until 1992. Dr. Shamash also serves on the Board of Directors of Keytronic
Corp., Netsmart Technologies, Inc., American Medical Alert Corp., and
Softheon Corp.
Director - Sanford R. Simon
Dr. Sanford R. Simon has been a member of the board of directors since
March 17, 2006. Dr. Simon has been a Professor of Biochemistry, Cell Biology and
Pathology at Stony Brook since 1997. He joined the faculty at Stony Brook as an
Assistant Professor in 1969 and was promoted to Associate Professor with tenure
in 1975. Dr. Simon was a member of the Board of Directors of The Collaborative
Group from 1995 to 2004. From 1967 to 1969 Dr. Simon was a Guest Investigator at
Rockefeller University. Dr. Simon received a B.A. in Zoology and Chemistry from
Columbia University in 1963, a Ph.D. in Biochemistry from Rockefeller University
in 1967, and studied as a postdoctoral fellow with Nobel Prize winner Max Perutz
in Cambridge, England.
Secretary and Strategic Technology Development Officer - Ming-Hwa Benjamin Liang
Ming-Hwa Benjamin Liang has been our Secretary and Strategic
Technology Development Officer since October 2005. Between May 1999 and
September 2005, Mr. Liang has been the director of research and development at
Biowell Technology Inc. Mr. Liang received a B.S. in Bio-Agriculture from
Colorado State University in 1989, a M.S. in Horticulture from the
University of Missouri at Columbia in 1991, his Ph.D. in Plant Science from the
University of Missouri at Columbia in 1997 and his LL.M. in Intellectual
Property Law from Shih Hsin University, Taiwan in 2004.
Code of Ethics
The Company has not yet adopted a Code of Ethics. The Company's Board
of Directors is in the process of reviewing whether it should adopt a Code of
Ethics given the scale and character of its operations at this time.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Since we are governed under Section 15(d) of the Exchange Act, we are
not required to file reports of executive officers and directors and persons who
own more than 10% of a registered class of the Company's equity securities
pursuant to Section 16(a) of the Exchange Act.
35
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid by us during the
fiscal years ended September 30, 2006, 2005 and 2004 to our Chief Executive
Officer and our former Chief Executive Officer. No executive officer of the
Company received total salary and bonus in excess of $100,000 during the fiscal
year ended September 30, 2006.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
Restricted Securities
Name and Annual Annual Other Annual Stock Underlying LTIP All Other
Principal Fiscal Salary Bonus Compensation Awards Options/SARs Payments Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
James A. 2006 0 0 0 0 7,500,000 0 0
Hayward, 2005 0 0 0 0 0 0 0
CEO (1) 2004 0 0 0 0 0 0 0
(1) James A. Hayward was appointed as Chief Executive Officer on October 5,
2005.
The Board of Directors, in their discretion, may award stock and stock
options to key executives for achieving financing or expenditure guidelines,
meeting our business plan objectives, as part of their compensation for
employment or for retention purposes.
Employment Agreements
None.
36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding the shares
of our common stock beneficially owned as of September 30, 2006, (i) by each
person who is known to us to beneficially own more than 5% of the outstanding
common stock, (ii) by each of the executive officers named in the table under
"Executive Compensation" and by each of our directors, and (iii) by all officers
and directors as a group.
NAME AND ADDRESS OF TITLE OF NUMBER OF PERCENTAGE
BENEFICIAL OWNER CLASS SHARES OWNED OF CLASS
(1) (2)
Jun-Jei Sheu Common Stock 3,113,695 (3) 2.57%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
James A. Hayward Common Stock 7,759,400 (4) 6.40%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
Yacov Shamash Common Stock 250,000 (5) 0.21%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
Sanford R. Simon Common Stock 250,000 (5) 0.21%
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
All directors and officers as a group Common Stock 11,373,095 (6) 9.39%
(4 persons)
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to the
shares shown. Except as indicated by footnote and subject to community
property laws where applicable, to our knowledge, the stockholders named
in the table have sole voting and investment power with respect to all
common stock shares shown as beneficially owned by them. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days upon the exercise of options, warrants or
convertible securities (in any case, the "Currently Exercisable Options").
Each beneficial owner's percentage ownership is determined by assuming
that the Currently Exercisable Options that are held by such person (but
not those held by any other person) have been exercised and converted.
(2) Based upon 121,162,385 shares issued and outstanding on December 29, 2006.
(3) Includes 315,859 shares owned by his wife and 254,354 shares owned by his
minor children. Also includes 1,500,000 shares owned by Biowell, of which
company Dr. Sheu is deemed a beneficial owner.
(4) Includes 7,500,000 shares underlying currently exercisable warrants.
(5) Includes 250,000 shares underlying a currently exercisable warrant.
(6) Includes 8,000,000 shares underlying currently exercisable options and
warrants.
37
EQUITY COMPENSATION PLAN INFORMATION
2002 Professional/Employee/Consultant Compensation Plan
In November of 2002, we created a special compensation plan to pay the
founders, consultants and professionals that had been contributing valuable
services to us during the previous nine months. This plan, under which 2,000,000
shares of our common stock were reserved for issuance, is called the
Professional/Employee/Consultant Compensation Plan (the "Compensation Plan").
Share and option issuances from the Compensation Plan were to be staggered over
the following six to eight months, and consultants that were to continue
providing services thereafter either became employees or received renewed
contracts from us in July of 2003, which contracts contained a more traditional
cash compensation component. Each qualified and eligible recipient of shares
and/or options under the Compensation Plan received securities in lieu of cash
payment for services. Each recipient agreed, in his or her respective consulting
contract with us, to sell a limited number of shares monthly.
In our financial statements, shares that are disclosed as having been
issued from November 2002 through June 30, 2003 that were valued at $0.65 per
share were shares issued from the Compensation Plan on the basis of contracts
executed at that time for previously rendered services. Common Stock disclosed
as being issued in exchange for cash at $1.00 per share represent options that
were exercised under the Compensation Plan. In December of 2004, we adjusted the
exercise price of options under the Compensation Plan to $0.60 per share. As of
October 31, 2006, a total of 1,440,000 shares have been issued from, and options
to purchase 560,000 shares have been issued under the Compensation Plan, and
options to purchase 264,000 shares have been exercised as of that date.
2005 Incentive Stock Plan
On January 26, 2005, the Board of Directors, and on February 15, 2005,
the holders of a majority of the outstanding common stock of the Company
approved the Company's 2005 Incentive Stock Plan and authorized the issuance of
16,000,000 shares of common stock as stock awards and stock options thereunder.
The 2005 Incentive Stock Plan is designed to retain directors, executives, and
selected employees and consultants by rewarding them for making contributions to
our success with an award of shares of our common stock. As of October 31, 2006,
a total of 8,550,000 shares have been issued and options to purchase 5,660,000
shares have been granted under the 2005 Incentive Stock Plan.
During the months of March, May, July and August 2005, we issued a
total of 8,550,000 shares of our common stock to certain employees and
consultants pursuant to the 2005 Incentive Stock Plan. We engaged our outside
counsel to conduct an investigation of the circumstances surrounding the
issuance of these shares. On April 26, 2006, we voluntarily reported the
findings from this investigation to the SEC, and agreed to provide the SEC with
further information arising from the investigation. We believe that the issuance
of 8,000,000 shares to employees in July 2005 was effectuated by both our former
President and our former Chief Financial Officer/Chief Operating Officer without
approval of our board of directors. These former officers received a total of
3,000,000 of these shares. In addition, it appears that the 8,000,000 shares
issued in July 2005, as well as an additional 550,000 shares issued to employees
and consultants in March, May and August 2005, were improperly issued without a
restrictive legend stating that the shares could not be resold legally except in
compliance with the Securities Act of 1933, as amended. The members of the
Company's management who effectuated the stock issuances no longer work for the
Company. These shares were not registered under the Securities Act of 1933, or
the securities laws of any state, and we believe that certain of these shares
may have been sold on the open market, though we have been unable to determine
the magnitude of such sales. If violations of securities laws occurred in
connection with the resale of certain of these shares, the employees and
consultants or persons who purchased shares from them may have rights to have
their purchase rescinded or other claims against us for violation of securities
laws, which could harm our business, results of operations, and financial
condition.
38
Plan Category Number of Securities Weighted-Average Number of Securities
to be Issued Upon Exercise Price of Remaining Available for
Exercise of Outstanding Options, Future Issuance Under
Outstanding Options, Warrants and Rights Equity Compensation Plans
Warrants and Rights (Excluding Securities
Reflected in Column (a))
(a) (b) (c)
Professional/Consultant/Employee 296,000 $0.60 0
Stock and Stock Option Compensation
Plan approved in November 2002
2005 Incentive Stock Plan approved 5,660,000 $0.47 1,790,000
on January 26, 2005
Total 5,956,000 $0.59 1,790,000
39
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On November 3, 2005, we issued and sold a promissory note in the
principal amount of $550,000 to Allied International Fund, Inc. ("Allied").
Allied in turn financed a portion of its making of this loan by borrowing
$450,000 from certain persons, including $100,000 from James A. Hayward, a
director and our Chief Executive Officer. The terms of the promissory note
provided that we issue upon the funding of the note warrants to purchase
5,000,000 shares of our common stock at an exercise price of $0.50 per share to
certain persons designated by Allied. On November 9, 2005, we issued nine
warrants to Allied and eight other persons to purchase an aggregate of 5,500,000
shares of our common stock at an exercise price of $0.50 per share. These
warrants included a warrant to purchase 1,100,000 shares that was issued to
James A. Hayward, a director and our Chief Executive Officer. Additionally, we
paid $55,000 in cash to VC Arjent, Ltd. for its services as the placement agent
with respect to this placement. All principal and accrued but unpaid interest
under the promissory note was paid in full shortly after the closing of and from
the proceeds of a private placement we completed on March 8, 2006.
In February 2005, we entered into an agreement with The Research
Foundation of the State University of New York acting on behalf of Stony Brook
University ("The Research Foundation") to support a project entitled "A Chimeric
Method and System for DNA Encryption and Authentication." Pursuant to this
agreement, the Research Foundation made a grant of $79,005.77 to us to support
the project, which amount is payable over six months. Upon approval from The
Research Foundation, we will receive an additional grant of $80,000, payable
over one year. On July 31, 2006, we received an additional grant of $79,005.07
for use by us during the period from July 1, 2006 to July 1, 2007. The general
objective of this project is to further extend the application of chimeric DNA
methodologies in different product applications such as ink and thread. Dr.
Sanford R. Simon, Professor of Biochemistry, Cell Biology, and Pathology at
Stony Brook University and one of our directors, will lead this project on
behalf of Stony Brook University together with Dr. Benjamin Liang, our Strategic
Technology Development Officer.
On March 29, 2006 and April 13, 2006, we borrowed $200,000 in the
aggregate, at a rate of 7.5% per annum, from BioCogent whose President and Chief
Executive Officer and sole stockholder is James A. Hayward, one of our directors
and our Chief Executive Officer. These loans were due and payable upon the
earlier to occur of (1) the close of business on June 30, 2006, or (2) the
closing of the issuance and sale of our securities for gross proceeds of at
least $250,000. The proceeds from the loans were used for general corporate
purposes. The note issued on March 29, 2006 was repaid with interest in May,
2006. The note issued on April 13, 2006 was repaid with interest in June, 2006.
In May, 2006, we signed a Business Development and Trademark License
Agreement with Dr. Suwelack Skin & Health Care AG ("Dr. Suwelack") providing Dr.
Suwelack 170,000 shipping labels marked with the SigNature logo using SigNature
DNA Ink, and a limited, non-exclusive, non-transferable right to use the
SigNature logo via these labels on its packaging. Dr. Suwelack agreed to pay us
(euro)15,000 for these labels and rights. (euro)7,500 of this amount was paid
upon signing of the agreement and the remaining 50% is due upon Dr. Suwelack's
receipt of the shipping labels. James A. Hayward, a director and our Chief
Executive Officer, serves on Dr. Suwelack's board of directors. BioCogent, whose
President and Chief Executive Officer and sole stockholder is Dr. Hayward,
provides consulting services to Dr. Suwelack
On September 1, 2006, we issued warrants to purchase an aggregate of
18,400,000 shares of our common stock exercisable for a period of five years
commencing on September 1, 2006, at a price of $0.09 per share, the closing
price of our common stock on the date of issuance. Each such warrant provides
its holder unlimited piggyback registration rights with respect to any
registration statement we file. These warrants include a warrant to purchase an
aggregate of 6,400,000 shares of our common stock that was issued to James A.
Hayward, a director and our Chief Executive Officer. The Company also issued a
warrant to purchase 250,000 shares of our common stock to each of Sanford R.
Simon and Yacov Shamash, each of whom is one of our directors. Each of these
warrants is exercisable for a period commencing on March 17, 2007, and expiring
on August 31, 2011, at a price of $0.09 per share, the closing price of our
common stock on the date of issuance of the warrants, and provide its holder
unlimited piggyback registration rights with respect to any registration
statement filed by the Company.
We have no policy regarding entering into transactions with affiliated
parties.
40
ITEM 13. EXHIBITS.
Exhibit Description
2.1 Articles of Merger of Foreign and Domestic Corporations, filed
December 19, 1998 with the Nevada Secretary of State, filed as an
exhibit to the annual report on Form 10-KSB filed with the
Commission on December 29, 2003 and incorporated herein by
reference.
3.1 Articles of Incorporation of DCC Acquisition Corporation, filed
April 20, 1998 with the Nevada Secretary of State, filed as an
exhibit to the annual report on Form 10-KSB filed with the
Commission on December 29, 2003 and incorporated herein by
reference.
3.2 Articles of Amendment of Articles of Incorporation of DCC
Acquisition Corp. changing corporation name to ProHealth Medical
Technologies, Inc.
3.3 Certificate of Designations, Powers, preferences and Rights of the
Founders' Series of Convertible Preferred Stock, filed as an exhibit
to the annual report on Form 10-KSB filed with the Commission on
December 29, 2003 and incorporated herein by reference.
3.4 Articles of Amendment of Articles of Incorporation of Applied DNA
Sciences, Inc. increasing the par value of the company's common
stock, filed on December 3, 2003 with the Nevada Secretary of State,
filed as an exhibit to the annual report on Form 10-KSB filed with
the Commission on December 29, 2003 and incorporated herein by
reference.
3.5 By-Laws of Applied DNA Sciences, Inc., filed as an exhibit to the
annual report on Form 10-KSB filed with the Commission on December
29, 2003 and incorporated herein by reference.
4.1 Form of Subscription Agreement, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 28, 2005 and
incorporated herein by reference.
4.2 Form of 10% Secured Convertible Promissory Note, filed as an exhibit
to the current report on Form 8-K filed with the Commission on
January 28, 2005 and incorporated herein by reference.
4.3 Form of Warrant Agreement, filed as an exhibit to the current report
on Form 8-K filed with the Commission on January 28, 2005 and
incorporated herein by reference.
4.4 Registration Rights Agreement, dated January 28, 2005, between the
Company and Vertical Capital Partners, Inc., on behalf of the
investors, filed as an exhibit to the current report on Form 8-K
filed with the Commission on January 28, 2005 and incorporated
herein by reference.
4.5 Security Agreement, dated January 28, 2005, between the Company and
Vertical Capital Partners, Inc., on behalf of the investors, filed
as an exhibit to the current report on Form 8-K filed with the
Commission on January 28, 2005 and incorporated herein by reference.
10.1 Exclusive License Agreement between Biowell Technology Corp. and
Applied DNA Sciences, Inc. executed on October 8, 2002, filed as
an exhibit to the registration statement on Form SB-2 filed with
the Commission on February 15, 2005 and incorporated herein by
reference.
10.2 Sub-License Agreement with G. A. Corporate Finance Ltd. Applied DNA
Sciences, Inc., executed on July 29, 2003, as amended, filed as an
exhibit to the current report on Form 8-K filed with the Commission
on September 29, 2003 and incorporated herein by reference.
10.3 Indemnification Agreement with Larry Lee, filed as an exhibit to the
registration statement on Form SB-2 filed with the Commission on
February 15, 2005 and incorporated herein by reference.
41
10.4 Indemnification Agreement with Robin Hutchison, filed as an exhibit
to the registration statement on Form SB-2 filed with the Commission
on February 15, 2005 and incorporated herein by reference.
10.5 Indemnification Agreement with Peter Brocklesby, filed as an exhibit
to the registration statement on Form SB-2 filed with the Commission
on February 15, 2005 and incorporated herein by reference.
10.6 Indemnification Agreement with Adrian Botash, filed as an exhibit to
the registration statement on Form SB-2 filed with the Commission on
February 15, 2005 and incorporated herein by reference.
10.7 Stock Purchase Agreement, dated as of January 28, 2005, by and
between Applied DNA Sciences, Inc. and Biowell Technology, Inc.,
filed as an exhibit to the current report on Form 8-K filed with the
Commission on February 2, 2005 and incorporated herein by reference.
10.8 Investment Advisory Agreement, dated as of February 14, 2005, by and
between Applied DNA Sciences, Inc. and First London Finance, Ltd.,
filed as an exhibit to the registration statement on Form SB-2 filed
with the Commission on February 15, 2005 and incorporated herein by
reference.
10.9 Amendment to the License Agreement, dated as of November 2, 2004, by
and between Applied DNA Sciences, Inc. and Biowell Technology Inc.,
filed as an exhibit to the registration statement on Form SB-2 filed
with the Commission on June 16, 2005 and incorporated herein by
reference.
10.10 Joint Product Development and Marketing Agreement, dated as of
November 10, 2004, by and between Applied DNA Sciences, Inc. and
Hologrammas S.A. de C.V., filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on October 28, 2005
and incorporated herein by reference.
10.11 Cooperative Research and Development Agreement, dated as of
September 2, 2004, by and between Applied DNA Sciences, Inc. and
Bechtel BWXT Idaho, LLC, filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on October 28, 2005
and incorporated herein by reference.
10.12 Amendment to the Cooperative Research and Development Agreement,
dated as of March 24, 2005, by and between Applied DNA Sciences,
Inc. and Battelle Energy Alliance, LLC, filed as an exhibit to the
current report on Form 8-K filed with the Commission on May 10, 2005
and incorporated herein by reference.
10.13 Stock Purchase Amendment Agreement, dated as of July 12, 2005, by
and between Applied DNA Sciences, Inc. and Biowell Technology, Inc.,
filed as an exhibit to the current report on Form 8-K filed with the
Commission on July 21, 2005 and incorporated herein by reference.
10.14 License Agreement, dated as of July 12, 2005, by and between Applied
DNA Sciences, Inc. and Biowell Technology, Inc., filed as an exhibit
to the current report on Form 8-K filed with the Commission on July
21, 2005 and incorporated herein by reference.
10.15 Amendment to the License Agreement, dated as of October 10, 2005, by
and between Applied DNA Sciences, Inc. and Biowell Technology, Inc.,
filed as an exhibit to the registration statement on Form SB-2 filed
with the Commission on October 28, 2005 and incorporated herein by
reference.
10.16 Consulting Agreement, dated as of July 12, 2005, by and between
Applied DNA Sciences, Inc. and Timpix International Limited, filed
as an exhibit to the current report on Form 8-K filed with the
Commission on July 21, 2005 and incorporated herein by reference.
42
10.17 Letter of Engagement, dated as of June 20, 2005, by and between
Applied DNA Sciences, Inc. and Trilogy Capital Partners, Inc., filed
as an exhibit to the current report on Form 8-K filed with the
Commission on July 21, 2005 and incorporated herein by reference.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and
Rule 15d-14(a), promulgated under the Securities and Exchange Act of
1934, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and
Rule 15d 14(a), promulgated under the Securities and Exchange Act of
1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer)
43
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth fees billed to us by our auditors during
the fiscal years ended September 30, 2006 and 2005 for: (i) services rendered
for the audit of our annual financial statements and the review of our quarterly
financial statements, (ii) services by our auditor that are reasonably related
to the performance of the audit or review of our financial statements and that
are not reported as Audit Fees, (iii) services rendered in connection with tax
compliance, tax advice and tax planning, and (iv) all other fees for services
rendered.
September 30, 2006 September 30, 2005
(i) Audit Fees $221,362 $134,341
(ii) Audit Related Fees $34,500 -
(iii) Tax Fees - -
(iv) All Other Fees - -
Total Fees $255,862 $134,341
Audit Fees
Consists of fees billed for professional services rendered for the
audit of the Company's consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by Russell Bedford Stefanou Mirchandani LLP
in connection with statutory and regulatory filings or engagements.
Audit Related Fees
Consists of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
consolidated financial statements and are not reported under "Audit Fees." These
services consist of responding to SEC comments and the review of and consent to
registration statements.
Tax Fees
Consists of fees billed for professional services for tax compliance,
tax advice and tax planning.
All Other Fees
Consists of fees for products and services other than the services
reported above. There were no management consulting services provided in fiscal
2006 or 2005.
The Board of Directors has considered whether the provision of
non-audit services is compatible with maintaining the principal accountant's
independence.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors
The Company currently does not have a designated Audit Committee, and
accordingly, the Company's Board of Directors' policy is to pre-approve all
audit and permissible non-audit services provided by the independent auditors.
These services may include audit services, audit-related services, tax services
and other services. Pre-approval is generally provided for up to one year and
any pre-approval is detailed as to the particular service or category of
services and is generally subject to a specific budget. The independent auditors
and management are required to periodically report to the Company's Board of
Directors regarding the extent of services provided by the independent auditors
in accordance with this pre-approval, and the fees for the services performed to
date. The Board of Directors may also pre-approve particular services on a
case-by-case basis.
44
Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
APPLIED DNA SCIENCES, INC.
Date: January 16, 2007 /s/JAMES A. HAYWARD
-------------------
James A. Hayward
Chief Executive Officer
(Principal Executive Officer)
and Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Position Date
/s/ JAMES A. HAYWARD Chief Executive Officer (Principal Executive Officer) and Chief January 16, 2007
-------------------- Financial Officer (Principal Financial Officer and Principal
Accounting Officer)
/s/ JUN-JEI SHEU Chairman of the Board of Directors January 16, 2007
----------------
Jun-Jei Sheu
/s/ YACOV SHAMASH Director January 16, 2007
-----------------
Yacov Shamash
/s/ SANFORD R. SIMON Director January 16, 2007
--------------------
Sanford R. Simon
45