As
filed with the Securities and Exchange Commission on August 22,
2008
Registration
No. 333-
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
———————————————————————————
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
———————————————————————————
Applied
DNA Sciences, Inc.
(Exact
name of registrant as specified in its charter)
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Nevada
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2836
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59-2262718
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(State
or other jurisdiction of
incorporation
or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
Number)
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———————————————————————————
25
Health Sciences Drive, Suite 113
Stony
Brook, New York 11790
(631)
444-6862
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
James
A. Hayward, Ph.D., Sc.D., Chief Executive Officer
Applied
DNA Sciences, Inc.
25
Health Sciences Drive, Suite 113
Stony
Brook, New York 11790
(631)
444- 6370
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
With
copies to:
———————————————————————————
Merrill
Kraines, Esq.
Fulbright
& Jaworski L.L.P.
666
Fifth Avenue
New
York, New York 10103
Telephone:
212.318.3261
Facsimile:
212.318.3400
———————————————————————————
Approximate
date of commencement of proposed sale to the public:
As
soon as practicable after this Registration Statement is declared
effective.
———————————————————————————
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. þ
If this
Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
Accelerated
filer o
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Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company þ
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———————————————————————————
CALCULATION
OF REGISTRATION FEE
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Proposed
Maximum
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Proposed
Maximum
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Title
of Each Class of
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Amount
to be
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Offering
Price
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Aggregate
Offering
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Amount
of
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Securities
to be Registered
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Registered
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per
Share(1)
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Price(1)
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Registration
Fee
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Common
Stock, $0.001 par value per share
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17,606,377
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0.06
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$ |
1,056,382.62 |
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$ |
41.52 |
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Common
Stock, $0.001 par value per share issuable upon the exercise of
common stock purchase warrants at an exercise price of $.50 per
share
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16,400,000
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0.06
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$ |
984,000.00 |
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38.67 |
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Common
Stock, $0.001 par value per share issuable upon the exercise of
common stock purchase warrants at an exercise price of $.09 per
share
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10,400,000
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0.06
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$ |
624,000.00 |
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24.52 |
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Total
Registration Fee
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$ |
2,664,382.62 |
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$ |
104.71 |
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(1)
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In
accordance with Rule 457(c) under the Securities Act of 1933, the price is
estimated solely for the purposes of calculating the registration fee and
is the average of the reported high and low sale prices of the common
stock as reported on August 20,
2008.
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The
registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until this Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this Prospectus is not complete and may be
changed. The selling stockholders may not sell these securities until
the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
PRELIMINARY
PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 22, 2008
APPLIED
DNA SCIENCES, INC.
44,406,377
SHARES OF
COMMON
STOCK
This
prospectus relates to the resale by the selling stockholders of up to 44,406,377
shares of our common stock, which consists of (i) 16,948,877 shares of common
stock issued upon the automatic conversion of secured promissory notes issued to
investors in private placements during the period from March 2006 through June
2007, (ii) 657,500 shares of common stock issued to consultants in February
2006, (iii) up to 16,400,000 shares of common stock issuable upon the exercise
of common stock purchase warrants issued to investors in private placements
during the period from March 2006 through June 2007 at an exercise price of $.50
per share and (iv) up to 10,400,000 shares of common stock issuable upon the
exercise of common stock purchase warrants issued to employees, directors and
consultants in February 2006 at an exercise price of $.09 per
share.
The
selling stockholders may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions or a combination of such methods of sale directly or
through brokers. We will not receive any proceeds from the sales by
the selling stockholders, but we will receive funds from the exercise of
warrants held by selling stockholders, if exercised. We will pay the
expenses of registering these shares.
Our
shares of common stock are quoted on the OTC Bulletin Board. Our
shares are quoted under the symbol “APDN.OB”. On August 21, 2008, the
closing sales price for our common stock on the OTC Bulletin Board was $0.06 per
share.
The
purchase of the securities offered through this prospectus involves a high
degree of risk. See section entitled “Risk Factors” beginning on page
3.
Neither
the U.S. Securities and Exchange Commission (“SEC”) nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
The
Date of This Prospectus Is
,
2008.
———————————————————————————
Please
read this prospectus carefully. It describes our business, our
financial condition and results of operations. We have prepared this
prospectus so that you will have the information necessary to make an informed
investment decision. You should rely only on information contained in
this prospectus. We have not authorized any other person to provide
you with different information. The selling stockholders are offering
to sell shares of our common stock and seeking offers to buy shares of our
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate
only as of the date of the prospectus, regardless of the time the prospectus is
delivered or the common stock is sold.
In this
prospectus “Applied DNA,” “we,” “us” and “our” refer to Applied DNA Sciences,
Inc. and its subsidiaries. Applied DNA and SigNature are the subject
of our trademark applications pending registration with the United States Patent
and Trademark Office. This prospectus contains other product names,
trade names and trademarks of Applied DNA Sciences, Inc. and of other
organizations.
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The
following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the
“risk factors” section, the financial statements and the notes to the
financial statements.
Our
Company
We
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 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 customers to
cost-effectively:
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give
assurance to manufacturers, suppliers, distributors, retailers and
end-users that their products are authentic and can be forensically
authenticated;
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integrate
our SigNature DNA Markers with existing security solutions such as
barcodes, radio frequency identification (RFID) tags, holograms,
microchips and other security measures; and
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add
value to the “bottom-line” by helping to diminish product diversion and
counterfeiting.
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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:
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continuing
to improve and customize our solution to meet our current and potential
customers’ needs;
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continuing
to develop and enhance our existing DNA marker authentication
technologies;
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expanding
our customer base both domestically and abroad by targeting high volume
markets; and
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augmenting
our competitive position through strategic acquisitions and
alliances.
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We
have also begun to develop and manufacture DermalRx, an ingredient for use
in skin care products, which allows for exfoliation without the irritation
or inflammation associated with chemical peeling.
For
the year ended September 30, 2007, we generated revenues of $121,920 and
had net losses of $13.3 million. Our registered independent
certified public accountants have stated in their report dated January 14,
2008, 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.
Summary
Risks
Before
you invest in our stock, you should carefully consider all the information
in this prospectus, including matters set forth under the heading “Risk
Factors.” We believe that the following are some of the major
risks and uncertainties that may affect us:
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We
have a short operating history, a relatively new business model, and have
not produced significant revenues, which makes it difficult to evaluate
our future prospects and increases the risk that we will not be
successful;
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We
have a history of losses which may continue, and which may harm our
ability to obtain financing and continue our operations;
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If
we are unable to obtain additional financing our business operations will
be harmed or discontinued, and if we do obtain additional financing our
shareholders may suffer substantial dilution;
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Our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to obtain future
financing;
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If
our existing products and services are not accepted by potential customers
or we fail to introduce new products and services, our business, results
of operations and financial condition will be harmed;
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If
we are unable to retain the services of Drs. Hayward or Liang we may not
be able to continue our operations;
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The
markets for our SigNature program are very competitive, and we may be
unable to continue to compete effectively in this industry in the
future;
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We
need to expand our sales, marketing and support organizations and our
distribution arrangements to increase market acceptance of our products
and services;
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A
manufacturer’s inability or willingness to produce our goods on time and
to our specifications could result in lost revenue and net losses and if
we need to replace manufacturers, our expenses could increase, resulting
in smaller profit margins; and
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Our
intellectual property rights are valuable, and any inability to protect
them could reduce the value of our products, services and
brand.
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Corporate
Information
Our
principal offices are located at 25 Health Sciences Drive, Suite 113,
Stony Brook, New York 11790, and our telephone number is (631)
444-6370. We are a Nevada corporation. We maintain a
website at www.adnas.com. The
information contained on that website is not deemed to be a part of this
prospectus.
The
Offering
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Common
stock offered by selling stockholders
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Up
to 44,406,377 shares, including the following:
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11,966,285
shares of common stock issued upon the conversion of the promissory notes
issued during the period in March 2006;
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4,982,592
shares of common stock issued upon the conversion of the promissory notes
issued during the period from May and June 2006;
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657,500
shares of common stock issued to consultants;
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up
to 16,400,000 shares of common stock issuable upon the exercise of common
stock purchase warrants at an exercise price of $.50 per share;
and
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up
to 10,400,000 shares of common stock issuable upon the exercise of common
stock purchase warrants at an exercise price of $.09 per
share;
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This
number represents approximately 19% of our current outstanding
stock
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Common
stock to be outstanding after the offering
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Up
to 227,191,959 shares(1)
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Use
of proceeds
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We
will not receive any proceeds from the sale of the common stock by the
selling stockholders, except for funds from the exercise of warrants by
the selling stockholders, if and when exercised. We expect to
use the proceeds received from the exercise of the warrants, if any, for
working capital, including general corporate purposes.
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OTC
Bulletin Board
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Our
shares are quoted on the OTC Bulletin Board under the symbol
“APDN.OB”.
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(1)
The above information regarding common stock to be outstanding after the
offering is based on 200,391,959 shares of common stock outstanding as of
August 21, 2008, and assumes the subsequent exercise of warrants by our
selling stockholders.
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This
investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks
actually occur, our business, operating results and financial condition could be
harmed and the value of our stock could go down. This means you could
lose all or a part of your investment.
Risks
Relating To Our Business:
We
have a short operating history, a relatively new business model, and have not
produced significant revenues. This makes it difficult to evaluate
our future prospects and increases the risk that we will not be
successful.
We have a
short operating history with our current business model, which involves the
marketing, sale and distribution of botanical DNA encryption, embedment and
authentication products and services, which are based on technologies that we
acquired in July 12, 2005 from 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. In fiscal 2007 we transitioned from a developmental
stage to an operating company. 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 significant revenues in the future, prior to
our introduction of any new products, we will derive most of 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 $13.3 million for the year ended September 30, 2007 and
$2.4 million for the year ended September 30, 2006. For the nine
months ended June 30, 2008, we incurred a net loss of
$4,987,150. 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 incurred interest expense on notes and warrants
we issued to obtain financing. Our operations are subject to the
risks and competition inherent in a company that moved from the development
stage to an operating company. 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 November 2008. 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 14, 2008, our independent auditors stated that our
financial statements for the year ended September 30, 2007 were prepared
assuming that we would continue as a going concern, and that they have
substantial doubt about our ability to continue as a going
concern. Our auditors’ doubts are based on our incurring net losses
of $13.3 million for the year ended September 30, 2007. 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 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:
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availability,
quality and price relative to competitive solutions;
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customers’
opinions of the solutions’ utility;
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ease
of use;
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consistency
with prior practices;
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scientists’
opinions of the solutions’ usefulness;
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citation
of the solutions in published research; and
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general
trends in anti-counterfeit and security solutions’
research.
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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 of Dr. James
A. Hayward, one of our directors, our President and 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: Authentix, Collectors Universe Inc., Data Dot Technology, Digimarc
Corp., DNA Technologies, Inc., ID Global, Informium AG, Inksure Technologies,
Kodak, L-1 Identity Solutions, Manakoa, OpSec Security Group, SmartWater
Technology, Inc., Sun Chemical Corp, and Tracetag.
We expect
this competition to continue and intensify in the future. Competition
in our markets is primarily driven by:
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product
performance, features and liability;
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price;
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timing
of product introductions;
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ability
to develop, maintain and protect proprietary products and
technologies;
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sales
and distribution capabilities;
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technical
support and service;
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brand
loyalty;
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applications
support; and
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breadth
of product line.
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If a
competitor develops superior technology or cost-effective alternatives to our
products, our business, financial condition and results of operations could be
significantly harmed.
We
need to expand our sales, marketing and support organizations and our
distribution arrangements to increase market acceptance of our products and
services.
We
currently have few sales, marketing, customer service and support personnel and
will need to increase our staff to generate a greater volume of sales and to
support any new customers or the expanding needs of existing
customers. The employment market for sales, marketing, customer
service and support personnel in our industry is very competitive, and we may
not be able to hire the kind and number of sales, marketing, customer service
and support personnel we are targeting. Our inability to hire
qualified sales, marketing, customer service and support personnel may harm our
business, operating results and financial condition. We do not
currently have any arrangements with any distributors and we may not be able to
enter into arrangements with qualified distributors on acceptable terms or at
all. If we are not able to develop greater distribution capacity, we
may not be able to generate sufficient revenue to support our
operations.
A
manufacturer’s inability or willingness to produce our goods on time and to our
specifications could result in lost revenue and net losses.
Though we
manufacture prototypes, samples and some of our own products, we currently do
not own or operate any significant manufacturing facilities and depend upon
independent third parties for the manufacture of some of our products to our
specifications. The inability of a manufacturer to ship orders of
such products in a timely manner or to meet our quality standards could cause us
to miss the delivery date requirements of our customers for those items, which
could result in cancellation of orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could harm our business by resulting
in decreased revenues or net losses upon sales of products, if any sales could
be made.
If
we need to replace manufacturers, our expenses could increase, resulting in
smaller profit margins.
We
compete with other companies for the production capacity of our manufacturers
and import quota capacity. Some of these competitors have greater
financial and other resources than we have, and thus may have an advantage in
the competition for production and import quota capacity. If we
experience a significant increase in demand, or if our existing manufacturers
must be replaced, we will need to establish new relationships with another or
multiple manufacturers. We cannot assure you that this additional
third party manufacturing capacity will be available when required on terms that
are acceptable to us or terms similar to those we have with our existing
manufacturers, either from a production standpoint or a financial
standpoint. We do not have long-term contracts with our
manufacturers, and our manufacturers do not produce our products
exclusively. Should we be forced to replace our manufacturers, we may
experience an adverse financial impact, or an adverse operational impact, such
as being forced to pay increased costs for such replacement manufacturing or
delays upon distribution and delivery of our products to our customers, which
could cause us to lose customers or lose revenues because of late
shipments.
If
a manufacturer fails to use acceptable labor practices, we might have delays in
shipments or face joint liability for violations, resulting in decreased revenue
and increased expenses.
While we
require our independent manufacturers to operate in compliance with applicable
laws and regulations, we have no control over their ultimate
actions. While our internal and vendor operating guidelines promote
ethical business practices and our staff and buying agents periodically visit
and monitor the operations of our independent manufacturers, we do not control
these manufacturers or their labor practices. The violation of labor
or other laws by our independent manufacturers, or by one of our licensing
partners, or the divergence of an independent manufacturer’s or licensing
partner’s labor practices from those generally accepted as ethical in the United
States, could interrupt, or otherwise disrupt the shipment of finished products
to us or damage our reputation. Any of these, in turn, could have a
material adverse effect on our financial condition and results of operations,
such as the loss of potential revenue and incurring additional
expenses.
Failure
to license new technologies could impair sales of our existing products or any
new product development we undertake in the future.
To
generate broad product lines, it is advantageous to sometimes license
technologies from third parties rather than depend exclusively on the
development efforts of our own employees. As a result, we believe our
ability to license new technologies from third parties is and will continue to
be important to our ability to offer new products. In addition, from
time to time we are notified or become aware of patents held by third parties
that are related to technologies we are selling or may sell in the
future. After a review of these patents, we may decide to seek a
license for these technologies from these third parties. There can be
no assurance that we will 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:
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operations
and financial systems;
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procedures
and controls; and
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training
and management of our employees.
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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:
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difficulties
in staffing, managing and integrating international operations due to
language, cultural or other differences;
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different
or conflicting regulatory or legal requirements;
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foreign
currency fluctuations; and
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diversion
of significant time and attention of our
management.
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Failure
to attract and retain qualified scientific, production and managerial personnel
could harm our business.
Recruiting
and retaining qualified scientific and production personnel to perform and
manage prototype, sample, and product manufacturing and business development
personnel to conduct business development are critical to our
success. In addition, our desired growth and expansion into areas and
activities requiring additional expertise, such as clinical testing, government
approvals, production, and marketing will require the addition of new management
personnel and the development of additional expertise by existing management
personnel. Because the industry in which we compete is very
competitive, we face significant challenges attracting and retaining a qualified
personnel base. Although we believe we have been and will be able to
attract and retain these personnel, we may not be able to continue to
successfully attract qualified personnel. The failure to attract and
retain these personnel or, alternatively, to develop this expertise internally
would harm our business since our ability to conduct business development and
manufacturing will be reduced or eliminated, resulting in lower
revenues. We generally do not enter into employment agreements
requiring our employees to continue in our employment for any period of
time.
Our
intellectual property rights are valuable, and any inability to protect them
could reduce the value of our products, services and brand.
Our
patents, trademarks, trade secrets, copyrights and all of our other intellectual
property rights are important assets for us. There are events that are outside
of our control that pose a threat to our intellectual property rights as well as
to our products and services. For example, effective intellectual
property protection may not be available in every country in which our products
and services are distributed. The efforts we have taken to protect
our proprietary rights may not be sufficient or effective. Any
significant impairment of our intellectual property rights could harm our
business or our ability to compete. Protecting our intellectual
property rights is costly and time consuming. Any increase in the
unauthorized use of our intellectual property could make it more expensive to do
business and harm our operating results. Although we seek to obtain
patent protection for our innovations, it is possible we may not be able to
protect some of these innovations. Given the costs of obtaining
patent protection, we may choose not to protect certain innovations that later
turn out to be important. There is always the possibility that the
scope of the protection gained from one of our issued patents will be
insufficient or deemed invalid or unenforceable. We also seek to
maintain certain intellectual property as trade secrets. The secrecy could be
compromised by third parties, or intentionally or accidentally by our employees,
which would cause us to lose the competitive advantage resulting from these
trade secrets.
Intellectual
property litigation could harm our business.
Litigation
regarding patents and other intellectual property rights is extensive in the
biotechnology industry. In the event of an intellectual property
dispute, we may be forced to litigate. This litigation could involve
proceedings instituted by the U.S. Patent and Trademark Office or the
International Trade Commission, as well as proceedings brought directly by
affected third parties. Intellectual property litigation can be
extremely expensive, and these expenses, as well as the consequences should we
not prevail, could seriously harm our business.
If a
third party claims an intellectual property right to technology we use, we might
need to discontinue an important product or product line, alter our products and
processes, pay license fees or cease our affected business
activities. Although we might under these circumstances attempt to
obtain a license to this intellectual property, we may not be able to do so on
favorable terms, or at all. Furthermore, a third party may claim that
we are using inventions covered by the third party’s patent rights and may go to
court to stop us from engaging in our normal operations and activities,
including making or selling our product candidates. These lawsuits
are costly and could affect our results of operations and divert the attention
of managerial and technical personnel. A court may decide that we are
infringing the third party’s patents and would order us to stop the activities
covered by the patents. In addition, a court may order us to pay the
other party damages for having violated the other party’s
patents. The biotechnology industry has produced a proliferation of
patents, and it is not always clear to industry participants, including us,
which patents cover various types of products or methods of use. The
coverage of patents is subject to interpretation by the courts, and the
interpretation is not always uniform. If we are sued for patent
infringement, we would need to demonstrate that our products or methods of use
either do not infringe the patent claims of the relevant patent and/or that the
patent claims are invalid, and we may not be able to do this. Proving
invalidity, in particular, is difficult since it requires a showing of clear and
convincing evidence to overcome the presumption of validity enjoyed by issued
patents.
Because
some patent applications in the United States may be maintained in secrecy until
the patents are issued, because patent applications in the United States and
many foreign jurisdictions are typically not published until eighteen months
after filing, and because publications in the scientific literature often lag
behind actual discoveries, we cannot be certain that others have not filed
patent applications for technology covered by our or our licensor’s issued
patents or pending applications or that we or our licensors were the first to
invent the technology. Our competitors may have filed, and may in the
future file, patent applications covering technology similar to
ours. Any such patent application may have priority over our or our
licensors’ patent applications and could further require us to obtain rights to
issued patents covering such technologies. If another party has filed
a United States patent application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the United States Patent
and Trademark Office to determine priority of invention in the United
States. The costs of these proceedings could be substantial, and it
is possible that such efforts would be unsuccessful, resulting in a loss of our
United States patent position with respect to such inventions.
Some of
our competitors may be able to sustain the costs of complex patent litigation
more effectively than we can because they have substantially greater
resources. In addition, any uncertainties resulting from the
initiation and continuation of any litigation could have a material adverse
effect on our ability to raise the funds necessary to continue our
operations.
Accidents
related to hazardous materials could adversely affect our business.
Some of
our operations require the controlled use of hazardous
materials. Although we believe our safety procedures comply with the
standards prescribed by federal, state, local and foreign regulations, the risk
of accidental contamination of property or injury to individuals from these
materials cannot be completely eliminated. In the event of an
accident, we could be liable for any damages that result, which could seriously
damage our business and results of operations.
Potential
product liability claims could affect our earnings and financial
condition.
We face a
potential risk of liability claims based on our products and services, and we
have faced such claims in the past. Though we have product liability
insurance coverage which we 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 material revenue and the losses our business has
incurred for the period from our inception to June 30, 2008, this could result
in a significant decrease in our liquidity or assets, which could result in the
reduction or termination of our business.
We
were obligated to pay liquidated damages as a result of our failure to have our
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, for
each month after June 15, 2005 that we did not have a registration statement
registering the shares underlying these convertible notes and warrants declared
effective, we were obligated to pay liquidated damages in the amount of 3.5% per
month of the face amount of the notes, an amount equal to
$367,885. On July 24, 2008, the SEC declared effective our
registration statement 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. At our option, these
liquidated damages can be paid in cash or unregistered shares of our common
stock. To date we have decided to pay certain of these liquidated
damages in common stock, although any future payments of liquidated damages may,
at our option, be made in cash. If we decide to pay such liquidated
damages in cash, we would be required to use our limited working capital and
potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Based on
the closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our
common stock on July 15, 2005, August 15, 2005, September 15, 2005, October 17,
2005, November 15, 2005 and December 15, 2005, respectively, we issued a total
of 3,807,375 shares of common stock in liquidated damages from August, 2005 to
January, 2006 to persons who invested in the January and February, 2005 private
placements. The issuance of
shares upon any payment by us of further liquidated damages will have the effect
of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
We paid
liquidated damages in the form of common stock only for the period from June 15,
2005 to December 15, 2005, and only to persons who invested in the January and
February, 2005 private placements. We believe that we have no
enforceable obligation to pay liquidated damages to holders of any shares we
agreed to register under the registration rights agreement for periods after the
first anniversary of the date of issuance of such shares, since they were
eligible for resale under Rule 144 of the Securities Act during such periods,
and such liquidated damages are grossly inconsistent with actual damages to such
persons. Nonetheless, as of June 30, 2008 we have accrued
approximately $12.0 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 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. Since our voluntary report of the findings of our
internal investigation to the SEC on April 26, 2006, we have received no
communication from the SEC or any third party with respect to this
matter. 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
August 21, 2008, we had 200,391,959 shares of common stock issued and
outstanding and outstanding options and warrants to purchase 71,243,464 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 or Section 15(d) 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 six years, however, there can be no assurance that in the future we will
always be current in our reporting requirements.
We
may not be able to implement section 404 of the Sarbanes Oxley Act of 2002 on a
timely basis.
The SEC,
as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules generally
requiring each public company to include a report of management on the company's
internal controls over financial reporting in its annual report on Form 10-K
that contains an assessment by management of the effectiveness of the company's
internal controls over financial reporting. This requirement will
first apply to our annual report on Form 10-K for the fiscal year ending
September 30, 2008. Under current rules, commencing with our annual
report for the fiscal year ending September 30, 2010 our independent registered
accounting firm must attest to and report on management's assessment of the
effectiveness of our internal controls over financial reporting.
We have
not yet developed a Section 404 implementation plan. We have in the
past discovered, and may in the future discover, areas of our internal controls
that need improvement. How companies should be implementing these new
requirements including internal control reforms to comply with Section 404's
requirements and how independent auditors will apply these requirements and test
companies' internal controls, is still reasonably uncertain.
We expect
that we will need to hire and/or engage additional personnel and incur
incremental costs in order to complete the work required by Section
404. We may not be able to complete a Section 404 plan on a timely
basis. Additionally, upon completion of a Section 404 plan, we may
not be able to conclude that our internal controls are effective, or in the
event that we conclude that our internal controls are effective, our independent
accountants may disagree with our assessment and may issue a report that is
qualified. Any failure to implement required new or improved
controls, or difficulties encountered in their implementation, could harm our
operating results or cause us to fail to meet our reporting
obligations.
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:
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that
a broker or dealer approve a person’s account for transactions in penny
stocks; and
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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.
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In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
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obtain
financial information and investment experience objectives of the person;
and
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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.
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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:
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sets
forth the basis on which the broker or dealer made the suitability
determination; and
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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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.
We will
not receive any proceeds from the sale of the shares of common stock by the
selling stockholders, except for funds received from the exercise of warrants
held by certain of the selling stockholders, if and when
exercised. We plan to use the net proceeds received from the exercise
of any warrants, if any, for working capital and general corporate
purposes. The actual allocation of proceeds realized from the
exercise of these securities will depend upon the amount and timing of such
exercises, our operating revenues and cash position at such time and our working
capital requirements. There can be no assurances that any of the
outstanding warrants will be exercised.
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, 2006 and September 30, 2007 and the six months ended March 31,
2008. In February of 2003, we changed our year end to September
30. We changed our fiscal year end in connection with a reverse
merger we entered into in December 2002, in which the acquirer for accounting
purposes had a fiscal year end of September 30. For ease of fiscal
reporting, we adopted the same fiscal year end.
Year ended 9/30/06
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High
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Low
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December
31, 2005
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$ |
0.58 |
|
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$ |
0.16 |
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March
31, 2006
|
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$ |
0.37 |
|
|
$ |
0.15 |
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June
30, 2006
|
|
$ |
0.27 |
|
|
$ |
0.10 |
|
September
30, 2006
|
|
$ |
0.17 |
|
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$ |
0.07 |
|
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|
|
|
|
|
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Year ended 9/30/07
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High
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Low
|
|
|
|
|
|
|
|
|
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December
31, 2006
|
|
$ |
0.12 |
|
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$ |
0.07 |
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March
31, 2007
|
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$ |
0.28 |
|
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$ |
0.09 |
|
June
30, 2007
|
|
$ |
0.23 |
|
|
$ |
0.10 |
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September
30, 2007
|
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$ |
0.15 |
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$ |
0.08 |
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|
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|
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Year ended 9/30/08
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High
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Low
|
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|
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|
|
|
|
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December
31, 2007
|
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$ |
0.17 |
|
|
$ |
0.09 |
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March
31, 2008
|
|
$ |
0.22 |
|
|
$ |
0.09 |
|
June
30, 2008
|
|
$ |
0.14 |
|
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$ |
0.09 |
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Holders
As of
August 21, 2008, we had approximately 1,096 holders of our common
stock. The number of record holders was determined from the records
of our transfer agent and does not include beneficial owners of common stock
whose shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock
is American Stock Transfer & Trust Company, 6201 15th Avenue,
Brooklyn, New York 11219.
Dividends
We have
never declared or paid any cash dividends on our common stock. We do
not anticipate paying any cash dividends to stockholders in the foreseeable
future. In addition, any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements, and such
other factors as the Board of Directors deem relevant.
Equity
Compensation Plan Information
2002
Professional/Employee/Consultant Compensation Plan
In
November of 2002, we created a special compensation plan to pay the founders,
consultants and professionals that had been contributing valuable services to us
during the previous nine months. This plan, under which 2,000,000
shares of our common stock were reserved for issuance, is called the
Professional/Employee/Consultant Compensation Plan (the “Compensation
Plan”). Share and option issuances from the Compensation Plan were to
be staggered over the following six to eight months, and consultants that were
to continue providing services thereafter either became employees or received
renewed contracts from us in July of 2003, 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 December of 2004, we adjusted the
exercise price of options under the Compensation Plan to $0.60 per
share. As of August 21, 2008, 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 2005
Incentive Stock Plan and authorized the issuance of 16,000,000 shares of common
stock as stock awards and stock options thereunder. On May 16, 2007,
at the annual meeting of stockholders, the holders of a majority of the
outstanding common stock of the Company approved an increase in the number of
shares subject to the 2005 Incentive Stock Plan to 20,000,000 shares of common
stock. On June 17, 2008, the Board of Directors unanimously adopted
an amendment to the 2005 Incentive Stock Plan that will increase the total
number of shares of common stock issuable pursuant to the 2005 Incentive Stock
Plan from a total of 20,000,000 shares to a total of 100,000,000 shares, which
is subject to approval by our stockholders at the 2008 annual meeting of
stockholders.
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 August 21,
2008, a total of 8,550,000 shares have been issued and options to purchase
42,410,000 shares have been granted under the 2005 Incentive Stock
Plan.
The Board
of Directors, in their discretion, may award stock and stock options to
executive officers and key employees as part of their compensation for
employment or for retention purposes.
Plan
Category
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|
Number
of Securities
to
be Issued Upon
Exercise
of
Outstanding
Options, Warrants and Rights
|
|
|
Weighted-Average
Exercise
Price of
Outstanding
Options, Warrants and Rights
|
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|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities
Reflected
in Column (a))
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|
2005
Incentive Stock Plan
approved
on January 26, 2005
|
|
|
42,410,000 |
|
|
$ |
0.47 |
|
|
|
5,790,000 |
|
|
|
|
42,410,000 |
|
|
$ |
0.47 |
|
|
|
5,790,000 |
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Amendment to the 2005
Incentive Stock Plan and Recent Equity Award Grants
On June
17, 2008, the Board of Directors adopted an amendment to the 2005 Incentive
Stock Plan that will increase the total number of shares of common stock
issuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000
shares to a total of 100,000,000 shares, which is subject to approval by our
stockholders at the 2008 annual meeting of stockholders. In
connection with the share increase amendment, the Board of Directors granted
options to purchase a total of 37,750,000 shares to certain key employees and
non-employee directors under the 2005 Incentive Stock Plan, including
17,000,000, 5,000,000 and 7,000,000 to James A. Hayward, Kurt H. Jensen and
Ming-Hwa Liang, respectively. The options granted to our key
employees and non-employee directors vested with respect to 25% of the
underlying shares on the date of grant and the remaining will vest ratably each
anniversary thereafter until fully vested on the third anniversary of the date
of grant.
The
effectiveness of the share increase amendment and the exercise of these stock
options by the key employees and non-employee directors are subject to approval
by our stockholders at the 2008 annual meeting of stockholders.
AND
PLAN OF OPERATIONS
Forward-looking
Information
This
Registration Statement on Form S-1 (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 27A of the
Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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:
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discuss
our future expectations;
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contain
projections of our future results of operations or of our financial
condition; and
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state
other “forward-looking”
information.
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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 our 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 customers to cost-effectively:
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give
assurance to manufacturers, suppliers, distributors, retailers and
end-users that their products are authentic and can be forensically
authenticated;
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integrate
our SigNature DNA Markers with existing security solutions such as
barcodes, radio frequency identification (RFID) tags, holograms,
microchips and other securities measures; and
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add
value to the “bottom-line” by helping to diminish product diversion and
counterfeiting.
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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:
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continuing
to improve and customize our solution to meet our current and potential
customers’ needs;
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continuing
to develop and enhance our existing DNA marker authentication
technologies;
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expanding
our customer base both domestically and abroad by targeting high volume
markets; and
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augmenting
our competitive position through strategic acquisitions and
alliances.
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We have
also begun to develop and manufacture DermalRx, an ingredient for use in skin
care products, which allows for exfoliation without the irritation or
inflammation associated with chemical peeling.
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 November 2008. We believe we may be
required to seek additional capital to sustain or expand our prototype and
sample manufacturing, and sales and marketing activities, and to otherwise
continue our business operations beyond that date. We have no
commitments for any future 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 $50,000 for product research and development
activities during the next 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
We
currently have seven employees and three part-time employees. 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 prospectus.
The
accounting policies identified as critical are as follows:
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Equity
issued with registration rights;
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Revenue
recognition;
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Allowance
for Doubtful Accounts;
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Warrant
liability; and
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Fair
value of intangible assets.
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Equity
Issued with Registration Rights
In
connection with the private placement of our convertible promissory 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,
pursuant to a registration rights agreement we agreed to file a registration
statement to register the common stock issuable upon the conversion of the
promissory notes and the exercise of the warrants and to have the registration
statement declared effective by the SEC. The registration rights
agreement provided for the payment of liquidated damages if a registration
statement was not declared effective by the SEC within 120 days of the private
placement of the convertible promissory notes. The liquidated damages
are equal to 3.5% per month of the aggregate proceeds, with no
limitations. The liquidated damages may be paid in cash or our common
stock, at our option. Although the promissory 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 issuable upon the conversion of the promissory notes and the
exercise of the warrants subject to the liquidated damages provisions of the
registration rights agreement does not meet the tests required for shareholders’
equity classification in the past, and accordingly has been reflected between
liabilities and equity in our previous consolidated balance sheet.
As of
September 30, 2007, we did not have a registration statement declared effective
relating to the common stock issuable upon the conversion of the promissory
notes and the exercise of the warrants. In accordance with EITF
00-19-2, we evaluated the likelihood of having the registration statement
declared effective by the SEC. As of September 30, 2007, we
determined it was probable that we will be required to remit payments to these
investors because of our failure to have the registration statement declared
effective and we estimated that the obligation to make additional payments would
continue for nine months from September 30, 2007, at which time we estimated
that the registration statement would have been declared
effective. Although we were unable to estimate the exact amount of
time needed to have the registration statement declared effective, we believed
that an additional nine months would be required to complete the SEC’s comment
and review process and have the registration statement declared
effective. In accordance with SFAS No. 5, Accounting For
Contingencies, we accrued nine months of additional liquidated damages, or
$3,310,965, as a charge to operations during the year ended September 30,
2007.
As a
result of not having our registration statement declared effective, we recorded
an aggregate liability of $11,750,941 as of September 30, 2007 and an increase
of $7,725,585 as compared to September 30, 2006, in order to account for the
potential liquidated damages accruing until the registration statement is
declared effective by the SEC. This increase, which was charged to
operations as a selling, general and administrative expense, in fiscal 2007, is
comprised of $8,439,976 of current and prior years’ stipulated contractual
obligations, plus the additional accrual of $3,310,965 described previously to
account for the potential liquidated damages until the expected effectiveness of
the registration statement is achieved.
In
developing the best estimate for the accrual of additional liquidating damages,
we took into account a number of factors and information, including, but not
limited to, the following:
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advice
of our legal counsel and other advisors;
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our
experience in addressing comments raised by the SEC in past registration
statements;
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the
limited number of matters needed to be addressed by the Company to achieve
effectiveness;
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our
limited resources in connection with responding to SEC comments;
and
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the
intent to achieve effectiveness of the registration statement as soon as
practicable.
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Estimates
of potential future damages are based on our assumptions and projections and
actual results and outcomes could differ significantly.
In
September 2007, we issued common stock upon conversion of the final convertible
promissory note that contained embedded derivatives, such as certain conversion
features, variable interest features, call options and default
provisions.
At June
30, 2008, we had an accumulative accrual of $12,023,888 of liquidated damages in
connection with certain previously outstanding convertible promissory notes and
related warrants, which is included in accounts payable and accrued
liabilities. Any increases to the accrued liabilities will be charged
to operations as a selling, general and administrative expense. Any
decreases will be included in other income (expenses). On July 24,
2008, the SEC declared effective our registration statement 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.
Revenue
Recognition
Revenues
are derived from rendering professional, scientific and technical services to
our customers in connection with authentication of raw materials used in certain
commercial products, such as cotton. In addition, we sell our
products, including Signature DNA Markers and DermalRx, to customers in the
biotechnology, personal care and consumer products industries.
Our
contracts for services have different terms and depending on the scope,
deliverables and complexity of the engagement, we are frequently required to
make judgments and estimates with respect to recognizing revenues.
We
examine each contract and consider the appropriate revenue recognition in
accordance with SAB 104 and Emerging Issue Task Force, or EITF, 00-21, Revenue
Recognition with Multiple Deliverables, or EITF 00-21. Revenue from
fixed price single task consulting contracts is generally recorded upon
completion of the contracts, which are generally short-term, or upon completion
of identifiable contractual tasks. We consider amounts to be earned
once evidence of an arrangement has been obtained, services are delivered, fees
are fixed or determinable, and collectibility is reasonably
assured.
At the
time we enter into a contract that includes multiple tasks, we estimate the
amount of actual labor and other costs that will be required to complete each
task based on historical experience. Since we have limited operating
history, we have based our estimates of labor and other costs upon the following
factors:
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results
of previous services rendered in connection with providing potential
customers with a proof of concept in connection with the specific
application of our products and services;
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time
records of personnel and contractors assigned to the identifiable
contractual tasks; and
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specific
identification of other direct costs (e.g. supplies, materials etc.)
consumed in connection with completing the identifiable
tasks.
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We
believe these estimates are reasonable, reliable and dependable as they are
based on our expertise in extracting DNA, applying our SigNature DNA Marker to
various products as well as recovering our SigNature DNA Marker after it has
been applied.
Revenues
from the achievement of contractual milestones, if deemed substantive, are
recognized as revenue when the milestones are achieved, and milestone payments
are due and collectible. Revenue relative to each task and from
contracts which are time and materials based is recorded as effort is
expended. Billings in excess of amounts earned are
deferred. Any anticipated losses on contracts are charged to income
when identified. Milestones are based upon contractually agreed upon
terms between us and our customers. To the extent we do not accurately forecast
the level of effort required to complete a contract, or individual tasks within
a contract, and we are unable to negotiate additional billings with a customer
for cost over-runs, we may incur losses on individual contracts. All
selling, general and administrative costs are treated as period costs and
expensed as incurred.
While
each contract is different, we generally provide the following general
deliverables:
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written
or oral reports as to the authenticity of the product;
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written
or oral reports as to the presence of our SigNature DNA
Marker;
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written
or oral reports as to the status of a particular feasibility study;
and
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delivery
of our Signature DNA Markers.
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Since our
transition to an operating company in fiscal 2007, we have earned and received
$705,515 in payments from various contracts and purchase orders with an average
gross profit margin of $557,949.
Allowance
for Uncollectible Receivables
The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of customers to make required
payments. The Company uses a combination of write-off history, aging
analysis and any specific known troubled accounts in determining the
allowance. If the financial condition of customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances could be required.
Warrant
Liability
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
were 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.
In
December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
Payment Arrangements ("FSP 00-19-2") which addresses accounting for registration
payment arrangements. FSP 00-19-2 specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or
included as a provision of a financial instrument or other agreement, should be
separately recognized and measured in accordance with FASB Statement No. 5,
Accounting for Contingencies. FSP 00-19-2 further clarifies that a
financial instrument subject to a registration payment arrangement should be
accounted for in accordance with other applicable generally accepted accounting
principles without regard to the contingent obligation to transfer consideration
pursuant to the registration payment arrangement. For registration
payment arrangements and financial instruments subject to those arrangements
that were entered into prior to the issuance of EITF 00-19-2, this guidance
shall be effective for financial statements issued for fiscal years beginning
after December 15, 2006 and interim periods within those fiscal
years.
As
described above, as of September 30, 2007, we exchanged common stock for the
previously issued Convertible Promissory Notes that contained certain embedded
derivative financial instruments. As a result, the Company
reclassified the warrant liabilities recorded in conjunction with the
convertible promissory notes to equity as of the conversion date of the
remaining note. We do not use derivative instruments to hedge
exposures to cash flow, market, or foreign currency risks.
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. During the years ended
September 30, 2007 and 2006, our management performed an evaluation of the
Company’s intangible assets (intellectual property) for purposes of determining
the implied fair value of the assets at September 30, 2007 and 2006,
respectively. The test indicated that the recorded remaining book
value of its intellectual property exceeded its fair value for the year ended
September 30, 2006, 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
$2,091,800. Considerable management judgment is necessary to estimate
the fair value. Accordingly, actual results could vary significantly
from management’s estimates
The
identifiable intangible assets acquired and their carrying value at June 30,
2008 were:
Trade
secrets and developed technologies (Weighted average life of 7
years)
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$
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9,430,900
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Patents
(Weighted average life of 5 years)
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34,257
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Total
Amortized identifiable intangible assets-Gross carrying
value:
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$
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9,465,157
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Less:
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Accumulated
Amortization
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(2,351,113
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Impairment
(See below)
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(5,655,011
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Net:
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$
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1,459,033
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Residual
value:
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$
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0
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Total
amortization expense charged to operations for the three and nine month periods
ended June 30, 2008 was $93,482 and $277,787, respectively, and, $92,661 and
$277,983 for the three and nine month periods ended June 30, 2007,
respectively.
Estimated
amortization expense as of June 30, 2008 was as follows:
2008
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$
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93,483
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2009
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365,124
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2010
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363,791
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2011
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363,791
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2012
and thereafter
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272,844
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Total
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$
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1,459,033
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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.
Comparison
of the Year Ended September 30, 2007 to the Year Ended September 30,
2006
Revenues
During
the year ended September 30, 2007, we transitioned from a development stage
enterprise to an operating company. For the years ended September 30,
2007 and 2006, we generated $121,920 and $18,900 in revenues from operations,
respectively. Our cost of sales for the year ended September 30, 2007
was $23,073, netting us a gross profit of $98,847. For September 30,
2006, our cost of sales was $15,639, netting us a gross profit of
$3,261.
Costs
and Expenses
Selling,
General and Administrative
Selling,
general and administrative expenses for the twelve months ended September 30,
2007 increased 41.9% to $12.1 million from $8.53 million in the same period in
2006. See a discussion of non cash items below in the Liquidity &
Capital Resources section. Included within the selling, general and
administrative expenses for the years ended September 30, 2007 and 2006 were
expenses relating to fund raising and consultant costs of $7.9 million and $3.6
million, respectively.
Research
and Development
Research
and development expenses decreased $42,346 for the twelve months ended September
30, 2007 compared to the same period in 2006 from $153,191 to $110,845 primarily
due to reduced activity in research and development and a change in focus to
marketing activities.
Depreciation
and Amortization
In the
twelve months ended September 30, 2007, depreciation and amortization decreased
$937,717 for the period compared to 2006 from $1,370,299 to
$432,582. The decrease is attributable to the decrease in intangible
amortization due to the impairment write off in the year ended September 30,
2006.
Impairment
of intangible asset(s)
During
the year ended September 30, 2007 and 2006, we performed an evaluation of our
intangible assets (intellectual property) and determined that the implied fair
carrying value exceeded its fair value at September 30,
2006. Accordingly, we recorded a non cash impairment charge to
operations of $5.7 million in the year ended September 30, 2006 as compared to
$0.00 for the year ended September 30, 2007.
Total
Operating Expenses
During
the year ended September 30, 2007, total operating expenses decreased to $12.6
million from $15.7 million in the prior year, or a decrease of $3.1 million
primarily due to the impairment in intangible assets charged to operation in the
year ended September 30, 2006.
Other
Income/Loss
Other
income for the twelve months ended September 30, 2007 decreased from a gain of
$16.9 million in the comparable period to $1.4 million due to a smaller increase
in fair value of warrant liabilities and debt derivatives.
Interest
Expenses
Interest
expenses for the twelve months ended September 30, 2007, decreased to $2.2
million from $3.6 million in the same period of 2006, a decrease of $1.4 million
as a result of conversion of our debt instruments to common stock.
Net
Income (loss)
Net loss
for the twelve months ended September 30, 2007 increased to a loss of $13.3
million from a loss of $2.4 million in the prior period as a result of the
combination of factors described above.
Three
Months Ended June 30, 2008 Compared With Three Months Ended June 30,
2007
Revenues
During
the year ended September 30, 2007, we transitioned from a development stage
enterprise to an operating company. For the three months ended June
30, 2008, we generated $252,691 in revenues from operations and our cost of
sales for the three months ended June 30, 2008 was $50,489, netting us a gross
profit of $202,202. For the three months ended June 30, 2007, we had
no revenues or cost of sales.
Costs
and Expenses
Selling,
General and Administrative
Selling,
general and administrative expenses decreased from $1,968,642 for the three
months ended June 30, 2007 to $951,828 for the three months ended June 30,
2008. The decrease of $1,016,814, or 52%, is primarily attributable
to a decrease in cost incurred in connection with professional
services.
Research
and Development
In the
nine months ended June 30, 2008, research and development expenses increased by
$17,753 to $112,042 from $94,289 for the same period in 2007.
Depreciation
and Amortization
Depreciation
and amortization expenses for the nine months ended June 30, 2008 did not change
materially from the same period in 2007, an increase of $9 to $324,603 from
$324,594.
Total
Operating Expenses
Total
operating expenses decreased to $1,081,199 from $2,102,503, or a decrease of
$1,021,304 primarily attributable to a decrease in costs incurred in connection
with professional services.
Other
Income/Loss
Gain on
reevaluation of debt derivative and warrant liability decreased by $4,431,421
from a gain of $4,431,421 for the three months ended June 30, 2007 to $0 for the
three months ended June 30, 2008. In September 2007, we exchanged
common stock for the remaining Secured Convertible Promissory Notes that
contained embedded derivatives. As a result, we reclassified the
warrant liabilities recorded in conjunction with the convertible promissory
notes to equity as of the conversion date of the related debt.
Interest
Expenses
Interest
expense for the three months ended June 30, 2008 increased by $128,759 to
$649,722 from $520,963 in the same period of 2007. The increase in
interest expense was due to an increase in outstanding debt.
Net
Income (loss)
Net loss
for the three months ended June 30, 2008 increased to $1,528,719 from a net
income of $1,807,954 in the prior period primarily attributable to the gain in
change in warrant liability in 2007
Nine
Months Ended June 30, 2008 Compared With Nine Months Ended June 30,
2007
Revenues
For the
nine months ended June 30, 2008, we generated $583,595 in revenues from
operations and our cost of sales for the nine months ended June 30, 2008 was
$124,493, netting us a gross profit of $459,102. For the nine months
ended June 30, 2007, we had no revenues or cost of sales.
Costs
and Expenses
Selling,
General and Administrative
Selling,
general and administrative expenses decreased from $6,012,028 for the nine
months ended June 30, 2007 to $3,365,880 for the nine months ended June 30,
2008. The decrease of $2,646,148, or 44%, is primarily attributable to a
decrease in cost incurred in connection with professional services.
Depreciation
Depreciation
expenses for the nine months ended June 30, 2008 did not change materially from
the same period in 2007 (an increase of $9).
Research
and Development
In the
nine months ended June 30, 2008, research and development expenses increased by
$17,753 from $94,289 to $112,042 for the period compared to the same period in
2007.
Total
Operating Expenses
Total
operating expenses decreased to $3,802,525 from $6,430,911, or a decrease of
$2,628,386 primarily attributable to a decrease in costs incurred in connection
with professional services.
Other
Income/Loss
Gain on
reevaluation of debt derivative and warrant liability decreased by $142,131 from
a gain of $142,131 for the nine months ended June 30, 2007 to $0 for the nine
months ended June 30, 2008. In September 2007, we exchanged common
stock for the remaining Secured Convertible Promissory Notes that contained
embedded derivatives. As a result, we reclassified the warrant liabilities
recorded in conjunction with the convertible promissory notes to equity as of
the conversion date of the related debt.
Interest
Expenses
Interest
expense for the nine months ended June 30, 2008 decreased by $301,975 to
$1,643,727 from $1,945,702 in the same period of 2007. The decrease
in interest expense was due to the lower year to date debt as compared to
2007.
Net
Income (loss)
Net loss
for the nine months ended June 30, 2008 decreased to $4,987,150 from a net loss
of $8,233,506 in the prior period primarily attributable to reduced professional
and other related fees from 2007.
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.
Debt
and Equity Financing Transactions
Fiscal
2006
In fiscal
2006, we completed three 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 Dr.
Hayward, a director, our President and 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 Dr. Hayward, a director, our
President and Chief Executive Officer. We paid $55,000 in cash to VC
Arjent, Ltd. for its services as the placement agent with respect to this
placement. All principal and accrued but unpaid interest under the
promissory note was paid in full shortly after the closing of and from the
proceeds of a private placement we completed on March 8, 2006. On
March 8, 2006, we issued and sold an aggregate of 30 units consisting of (i) a
$50,000 principal amount secured convertible promissory note bearing interest at
10% per annum and convertible at $0.50 per share, and (ii) a warrant to purchase
100,000 shares of our common stock at an exercise price of $0.50 per share, for
aggregate gross proceeds of $1.5 million. The units were sold
pursuant to subscription agreements by and between each of the purchasers and
Applied DNA Operations Management, Inc., a Nevada corporation and our wholly
owned subsidiary (our “Subsidiary”). The $2.050 million in gross
proceeds from these first two offerings were held by our Subsidiary for our
benefit and used to fund commissions, fees and expenses associated with the
placements, to repay the outstanding promissory note described above plus
accrued interest thereunder, to fund financing fees, consultants and public
reporting costs, salaries and wages, research and development, facility costs as
well as 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 consisted 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.
Fiscal
2007
During
fiscal 2007, we issued sold an aggregate principal amount of $850,000 in secured
convertible promissory notes bearing interest at 10% per annum and warrants to
purchase an aggregate of 1,700,000 shares of our common stock to Dr. James A.
Hayward, a director, the Chairman of the Board of Directors, our President and
Chief Executive Officer, as follows:
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On
April 23, 2007, we issued and sold a $100,000 principal amount secured
promissory note bearing interest at a rate of 10% per annum and a warrant
to purchase 200,000 shares of our common stock. The promissory
note and accrued but unpaid interest thereon converted on April 22, 2008
at a conversion price of $0.15 into 733,334 shares of our common
stock. The warrant is exercisable for a four-year period
commencing on April 23, 2008, and expiring on April 22, 2012, at a price
of $0.50 per share. The warrant may be redeemed at our option
at a redemption price of $0.001 upon the earlier of (i) April 22, 2010,
and (ii) the date our common stock has traded on The Over the Counter
Bulletin Board at or above $1.00 per share for 20 consecutive trading
days.
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On
June 30, 2007, we issued and sold a $250,000 principal amount secured
promissory note bearing interest at a rate of 10% per annum and a warrant
to purchase 500,000 shares of our common stock. The promissory
note and accrued but unpaid interest thereon converted on June 30, 2008 at
a conversion price of $0.087732076 per share, which is equal to a 20%
discount to the average volume, weighted average price of our common stock
for the ten trading days prior to issuance, into 3,134,543 shares of our
common stock. The warrant is exercisable for a four-year period
commencing on June 30, 2008, and expiring on June 29, 2012, at a price of
$0.50 per share.
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On
July 30, 2007, we issued and sold a $200,000 principal amount secured
promissory note bearing interest at a rate of 10% per annum and a warrant
to purchase 400,000 shares of our common stock. The promissory
note and accrued but unpaid interest thereon converted on July 30, 2008 at
a conversion price of $0.102568072 per share, which is equal to a 20%
discount to the average volume, weighted average price of our common stock
for the ten trading days prior to issuance, into 2,144,917 shares of our
common stock. The warrant is exercisable for a four-year period
commencing on July 30, 2008, and expiring on July 29, 2012, at a price of
$0.50 per share.
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On
September 28, 2007, we issued and sold a $300,000 principal amount secured
promissory note bearing interest at a rate of 10% per annum and a warrant
to purchase 600,000 shares of our common stock. The promissory
note and accrued but unpaid interest thereon are convertible into shares
of our common stock at a price of $0.50 per share by the holder of the
promissory note at any time from September 28, 2007 through September 27,
2008, and shall automatically convert on September 28, 2008 at a
conversion price of $0.066429851 per share, which is equal to a 20%
discount to the average volume, weighted average price of our common stock
for the ten trading days prior to issuance. The warrant is
exercisable for a four-year period commencing on September 28, 2008, and
expiring on September 27, 2012, at a price of $0.50 per
share.
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In
addition, on June 27, 2007, we completed a private placement offering of
convertible debt and associated warrants in which we issued and sold to certain
investors an aggregate of 3 units of our securities, each unit consisting of (i)
a $50,000 Principal Amount of 10% Secured Convertible Promissory Note and (ii)
warrants to purchase 100,000 shares of our common stock. The notes
and accrued but unpaid interest thereon converted at $0.15 per share on June 27,
2008 into an aggregate of 1,100,000 shares of our common stock. The
warrants are exercisable for a four year period commencing on June 27, 2008, and
expiring on June 26, 2012, at a price of $0.50 per share. On August
8, 2007, we issued and sold a $100,000 principal amount secured promissory note
bearing interest at a rate of 10% per annum and a warrant to purchase 200,000
shares of our common stock to an “accredited investor,” as defined in
regulations promulgated under the Securities Act. The promissory note
and accrued but unpaid interest thereon converted on August 8, 2008 at a
conversion price of $0.096274883 per share, which is equal to a 20% discount to
the average volume, weighted average price of our common stock for the ten
trading days prior to issuance, into 1,142,562 shares of our common
stock. The warrant is exercisable for a four-year period commencing
on August 8, 2008, and expiring on August 7, 2012, at a price of $0.50 per
share.
Fiscal
2008
In the
nine months ended June 30, 2008, we sold an aggregate of thirty-four and a half
units at a price of $100,000 per unit for sale to “accredited investors,” as
defined in regulations promulgated under the Securities Act, for aggregate gross
proceeds of $3,450,000. Each unit consists of (i) a $100,000
Principal Amount 10% Secured Convertible Promissory Note and (ii) a warrant to
purchase 200,000 shares of our common stock. The promissory notes and
accrued but unpaid interest thereon automatically convert one year after
issuance at a conversion price equal to a discount to the average volume,
weighted average price of our common stock for the ten trading days prior to
issuance, and are convertible into shares of our common stock at the option of
the holder at any time prior to such automatic conversion at a price equal to
the greater of (i) 50% of the average price of our common stock for the ten
trading days prior to the date of the notice of conversion and (ii) the
automatic conversion price. In addition, any time prior to
conversion, we have the irrevocable right to repay the unpaid principal and
accrued but unpaid interest under the notes on three days notice. The
promissory notes bear interest at the rate of 10% per annum and are due and
payable in full on the one year anniversary of their issuance. The
warrants are exercisable for cash or on a cashless basis for a period of four
years commencing one year after issuance at a price of $0.50 per
share. Each warrant may be redeemed at our option at a redemption
price of $0.01 upon the earlier of (i) three years after the issuance, and (ii)
the date our common stock has traded on The Over the Counter Bulletin Board at
or above $1.00 per share for 20 consecutive trading days.
From July
1, 2008 through August 14, 2008, we sold one and a half units at a price of
$100,000 per unit for sale to “accredited investors,” as defined in regulations
promulgated under the Securities Act, for aggregate gross proceeds of
$150,000. Each unit consists of (i) a $100,000 Principal Amount 10%
Secured Convertible Promissory Note and (ii) a warrant to purchase 200,000
shares of our common stock. The promissory notes and accrued but
unpaid interest thereon automatically convert one year after issuance at a
conversion price equal to a discount to the average volume, weighted average
price of our common stock for the ten trading days prior to issuance, and are
convertible into shares of our common stock at the option of the holder at any
time prior to such automatic conversion at a price equal to the greater of (i)
50% of the average price of our common stock for the ten trading days prior to
the date of the notice of conversion and (ii) the automatic conversion
price. In addition, any time prior to conversion, we have the
irrevocable right to repay the unpaid principal and accrued but unpaid interest
under the notes on three days notice. The promissory notes bear
interest at the rate of 10% per annum and are due and payable in full on the one
year anniversary of their issuance. The warrants are exercisable for
cash or on a cashless basis for a period of four years commencing one year after
issuance at a price of $0.50 per share. Each warrant may be redeemed
at our option at a redemption price of $0.01 upon the earlier of (i) three years
after the issuance, and (ii) the date our common stock has traded on The Over
the Counter Bulletin Board at or above $1.00 per share for 20 consecutive
trading days.
We claim
an exemption from the registration requirements of the Securities Act for the
private placement of the units described above pursuant to Section 4(2) of the
Securities Act because each of the units was made in a sale by the issuer not
involving a public offering.
As of
September 30, 2007, we had a working capital deficit of $13.8
million. For the year ended September 30, 2007, we generated a net
cash flow deficit from operating activities of $2.3 million consisting primarily
of year to date losses of $13.3 million. Non cash adjustments
included $.4 million in depreciation and amortization charges, $.9 million for
options, warrants and common stock issued in exchange for services, $2.7 million
in financing costs and debt discounts attributable to convertible debentures and
net change in net increase in current liabilities of $8.3 million net with a non
cash adjustment of $1.4 million for income attributable to re-pricing of
warrants and debt derivatives. Cash used in investing activities
totaled $0.4 million, which was utilized for acquisition of property and
equipment and funds held in escrow. Cash provided by financing
activities for the year ended September 30, 2007 totaled $1.5 million consisting
of proceeds from issuance of convertible debt.
As of
December 31, 2007, we had a working capital deficit of approximately $13.674
million. For the three period ended December 31, 2007, we generated a
net cash flow deficit from operating activities of $1.427 million consisting
primarily of year to date losses of $2.133 million. Non-cash
adjustments included $492,443 in depreciation and amortization charges and
common stock issued for services provided of
$1,040,000. Additionally, we had a net decrease in current assets of
$29,368 and a net decrease in current liabilities of $855,607. Cash
used in investing activities totaled $94,508, which was utilized for acquisition
of property and equipment of $5,492 and reduction in cash held in escrow of
$100,000. We met our cash flow needs by issuance of convertible notes
of $2,152,500, net, for the three months ended December 31, 2007.
As of
June 30, 2008, we had a working capital deficit of approximately
$15,218,019. For the nine month period ended June 30, 2008, we
generated a net cash flow deficit from operating activities of $2,350,033
consisting primarily of year to date losses of $4,987,150. Non-cash
adjustments included $2,022,066 in depreciation and amortization charges and
common stock issued for services provided of
$1,040,000. Additionally, we had a net increase in current assets of
$97,566 and a net decrease in current liabilities of $327,383. Cash
provided in investing activities totaled $377,420, which was utilized for
acquisition of property and equipment of $22,500 and reduction in cash held in
escrow of $399,920. We met our cash flow needs by issuance of
convertible notes of $2,532,580, net, for the three months ended June 30,
2008.
We expect
capital expenditures to be less than $200,000 in fiscal 2008. Our
primary investments will be in laboratory equipment to support prototyping and
our authentication services.
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.
We
currently require additional financing in order to meet our current and
projected cash flow deficits from operations and development. We have
sufficient funds to conduct our operations for approximately three
months. We presently do not have any available credit, bank financing
or other readily available external sources of liquidity. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock, a downturn in the U.S. or global stock and debt markets and
other reasons could make it more difficult to obtain financing through the
issuance of equity securities or borrowing. Further, if we issue
additional equity or convertible debt securities, stockholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our common stock. If
additional financing is not available or is not available on acceptable terms,
this could have a material adverse effect on our business, results of operations
liquidity and financial condition.
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 14, 2008, 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.
Matter
Voluntarily Reported to the SEC and Securities Act Violations
During
the months of March, May, July and August 2005, we issued a total of 8,550,000
shares of our common stock to certain employees and consultants pursuant to the
2005 Incentive Stock Plan. We engaged our outside counsel to conduct
an investigation of the circumstances surrounding the issuance of these
shares. On April 26, 2006, we voluntarily reported the findings 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. Since our voluntary report of the findings of our
internal investigation to the SEC on April 26, 2006, we have received no
communication from the SEC or any third party with respect to this
matter. If violations of securities laws occurred in connection with
the resale of certain of these shares, the employees and consultants or persons
who purchased shares from them may have rights to have their purchase rescinded
or other claims against us for violation of securities laws, which could harm
our business, results of operations, and financial condition.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Inflation
The
effect of inflation on our revenue and operating results was not
significant.
Going
Concern
The
accompanying audited and unaudited condensed consolidated 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 14, 2008, 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 accompanying audited and unaudited condensed
consolidated 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.
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, where
we established laboratories for the manufacture of DNA markers and product
prototypes, and DNA authentication. To date, the company has a very
limited operating history, and as a result, the company’s operations have not
produced significant revenues.
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 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 customers to cost-effectively:
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assure
manufacturers, suppliers, distributors, retailers and end-users that their
products are authentic and can be forensically
authenticated;
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integrate
our SigNature DNA Markers with existing security solutions such as
barcodes, radio frequency identification (RFID) tags, holograms,
microchips and other securities measures; and
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add
value to the “bottom-line” by helping to diminish product diversion and
counterfeiting.
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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:
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continuing
to improve and customize our solution to meet our current and potential
customers’ needs;
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continuing
to develop and enhance our existing DNA marker authentication
technologies;
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expanding
our customer base both domestically and abroad by targeting high volume
markets; and
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augmenting
our competitive position through strategic acquisitions and
alliances.
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We have
also begun to develop and manufacture DermalRx, an ingredient for use in skin
care products, which allows for exfoliation without the irritation or
inflammation associated with chemical peeling.
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:
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$695
million of entertainment and software products;
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$283
million of clothing and accessories;
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$193
million of cigarettes and tobacco products ;
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$61
million of drugs and other medical supplies;
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$36
million of toys and sports equipment;
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$35
million of electronic equipment and supplies;
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$12
million in perfume and cosmetics;
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$11
million of food and alcohol products;
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$11
million in jewelry and watches;
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$10
million of computer equipment and supplies;
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$123
million of other goods.
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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 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 likely 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, and
25% of pharmaceuticals consumed in developing countries and that 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 combatted 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 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 approval of the U.S. Food and Drug Administration
(FDA). We have initiated a strategy to approach the FDA during
2008.
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 potential strategic partners in order to
continue to market and sell new product lines derived from, but not limited to,
DNA technology.
Target
Markets
We have
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:
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A
signed certificate or statement of authenticity from a respected authority
or expert on the artist;
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An
exhibition or gallery sticker attached to the art or
collectible;
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An
original sales receipt;
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A
film or recording of the artist talking about the art or
collectible;
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An
appraisal from a recognized authority or expert on the art or collectible;
and
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Letters
or papers from recognized experts or authorities discussing the art or
collectible.
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Fine
Wine
Vintners
and purveyors of fine wine are also vulnerable to counterfeiting or product
diversion. We believe our SigNature Program can provide vintners,
purveyors of fine wines and organizations within the wine community several
benefits:
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Verifed
authenticity increases potential customers' confidence in the product and
their purchase decision;
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For
the vintner, the SigNature Program can strengthen brand support and
recognition, and offers the potential for improved marketability and
sales; and
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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.
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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. In 2007 the Business Software Alliance ("BSA") reported
that in 2006, the United States software industry lost $7.3 billion as a result
of software piracy, an increase of $400 million over the previous
year. An independent study conducted by IDC for the BSA reported that
21 percent of software in the United States is unlicensed. Our
SigNature DNA Markers can be embedded onto digital and recording media products,
such as CDs, DVDs, videotapes and computer software, as well as the packaging of
these products.
Pharmaceuticals
The
pharmaceutical industry also faces major problems relative to counterfeit,
diluted, or falsely labeled drugs that make their way through healthcare systems
worldwide, posing a health threat to patients and a financial threat to
drugmakers and distributors. As a result, the pharmaceutical industry
and regulators are examining emerging anti-counterfeit technologies, including
RFID tags and EPCs to help stem the wave of counterfeit drugs and better track
legitimate drugs from manufacturing through the supply chain. Our
SigNature DNA Markers can easily be embedded directly into pharmaceutical
packaging or into RFID tags or EPCs attached to packaging, and since they are
ingestible, may be applied as part of a unit dose. In its 2004 report
"Combating Counterfeit Drugs," the Food and Drug Administration ("FDA") noted
that authentication technologies for pharmaceuticals (such as color-shifting
inks, holograms, taggants, or chemical markers 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:
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passports;
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lawful
permanent resident, or “green” cards;
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visas;
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drivers’
licenses;
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Social
Security cards;
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military
identification cards;
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national
transportation cards;
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security
cards for access to sensitive physical locations; and
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other
important identity cards, official documents and security-related
cards.
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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
SigNature
Program. Our SigNature Program consists of three steps:
creating and encapsulating a specific encrypted DNA segment, applying it to a
product or other item, and detecting the presence or absence of the specific
segment. We plan for the first two steps to be controlled exclusively
by Applied DNA and its certified agents to ensure the security of SigNature DNA
Markers. Once applied, the presence of any of our SigNature DNA
Markers can be detected by us or a customer in a simple spot test, or a sample
taken from the product or other item can be analyzed forensically to obtain
definitive proof of the presence or absence of a specific type of SigNature DNA
Marker (e.g., one designed to mark a particular product).
Creating
a Customer or Product-Specific SigNature DNA Marker
Our
SigNature DNA Markers are botanical DNA segments custom manufactured by us to
identify a particular class of or individual products or
items. During this manufacturing process, we scramble and encrypt a
naturally occurring botanical DNA code segment or segments, and then encapsulate
the resulting DNA segment utilizing our proprietary SigNature DNA Encapsulation
system. We then record and store the sequence of the DNA segment in a secure
database in order that we can later detect it.
Embedding
the SigNature DNA Marker
Our
SigNature DNA Markers may be directly embedded in products or other items, or
otherwise attached by embedding them into media that is incorporated in or
attached to the product or item. For example, we can embed SigNature
DNA Markers directly in paper, metal, plastics, stone, ceramic, and other
materials. Media in which we can embed SigNature DNA Markers
include:
SigNature DNA
Ink: Our SigNature DNA Ink can be applied directly or on a
label that is then affixed to the product or item. SigNature DNA Ink
is highly durable and degradation resistant. SigNature DNA Ink can be
visible (colored) or invisible. This makes it possible to mark
products with a visible, or overt, and/or invisible, or covert, SigNature DNA
Marker on any tangible surface such as a label. The location of
covert Signature DNA Markers on a product are recorded and stored in a secure
database. Similar media like varnish and paints can also be used
instead of ink. Examples of products and other items onto which
SigNature DNA Ink can be applied include:
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artwork
and collectibles (paintings, artifacts, antiques, stamps, coins,
documents, collectibles and memorabilia);
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corporate
documents: (confidential, date and time dependent documents or security
clearance documents);
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financial
instruments (currency, stock certificates, checks, bonds and
debentures);
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retail
items (event tickets, VIP tickets, clothing labels, luxury
products);
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pharmaceuticals
(tablet, capsule and pill surface printing); and
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other
miscellaneous items (lottery tickets, inspection stamps, custom seals,
passports and visas, etc.).
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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. We can also embed our SigNature DNA
markers into raw cotton fiber before manufacture of a finished cotton textile
product (e.g., a t-shirt) and authenticate a finished cotton
product.
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: Level one marker detection utilizes non–DNA based
mechanisms such as optical reporter markers and color shifting
ink. Adding optical reporter markers to our SigNature DNA affords the
ability to quickly screen for the presence or absence of our SigNature DNA
Markers using the portable hand held detectors. 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.
DermalRx
Business. In November, 2007, we began developing and
manufacturing DermalRx, an ingredient for skin care products. We
believe that our DermalRx helps skin care products exfoliate without the
irritation or inflammation associated with chemical peeling. We are
continuing to pursue our DermalRx business.
Sales
and Marketing
We have
since inception only had sales of our products in Europe through direct
sales. As of January 14, 2008, 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
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
other companies to manufacture our overt color-changing DNA Ink and our
SigNature DNA Encryption Detector pens.
Commercial
Agreements and Distribution of our Products
HPT Agreement. On
March 19, 2007, we entered into a Technology Reseller Agreement (the “HPT
Agreement”) with HPT International, LLC (“HPT”). In the HPT Agreement
we agreed to supply our SigNature DNA Markers to HPT to be affixed onto HPT's
holograms, Nylon 6 tags and other plastic or metal food tags. HPT has
been granted exclusive rights to affix our SigNature DNA Markers onto its
tagging products for distribution to its customers in the United Statesin the
poultry and kosher foods markets, and non-exclusive rights to attach our
SigNature DNA Markers onto its tagging products for distribution to its
customers worldwide. We will receive a fee for each SigNature DNA Marker that is
attached to an HPT product and distributed to a third party, and for each
forensic authentication test that we perform at HPT's request. HPT has been
granted exclusive rights in the U.S.poultry and kosher foods markets with
respect to new customers through March 18, 2008. After that date, HPT
will lose its exclusive rights if it does not realize certain sales goals or
does not agree to certain minimum purchases during the subsequent year of the
agreement. Under the HPT Agreement, HPT has the right to permanent
exclusivity in the U.S.poultry and kosher foods markets if realizes its sales
goals for the first two years under the HPT Agreement and achieves an additional
milestone to be agreed by us and HPT prior to March 18, 2009.
IIMAK
Agreement. On April 18, 2007, we entered into a Joint
Development and Marketing Agreement with International Imaging Materials, Inc.,
or IIMAK. In this agreement with IIMAK, the parties agreed to jointly develop
thermal transfer ribbons incorporating our SigNature DNA Markers to help prevent
counterfeiting and product diversion for an initial six (6) month period. This
period may be extended by mutual written agreement. Upon the successful
development of commercially feasible ribbons incorporating SigNature DNA
Markers, we will be paid royalties based on a calculation of net receipts by
IIMAK from sales of such products. We will receive the exclusive right to supply
DNA taggants to IIMAK and IIMAK will receive the exclusive right to manufacture
and sell such products worldwide. In February 2008, we completed the
joint development stage of this agreement and initiated pilot manufacturing of
IIMAK thermal transfer ribbons embedded with SigNature DNA.
Champion Thread Company
Agreement. On May 8, 2007, we entered into a Joint Development
and Marketing Agreement with Champion Thread Company, or Champion. We
agreed to jointly develop, commercialize and distribute SigNature DNA marked
products to the textile industry. Champion has been granted exclusive
rights to be the reseller for the thread, yarn, woven labels and printed labels
for textiles markets for an initial period of four years with automatic renewals
thereafter, subject to either party’s right not to renew. We will be
paid royalties on all sales made by Champion.
Printcolor Screen Ltd.
Agreement. On May 30, 2007, we entered into a Technology
Reseller Agreement with Printcolor Screen Ltd., or Printcolor. Under
the terms of the agreement, we have been granted the exclusive right to supply
our SigNature DNA Markers to Printcolor and Printcolor has been granted rights
to affix our SigNature DNA Markers onto Printcolor products for distribution to
its customers for an initial period of three years. This initial period will
automatically renew for successive one year periods unless terminated earlier.
We will be paid certain fees based on purchase orders received from
Printcolor. In October 2007, Printcolor committed to using our
SigNature DNA as a central component of its spectraCRYPT security product
line.
Supima Cotton
Agreement. On June 27, 2007, we entered into a Feasibility
Study Agreement with Supima, a non-profit organization for the promotion of U.S.
pima cotton growers. In connection with the agreement we undertook a
study of the feasibility of establishing a method or methods to authenticate and
identify U.S. produced pima cotton fibers. We received payments from
Supima upon signing of the agreement and in installments beginning on July 6,
2007 through completion of the feasibility study. The feasibility
study was successfully completed in the first quarter of 2008. We
plan to begin a preliminary launch of authentication services in 2008 and we may
in the future offer authentication services to member companies of Supima (as
well as non-member companies) to confirm the Supima cotton content of textile
items such as apparel and home fashion products. We are obligated to
pay Supima a percentage of any fees that we receive from such companies for
authentication services we provide them. We are also obligated to pay Supima
fifty percent of the aggregate amount of payments that we received from Supima
for the feasibility study out of any fees we receive from providing
authentication services. In addition, until the earlier of either (i)
five years or (ii) the repayment to Supima of fifty percent of the aggregate
amount of payments that we received from Supima for the feasibility study, we
are obligated to pay Supima a fee for each authentication service that we
provide. The agreement may be terminated by us or Supima after sixty (60) days
upon fourteen (14) days prior written notice.
Cash-In-Transit Industry. In
February 2008, we shipped our first order of SigNature DNA markers to a UK
distributor to the Cash-in-Transit industry. In March 2008, we
shipped our second order to the same customer.
DermalRx. As of
August 2008, we have shipped multiple orders of DermalRx to a consumer
products company for testing in their skin care products.
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: Authentix, Collectors Universe Inc., Data Dot Technology, Digimarc
Corp., DNA Technologies, Inc., ID Global, Informium AG, Inksure Technologies,
Kodak, L-1 Identity Solutions, Manakoa, OpSec Security Group, SmartWater
Technology, Inc., Sun Chemical Corp, and Tracetag.
Some
examples of competing security products include:
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fingerprint scanner (a
system that scans fingerprints before granting access to secure
information or facilities);
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voice recognition
software (software that authenticates users based on individual
vocal patterns);
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cornea scanner (a
scanner that scan the iris of a user’s eye to compare with data in a
computer database);
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face scanner (a
scanning system that use complex algorithms to distinguish one face from
another);
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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);
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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);
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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
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radioactivity & rare
molecules (radioactive substances or rare molecules which are
uncommon and readily detected).
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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:
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product
performance, features and liability;
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price;
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timing
of product introductions;
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ability
to develop, maintain and protect proprietary products and
technologies;
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sales
and distribution capabilities;
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technical
support and service;
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brand
loyalty;
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applications
support; and
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breadth
of product line.
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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, 23 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
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Patent No:
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Assignee of Record
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Dated Issued
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Jurisdiction
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Nucleic
Acid as Marker for Product Anticounterfeiting and
Identification
|
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89108443
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APDN
(B.V.I.) Inc.
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March
17,2000
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Taiwan
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Method
of using ribonucleic acid as product antifake mark and for
verification
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00107580.2
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Rixflex
Holdings
Limited
(2)
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February
2, 2005
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China
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EppenLocker
(A Leakage-Prevention Apparatus of Microcentrifuge)
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89204158
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APDN
(B.V.I.) Inc.
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March
10, 2000
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Taiwan
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Multiple
Tube Structure for Multiple PCR in a Closed Container
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89210575
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APDN
(B.V.I.) Inc.
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June
20, 2000
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Taiwan
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A
Device for Multiple Polymerase Chain Reactions In a Closed Container and a
Method of Using Thereof
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89111477
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APDN
(B.V.I.) Inc.
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June
12, 2000
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Taiwan
|
Method
for Mixing Nucleic Acid in Water Insoluble Media and Application
Thereof
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921221973
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APDN
(B.V.I.) Inc.
|
|
August
11, 2003
|
|
Taiwan
|
A
Method of Utilizing Nucleic Acids as Markers for Product Anti-Counterfeit
Labeling and Verification
|
|
US
7,115,301 B2
|
|
Rixflex
Holdings
Limited
(2)
|
|
October
3, 2006
|
|
United
States
|
Patents
Pending:
Patent Name
|
|
Application No.
|
|
Filed in the Name of
|
|
Dated Filed
|
|
Jurisdiction
|
|
|
|
|
|
|
|
|
|
Method
for Mixing Nucleic Acid in Water Insoluble Media and Application
Thereof
|
|
2002-294229
|
|
Biowell
(1)
|
|
August
31, 2002
|
|
Japan
|
|
|
03007023.9 |
|
Rixflex
Holdings
Limited
(2)
|
|
March
27, 2003 |
|
EU |
|
|
10/645,602
|
|
Rixflex
Holdings
Limited
(2)
|
|
August
22, 2003
|
|
United
States
|
Method
of dissolving nucleic acid in water insoluble medium and its
application
|
|
03155949.2
|
|
Rixflex
Holdings
Limited
(2)
|
|
August
27, 2003
|
|
China
|
Novel
nucleic acid based steganography system and application
thereof
|
|
10/909,431
|
|
Rixflex
Holdings
Limited
(2)
|
|
August
3, 2004
|
|
United
States
|
Cryptic
method of secret information carried in DNA molecule and its deencryption
method
|
|
921221490
|
|
APDN
(B.V.I.) Inc.
|
|
August
6, 2003
|
|
Taiwan
|
A
novel nucleic acid based steganography system and application
thereof
|
|
03127517.6
61387/2004
|
|
Biowell
(1)
Rixflex
Holdings
Limited
(2)
|
|
August
6, 2003
August
4, 2004
|
|
China
Korea
|
Patent Name
|
|
Application No.
|
|
Filed in the Name of
|
|
Dated Filed
|
|
Jurisdiction
|
|
|
|
|
|
|
|
|
|
A
novel method for coding based on nucleic acids and utility
thereof
|
|
04018374.1
1-2004-00742
|
|
Rixflex
Holdings
Limited
(2)
Rixflex
Holdings
Limited
(2)
|
|
August
3, 2004
August
4, 2004
|
|
EU
Vietnam
|
A
novel nucleic acid based steganography system and applications
thereof
|
|
092819
PI20043145
2004-225987
P-00200400374
764/CHE/2004
|
|
Rixflex
Holdings
Limited
(2)
Biowell
(1)
Rixflex
Holdings
Limited
(2)
Rixflex
Holdings
Limited
(2)
Rixflex
Holdings Limited (2)
|
|
August
4, 2004
August
4, 2004
August
2, 2004
August
4, 2004
August
4, 2004
|
|
Thailand
Malaysia
Japan
Indonesia
India
|
Method
for classifying group ID of shoppers and transferring the shopping
discount to group development funds development
|
|
92119302
|
|
APDN
(B.V.I.) Inc.
|
|
July
15, 2003
|
|
Taiwan
|
Method
for transferring feedback foundation capable of identifying multiple
objects
|
|
03150071.4
|
|
Rixflex
Holdings
Limited
(2)
|
|
July
31, 2003
|
|
China
|
Method
of Classifying Group ID of Shoppers and Transferring the Shopping Discount
to Group Development Funds
|
|
PI20042889
092217
2004-200730
|
|
Rixflex
Holdings
Limited
(2)
Rixflex
Holdings
Limited
(2)
Biowell
(1)
|
|
August
4, 2004
July
12, 2004
July
7, 2004
|
|
Malaysia
Thailand
Japan
|
System
and Method for authenticating multiple components associated with a
particular product.
|
|
11/437,265
PCT/US2006/019660
|
|
APDN
(B.V.I.) Inc.
APDN
(B.V.I.) Inc.
|
|
May
19, 2005
May
19, 2006
|
|
US
PCT
|
System
and Method for Marking Textiles with Nucleic Acid
|
|
10/825,968
|
|
APDN
(B.V.I.) Inc.
|
|
April
15, 2004
|
|
United
States
|
System
and Method for Marking Textiles with Nucleic Acids
|
|
Publication
#20050112610
|
|
APDN
(B.V.I.) Inc
|
|
4/16/2003
|
|
United
States
|
System
and Method for Authenticating Multiple Components Associated with a
Particular Good
|
|
Publication
# 22070048761
|
|
APDN
(B.V.I.) Inc
|
|
5/20/2005
|
|
United
States
|
System
and Method for Secure Document Printing and Detection
|
|
Application
# 60/874,425
|
|
APDN
(B.V.I.) Inc
|
|
12/12/2006
|
|
United
States
|
System
and Method for Authenticating Tablets
|
|
Application
#60/877,875
|
|
APDN
(B.V.I.) Inc
|
|
12/26/2006
|
|
United
States
|
System
and Method for Authenticating Sports Identification Goods
|
|
Application
# 60/877,869
|
|
APDN
(B.V.I.) Inc.
|
|
12/29/2006
|
|
United
States
|
Optical
Reporter Compositions
|
|
11/954,030
|
|
APDN
(B.V.I.) Inc.
|
|
2007/12/11
|
|
United
States
|
Methods
for Covalent Linking of Optical Reporters
|
|
11/954,009
|
|
|
|
|
|
|
Method
For Authenticating Articles with Optical Reporters
|
|
11/954,038
|
|
APDN
(B.V.I.) Inc.
|
|
2007/12/11
|
|
United
States
|
Method
for Secure Document Printing and Detection
|
|
11/954,044
|
|
APDN
(B.V.I.) Inc.
|
|
2007/12/11
|
|
United
States
|
Method
for Authenticating Sports Identification Goods
|
|
11/954,051
|
|
APDN
(B.V.I.) Inc.
|
|
2007/12/11
|
|
United
States
|
Method
for Authenticating Tablets
|
|
11/954,055
|
|
APDN
(B.V.I.) Inc.
|
|
2007/12/11
|
|
United
States
|
(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 Inc.
|
|
August
13, 2004
|
|
Mexico
|
APPLIED
DNA and model molecule design
|
|
846711
|
|
Applied
DNA Sciences Inc.
|
|
August
16, 2004
|
|
Mexico
|
APPLIED
DNA and model molecule design
|
|
3392818
|
|
Applied
DNA Sciences Inc.
|
|
March
21, 2005
|
|
European
Community
|
BIOWELL
and Design
|
|
3,155,578
|
|
Rixflex
Holdings Limited (1)
|
|
October
17, 2006
|
|
United
States
|
BIOWELL
and Design
|
|
2,675,941
|
|
Rixflex
Holdings Limited (1)
|
|
January
21, 2003
|
|
United
States
|
BIOWELL
and Design
|
|
2,611,291
|
|
Rixflex
Holdings Limited (1)
|
|
August
27, 2002
|
|
United
States
|
BIOWELL
and Design
|
|
4101159010000
|
|
Biowell
(2)
|
|
May
4, 2005
|
|
South
Korea
|
BIOWELL
and Design
|
|
4,819,252
|
|
Rixflex
Holdings Limited (1)
|
|
November
19, 2004
|
|
Japan
|
(1) 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 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.
Purchase
of Intellectual Property and License Agreement with Biowell
In the
first half of 2005, Biowell Technology, Inc. (“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 our existing license agreement and, on July
12, 2005, we entered into a license agreement with Biowell, under which we
granted Biowell an exclusive license to sell, market, and sub-license certain of
our products in Australia, certain countries in Asia and certain Middle Eastern
countries. By letter dated November 1, 2007, we terminated Biowell’s
rights as licensee with respect to Australia, China and certain other countries
in Asia because of Biowell’s failure to pay us certain fees, payments or
consideration in connection with the grant of the license. In
addition, we terminated the exclusivity of the license with respect to certain
Middle Eastern and other Asian countries because of Biowell’s failure to meet
certain minimum annual net sales in each of the various countries covered by the
license.
Employees
Presently,
we employ a total of 7 full-time employees and 3 part-time employees, including
2 in management, 4 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.
Description
of Properties
We
maintain our principal office at 25 Health Sciences Drive, Suite 113, Stony
Brook, New York 11790. We moved our principal office to the Long Island High
Technology Incubator, which is located on the campus of Stony Brook University,
in December 2005. We believe that our current office space and
facilities are sufficient to meet our present needs and do not anticipate any
difficulty securing alternative or additional space, as needed, on terms
acceptable to us.
Legal
Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is
subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
described below, we are currently not aware of any such legal proceedings that
we believe will have, individually or in the aggregate, a material adverse
affect on our business, financial condition or operating results.
Applied
DNA Sciences, Inc. v. Paul Reep et al. (Los Angeles County Superior Court Case
No. BC 367661):
We filed
this action against the defendants, Paul Reep, Adrian Butash, John Barnett,
Chanty Cheang, Jaime Cardona, Peter Brocklesby, Cheri Lu Brocklesby and Angela
Wiggins on or about March 9, 2007. In this matter, we have asked the
court to make a judicial determination that the defendants were unjustly
enriched and breached fiduciary duties owed to the company. We
resolved our claims against all of the defendants except Reep and Peter and
Cheri Lu Brocklesby. Default was entered against Peter and Cheri Lu
Brocklesby for failing to respond to the complaint, and the company has since
submitted documentation requesting that a default judgment be issued against
both of these individuals. That request is still being considered by
the Court. After the resolution of the claims involving the other
defendants, we agreed with Reep that this case should be consolidated with Paul
Reep v. Applied DNA Sciences, Inc. et al, Los Angeles Superior Court Case No.
BC345702. The trial in the consolidated matter was set for July 22,
2008; however, on June 19, 2008, we prevailed in our motion for summary judgment
in the matter captioned Paul Reep v. Applied DNA Sciences, Inc. et al, Los
Angeles Superior Court Case No. BC345702. After the decision granting
our motion for summary judgment was announced, we had communications with Reep's
counsel whereby the parties provisionally agreed for Reep to waive any appellate
rights he may have relating to Case No. BC 345702 in exchange for our agreement
to dismiss our affirmative lawsuit against Mr. Reep. A written
agreement setting forth the final resolution of both matters was executed
recently. The Court has set a status conference for August 27, 2008
at 9:00 a.m. in the event this case is not resolved.
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.
Douglas
A. Falkner v. Applied DNA Sciences, Inc. (Los Angeles County Superior Court Case
No. BC 386557):
Falkner
filed a claim on March 3, 2008 asserting counts for breach of contract under his
employment agreements dated March 10, 2003 and June 16, 2003 and wrongful
discharge in violation of public policy. The relief sought includes
unspecified compensatory damages, unspecified exemplary and punitive damages,
and attorneys’ fees. This matter is in the early stages of
discovery. We intend to vigorously defend against the claims asserted
against us.
Intervex,
Inc. v. Applied DNA Sciences, Inc. (Supreme Court of the State of New York Index
No.08-601219):
Intervex,
Inc., or Intervex, the plaintiff, filed a complaint on or about April 23, 2008
related to a claim for breach of contract. In March 2005, we entered
into a consulting agreement with Intervex, which provided for, among other
things, a payment of $6,000 per month for a period of 24 months, or an aggregate
of $144,000. In addition, the consulting agreement provided for the
issuance by us to Intervex of a five-year warrant to purchase 250,000 shares of
our common stock with an exercise price of $.75. Intervex asserts
that we owe it 17 payments of $6,000, or an aggregate of $102,000, plus accrued
interest thereon, and a warrant to purchase 250,000 shares of our common
stock. We have counterclaimed for compensatory and punitive damages,
restitution, attorneys’ fees and costs, interest and other relief the court
deems proper. This matter is in the early stages of
discovery. We intend to vigorously defend against the claims asserted
against us.
Available
Information
We are
subject to the informational requirements of the Exchange Act, which requires us
to file our Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB,
Current Reports on Form 8-K, amendments to such reports and other information
with the Securities and Exchange Commission (“SEC”). This information
is available at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. Information on the operation of the Public Reference Room
can be obtained by calling the SEC at 1-800-SEC-0330. Because we file
documents electronically with the SEC, you may also obtain this information by
visiting the SEC’s website at www.sec.gov. Our web site is located at
www.adnas.com.
DIRECTORS
AND EXECUTIVE OFFICERS
The
following is a list of our directors, executive officers and significant
employees.
Name
|
|
Age
|
|
Title
|
|
Board of Directors
|
James
A. Hayward
|
|
55
|
|
Chief
Executive Officer, President,
and Chairman
of the Board
|
|
Director
|
Kurt
Jensen
|
|
51
|
|
Chief
Financial Officer
|
|
|
Ming-Hwa
Benjamin Liang
|
|
45
|
|
Secretary
and Strategic Technology Development Officer
|
|
|
Sanford
R. Simon
|
|
65
|
|
|
|
Director
|
Yacov
Shamash
|
|
58
|
|
|
|
Director
|
Directors
are elected to serve until the next annual meeting of stockholders and until
their successors are elected and qualified. Currently there are three 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.
James
A. Hayward - Chief Executive Officer
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.
Kurt
Jensen - Chief Financial Officer
Kurt H.
Jensen, M.Sc.(Cand. Merc.) has been our Chief Financial Officer since December
21, 2007, taking over the position from Dr. Hayward. Mr. Jensen has
been our Controller since February 2006. Prior to that date, for a
period of more than 23 years, he was employed by Point of Woods Homes,
Inc. Mr. Jensen was awarded a M.Sc. in Economics and Business
Administration from the Copenhagen Business School in 1983.
Ming-Hwa
Benjamin Liang - Secretary and Strategic Technology Development
Officer
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.
Yacov
Shamash - Director
Dr. Yacov
Shamash has been a member of the board of directors since March 17,
2006. Dr. Shamash is Vice President of Economic Development at the
State University of New York at Stony Brook. Since 1992, he has been
the Dean of Engineering and Applied Sciences and the Harriman School for
Management and Policy at the University, and Founder of the New York State
Center for Excellence in Wireless Technologies at the University. Dr.
Shamash developed and directed the NSF Industry/University Cooperative Research
Center for the Design of Analog/Digital Integrated Circuits from 1989 to 1992
and also served as Chairman of the Electrical and Computer Engineering
Department at Washington State University from 1985 until 1992. Dr. Shamash also
serves on the Board of Directors of Keytronic Corp., Netsmart Technologies,
Inc., American Medical Alert Corp., and Softheon Corp.
Sanford
R. Simon - Director
Dr.
Sanford R. Simon has been a member of the board of directors since March 17,
2006. Dr. Simon has been a Professor of Biochemistry, Cell Biology
and 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.
Name
and Principal Position
|
|
Fiscal
Year
|
|
Annual
Salary
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
James
A. Hayward (1)
|
|
2007
|
|
|
0 |
|
|
|
0 |
|
Chief
Executive Officer, President, and
|
|
2006
|
|
|
0 |
|
|
|
0 |
|
Chairman
of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kurt
Jensen (2) |
|
2007
|
|
|
108,077 |
|
|
|
108,077 |
|
Chief
Financial Officer
|
|
2006
|
|
|
59,295 |
|
|
|
59,295 |
|
|
|
|
|
|
|
|
|
|
|
|
Ben
Liang
|
|
2007
|
|
|
103,027 |
|
|
|
103,027 |
|
Secretary
and
|
|
2006
|
|
|
85,756 |
|
|
|
85,756 |
|
Strategic
Technology Development Officer
|
|
|
|
|
|
|
|
|
|
|
(1) James
A. Hayward was appointed as Chief Executive Officer on October 5,
2005.
(2) Kurt
Jensen was appointed Chief Financial Officer on December 21, 2007.
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.
Compensation
Discussion and Analysis
Background
and Compensation Philosophy
We
currently have three named executive officers, Dr. James A. Hayward, a director,
our Chief Executive Officer, President and Chairman of the Board of Directors,
Kurt Jensen, who was our Controller during fiscal 2007 and was appointed our
Chief Financial Officer on December 21, 2007, and Ben Liang, our Secretary and
Chief Technology Officer. Dr. Hayward has elected not to receive cash
compensation until there is an improvement in the Company’s financial and
operating performance and prospects.
Our Board
of Directors has not adopted or established a formal policy or procedure for
determining the amount of compensation paid to our executive
officers. No pre-established, objective performance goals or metrics
have been used by the Board of Directors in determining the compensation of our
executive officers. Dr. Hayward is involved in the Board's
deliberations regarding executive compensation and provides recommendations with
respect to his and the compensation of Mr. Jensen and Dr. Liang based on, among
other things, the Company’s financial and operating performance and prospects
and the contributions made by Mr. Jensen and Dr. Liang to the success of the
Company.
Employment
Agreements
We have
no employment agreements with our named executive officers.
Bonuses
and Deferred Compensation
In fiscal
2007, we had no established bonus, deferred compensation or retirement plan,
although we may adopt such compensation arrangements in the
future. No bonuses were paid to our named executive officers related
to fiscal 2007.
Payment
of Post-Termination Compensation
We do not
have change-in-control agreements with any of our executive officers, and we are
not obligated to pay severance or other enhanced benefits to executive officers
upon termination of their employment.
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 December of 2004, we adjusted the exercise price
of options under the Compensation Plan to $0.60 per share. As of
September 30, 2007, 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. On May 16, 2007, at the annual meeting of stockholders,
the holders of a majority of the outstanding common stock of the Company
approved an increase in the number of shares subject to the 2005 Incentive Stock
Plan to 20,000,000 shares of common stock. 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 September 30, 2007, 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.
The Board
of Directors, in their discretion, may award stock and stock options to
executive officers and key employees as part of their compensation for
employment or for retention purposes.
Plan
Category
|
|
Number
of Securities
to
be Issued Upon
Exercise
of
Outstanding
Options,
Warrants
and Rights
|
|
|
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
|
|
|
Number
of Securities
Remaining
Available for
Future
Issuance Under
Equity
Compensation Plans
(Excluding
Securities
Reflected
in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
Incentive Stock Plan approved on January 26, 2005
|
|
|
5,660,000
|
|
|
$
|
0.47
|
|
|
|
5,790,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,660,000
|
|
|
$
|
0.47
|
|
|
|
5,790,000
|
|
Amendment to the 2005
Incentive Stock Plan and Recent Equity Award Grants
On June
17, 2008, the Board of Directors adopted an amendment to the 2005 Incentive
Stock Plan that will increase the total number of shares of common stock
issuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000
shares to a total of 100,000,000 shares, which is subject to approval by our
stockholders at the 2008 annual meeting of stockholders. In
connection with the share increase amendment, the Board of Directors granted
options to purchase a total of 37,750,000 shares to certain key employees and
non-employee directors under the 2005 Incentive Stock Plan, including
17,000,000, 5,000,000 and 7,000,000 to James A. Hayward, Kurt H. Jensen and
Ming-Hwa Liang, respectively. The options granted to our key
employees and non-employee directors vested with respect to 25% of the
underlying shares on the date of grant and the remaining will vest ratably each
anniversary thereafter until fully vested on the third anniversary of the date
of grant.
The
effectiveness of the share increase amendment and the exercise of these stock
options by the key employees and non-employee directors are subject to approval
by our stockholders at the 2008 annual meeting of stockholders.
Fiscal
2007 Director Compensation
Our directors received no compensation for their services as such in
fiscal 2007.
During
the year ended September 30, 2007, we issued and sold an aggregate principal
amount of $850,000 in secured convertible promissory notes bearing interest at
10% per annum and warrants to purchase an aggregate of 1,700,000 shares of our
common stock to James A. Hayward, our President, Chairman, Chief Executive
Officer and a director.
On April
23, 2007, we issued and sold to James A. Hayward a $100,000 principal amount
secured promissory note (“April Note”) bearing interest at a rate of 10% per
annum and a warrant (“April Warrant”) to purchase 200,000 shares of our common
stock. On June 30, 2007, we issued and sold to James A. Hayward a
$250,000 principal amount secured promissory note (“June Note”) bearing interest
at a rate of 10% per annum and a warrant (“June Warrant”) to purchase 500,000
shares of our common stock. On July 30, 2007, we issued and sold to James A.
Hayward a $200,000 principal amount secured promissory note (“July Note”)
bearing interest at a rate of 10% per annum and a warrant (“July Warrant”) to
purchase 400,000 shares of our common stock. On September 28, 2007,
we issued and sold to James A. Hayward a $300,000 principal amount secured
promissory note (“September Note”) bearing interest at a rate of 10% per annum
and a warrant (“September Warrant”) to purchase 600,000 shares of our common
stock.
The April
Note and accrued but unpaid interest thereon converted on April 22, 2008 at a
conversion price of $0.15 into 733,334 shares of our common
stock. The April Warrant is exercisable for a four-year period
commencing on April 23, 2008, and expiring on April 22, 2012, at a price of
$0.50 per share. The April Warrant may be redeemed at our option at a redemption
price of $0.01 upon the earlier of (i) April 22, 2010, and (ii) the date our
common stock has traded on The Over the Counter Bulletin Board at or above $1.00
per share for 20 consecutive trading days.
The June
Note and accrued but unpaid interest thereon converted on June 30, 2008 at a
conversion price of $0.087732076 per share, which is equal to a 20% discount to
the average volume, weighted average price of our common stock for the ten
trading days prior to issuance into 3,134,543 shares of our common stock. The
June Warrant is exercisable for a four-year period commencing on June 30, 2008,
and expiring on June 29, 2012, at a price of $0.50 per share. The June Warrant
may be redeemed at our option at a redemption price of $0.01 upon the earlier of
(i) June 29, 2010, and (ii) the date our common stock has traded on The Over the
Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading
days.
The July
Note and accrued but unpaid interest thereon converted on July 30, 2008 at a
conversion price of $0.102568072 per share, which is equal to a 20% discount to
the average volume, weighted average price of our common stock for the ten
trading days prior to issuance, into 2,144,917 shares of our common
stock. The July Warrant is exercisable for a four-year period
commencing on July 30, 2008, and expiring on July 29, 2012, at a price of $0.50
per share. The July Warrant may be redeemed at our option at a redemption price
of $0.01 upon the earlier of (i) July 29, 2010, and (ii) the date our common
stock has traded on The Over the Counter Bulletin Board at or above $1.00 per
share for 20 consecutive trading days.
The
September Note and accrued but unpaid interest thereon is convertible into
shares of our common stock at a price of $0.50 per share by the holder at any
time from September 28, 2007, through September 27, 2008, and shall
automatically convert on September 28, 2008 at a conversion price of
$0.066429851 per share, which is equal to a 30% discount to the average volume,
weighted average price of our common stock for the ten trading days prior to
issuance. At any time prior to conversion, we have the right to
prepay the September Note and accrued but unpaid interest thereon upon 3 days
prior written notice (during which period the holder can elect to convert the
note). The September Warrant is exercisable for a four-year period commencing on
September 28, 2008, and expiring on September 27, 2012, at a price of $0.50 per
share. The September Warrant may be redeemed at our option at a
redemption price of $0.01 upon the earlier of (i) September 27, 2010, and (ii)
the date our common stock has traded on The Over the Counter Bulletin Board at
or above $1.00 per share for 20 consecutive trading days.
Until the
principal and interest under the September Note is paid in full, or converted
into our common stock, the September Note will be secured by a security interest
in all of our assets. This security interest is pari passu with the security
interest granted to the holders of secured convertible promissory notes issued
in our private placement offerings.
We
currently have no policy regarding entering into transactions with affiliated
parties.
NAME
AND ADDRESS OF
BENEFICIAL
OWNER
|
|
TITLE
OF
CLASS
|
|
|
NUMBER
OF
SHARES
OWNED
(1)(2)
|
|
|
PERCENTAGE
OF
CLASS (3)
|
|
|
|
|
|
|
|
|
|
James
A. Hayward
25
Health Sciences Drive, Suite 113
Stony
Brook, New York 11790
|
|
Common
Stock
|
|
|
|
7,759,400
|
(4)
|
|
7.7%
|
|
|
|
|
|
|
|
|
|
|
Yacov
Shamash
25
Health Sciences Drive, Suite 113
Stony
Brook, New York 11790
|
|
Common
Stock
|
|
|
|
250,000
|
(5)
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Kurt
Jensen
25
Health Sciences Drive, Suite 113
Stony
Brook, New York 11790
|
|
Common
Stock
|
|
|
|
580,000
|
(6)
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Ben
Liang
25
Health Sciences Drive, Suite 113
Stony
Brook, New York 11790
|
|
Common
Stock
|
|
|
|
478,650
|
(7)
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Sanford
R. Simon
25
Health Sciences Drive, Suite 113
Stony
Brook, New York 11790
|
|
Common
Stock
|
|
|
|
250,000
|
(5)
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All
directors and officers as a group (5 persons)
|
|
Common
Stock
|
|
|
|
17,030,844
|
(8)
|
|
8.5%
|
|
|
|
|
|
|
|
|
|
|
*
indicates less than one percent
|
|
|
|
|
|
|
|
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to the shares
shown. Except as indicated by footnote and subject to community property
laws where applicable, to our knowledge, the stockholders named in the
table have sole voting and investment power with respect to all common
stock shares shown as beneficially owned by them. A person is deemed to be
the beneficial owner of securities that can be acquired by such person
within 60 days upon the exercise of options, warrants or convertible
securities (in any case, the "Currently Exercisable Options"). Each
beneficial owner's percentage ownership is determined by assuming that the
Currently Exercisable Options that are held by such person (but not those
held by any other person) have been exercised and
converted.
|
(2)
|
Does
not include shares subject to options granted on June 17, 2008 pursuant to
the 2005 Incentive Stock Plan, which vested with respect to 25% of the
underlying shares on the date of grant and will vest with respect to the
remaining shares ratably on each anniversary thereafter until fully vested
on the third anniversary of the date of grant, including 17,000,000 to
James A. Hayward, 500,000 to Yacov Shamash, 5,000,000 to Kurt H. Jensen,
7,000,000 to Ben Liang and 500,000 to Sanford R. Simon. The
exercise of the stock options is subject to approval by our stockholders
at the 2008 annual meeting of stockholders of an amendment to the 2005
Incentive Stock Plan that will increase the total number of shares of
common stock issuable thereunder.
|
(3)
|
Based
upon 200,391,959 shares of common stock outstanding as of August 21,
2008.
|
(4)
|
Includes
9,200,000 shares underlying currently exercisable
warrants.
|
(5)
|
Includes
250,000 shares underlying a currently exercisable
warrant.
|
(6)
|
Includes
40,000 shares held by a spouse and 500,000 immediately exercisable
options.
|
(7)
|
Includes
325,392 shares held by spouse.
|
(8)
|
Includes
8,000,000 shares underlying currently exercisable options and
warrants.
|
Our
current authorized capital stock consists of 410,000,000 shares of common stock,
par value $0.001 per share, of which 200,391,959 shares were issued and
outstanding as of August 22, 2008, and 10,000,000 shares of preferred stock, par
value $0.001 per share, of which 60,000 shares were issued and outstanding as of
the same date.
COMMON
STOCK
The
holders of common stock are entitled to one vote for each share held of record
on all matters to be voted on by the stockholders. The holders of common stock
are entitled to receive dividends ratably when, as and if declared by the board
of directors out of funds legally available therefore. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share equally and ratably in all assets remaining available for distribution
after payment of liabilities and after provision is made for each class of
stock, if any, having preference over the common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
non-assessable.
We have
engaged American Stock Transfer & Trust Company, located in Brooklyn, New
York, as independent transfer agent or registrar.
PREFERRED
STOCK
Under our
Restated Certificate of Incorporation, as amended, the Board of Directors is
authorized, subject to any limitations prescribed by the laws of the State of
Nevada, but without any further action by our stockholders, to provide for the
issuance of up to 10,000,000 shares of preferred stock in one or more series, to
establish from time to time the number of shares to be included in such series,
to fix the designations, powers, preferences and rights of the shares of each
such series and any qualifications, limitations or restrictions thereof, and to
increase or decrease the number of shares of any such series (but not below the
number of shares of such series then outstanding) without any further vote or
action by the stockholders. The board of directors may authorize and issue
preferred stock with voting or conversion rights that could adversely affect the
voting power or other rights of the holders of common stock.
To date,
the Board has designated a Founders’ Series of Convertible Preferred Stock,
which, in six months from the date of issuance, shall be convertible at the
option of the holder and upon our reaching certain financial objectives, into
shares of our restricted Common Stock. Each share, when eligible, is convertible
into 25 fully paid and non-assessable shares of our Common Stock, subject to a
leak out agreement that extends the Rule 144 period to two years. Holders will
be permitted to sell, after a one year holding period through a three year
holding period, 1% of the issued and outstanding shares of our common stock
every 90 days. This series has been authorized by the Board of Directors. On or
about February 1, 2005, the Founders’ Series of Preferred Stock was converted
into 1,500,000 shares of our common stock.
OPTIONS
There are
currently options outstanding that have been issued to our officers, directors
and employees to purchase 5,660,000 shares of our common stock pursuant to our
2005 Incentive Stock Plan. In addition, in connection with an
amendment to the 2005 Incentive Stock Plan adopted by the Board of Directors on
June 17, 2008, which will increase the total number of shares of common stock
issuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000
shares to a total of 100,000,000 shares, options to purchase a total of
37,750,000 shares were granted under the 2005 Incentive Stock Plan to certain
key employees and non-employee directors. The effectiveness of the
share increase amendment and the exercise of these stock options by the key
employees are subject to approval by stockholders at our 2008 annual meeting of
stockholders.
WARRANTS
In
connection with a private placement of a promissory note in November, 2005, we
have issued warrants to purchase a total of up to 5,500,000 shares of our common
stock exercisable at an exercise price of $0.50 per share at any time until five
years from their date of issuance to certain persons designated by the
noteholder. Each of these warrants provide for customary adjustments
to the exercise price of and shares subject to the warrant, including upon a
subdivision or combination of our common stock, but no such adjustment will be
made to either the exercise price or the number of shares subject to these
warrants in the event that we effect a reverse-split, or combination, of our
common stock within three years from their date of issuance. The
registration statement of which this prospectus forms a part registers the
resale of the common stock issuable upon exercise of these
warrants.
In
connection with a private placement of secured convertible notes that was
completed on March 8, 2006, we have issued warrants to purchase a total of up to
3,000,000 shares of our common stock. The warrants are exercisable until five
years from the date of issuance at a purchase price of $0.50 per
share. The registration statement of which this prospectus forms a
part registers the resale of the common stock issuable upon exercise of these
warrants.
In
connection with the closing of first and second tranches of the Offshore
Offering described under “Convertible Securities” below, on May 2, 2006, and
June 15, 2006, respectively, we issued warrants to purchase a total of 7,900,000
shares of our common stock, exercisable five years from the date of issuance at
a purchase price of $0.50 per share. The registration statement of
which this prospectus forms a part registers the resale of the common stock
issuable upon exercise of these warrants.
On
September 1, 2006, we issued warrants to purchase an aggregate of 18,900,000
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, our
President, Chairman, Chief Executive Officer and a director, a warrant to
purchase 6,000,000 shares of our common stock that was issued to Timpix
International Limited, a British Virgin Islands corporation, and warrants to
purchase an aggregate of 6,000,000 shares of our common stock that were issued
to entities affiliated with Arjent, our placement agent. 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. On February 10, 2008 one of the
warrants to purchase an aggregate of 2,500,000 shares of our common stock was
exercised using the cashless provision to purchase 1,375,000
shares. The registration statement of which this prospectus forms a
part registers the resale of the common stock issuable upon exercise of certain
of these warrants.
In
addition, we also have outstanding (i) warrants to purchase 105,464 shares of
common stock at $0.10 per share, (ii) warrants to purchase 5,000 shares of
common stock at $0.20 per share, (iii) warrants to purchase 7,550,000 shares of
common stock at $0.50 per share, (iv) warrants to purchase 8,226,000 shares of
common stock at $0.60 per share, (v) warrants to purchase 200,000 shares of
common stock at $0.70 per share, and (vi) warrants to purchase 55,000 shares of
common stock at $0.75 per share.
CONVERTIBLE
SECURITIES
We
completed a private placement on March 8, 2006, in which we sold an aggregate of
30 units of our securities, (i) a $50,000 principal amount secured convertible
promissory note bearing interest at 10% per annum, and (ii) a warrant to
purchase 100,000 shares of our common stock, for aggregate gross proceeds of
$1.5 million. The notes and interest accrued thereon are convertible into shares
of our common stock at a price of $0.50 per share by the holder anytime from
issuance through the first anniversary of issuance of the notes and
automatically convert on the maturity date at a 20% discount to the average bid
price for our common stock for the ten trading days prior to conversion. The
registration statement of which this prospectus forms a part registers the
resale of the common stock issued upon conversion of these promissory
notes.
In March,
2006 we commenced the Offshore Offering of up to 140 units, at a price of
$50,000 per unit, for a maximum offering of $7 million for sale to “accredited
investors” who are not “U.S. persons.” These units consist of (i) a $50,000
principal amount secured convertible promissory note, and (ii) a warrant to
purchase 100,000 shares of our common stock at a price of $0.50 per share. The
notes and accrued but unpaid interest thereon are convertible into shares of our
common stock at a price of $0.50 per share by the holder of the notes at any
time from their date of issuance through the first anniversary of such date and
shall automatically convert on such anniversary at a 20% discount to the average
of the closing bid prices of our common stock on trading days during the 12
months prior to such conversion. On May 2, 2006, we closed on the first tranche
of the Offshore Offering in which we sold 20 units for aggregate gross proceeds
of $1,000,000. We paid Arjent Limited $375,000 in commissions, fees and expenses
from these gross proceeds. On June 15, 2006, we completed the second
tranche of the Offshore Offering in which we sold 59 units for aggregate gross
proceeds of $2,950,000. We paid Arjent Limited $442,500 in commissions, fees and
expenses from these gross proceeds. The registration statement of
which this prospectus forms a part registers the resale of the common stock
issued upon conversion of these promissory notes.
REGISTRATION
RIGHTS
Pursuant
to the terms of a registration rights agreement with respect to common stock
underlying convertible notes and warrants we issued in private placements in
November and December, 2003, December, 2004, and January and February, 2005, if
we did not have a registration statement registering the shares underlying these
convertible notes and warrants declared effective on or before June 15, 2005, we
are obligated to pay liquidated damages in the amount of 3.5% per month of the
face amount of the notes, which equals $367,885, until the registration
statement is declared effective. At our option, these liquidated
damages can be paid in cash or unregistered shares of our common
stock. To date we have decided to pay certain of these liquidated
damages in common stock, although any future payments of liquidated damages may,
at our option, be made in cash. If we decide to pay such liquidated
damages in cash, we would be required to use our limited working capital and
potentially raise additional funds. If we decide to pay the
liquidated damages in shares of common stock, the number of shares issued would
depend on our stock price at the time that payment is due. Based on
the closing market prices of $0.66, $0.58, $0.70, $0.49, $0.32 and $0.20 for our
common stock on July 15, 2005, August 15, 2005, September 15, 2005, October 17,
2005, November 15, 2005 and December 15, 2005, respectively, we issued a total
of 3,807,375 shares of common stock in liquidated damages from August, 2005 to
January, 2006 to persons who invested in the January and February, 2005 private
placements. The issuance of
shares upon any payment by us of further liquidated damages will have the effect
of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
We paid
liquidated damages in the form of common stock only for the period from June 15,
2005 to December 15, 2005, and only to persons who invested in the January and
February, 2005 private placements. We believe that we have no
enforceable obligation to pay liquidated damages to holders of any shares we
agreed to register under the registration rights agreement for periods after the
first anniversary of the date of issuance of such shares, since they were
eligible for resale under Rule 144 of the Securities Act during such periods,
and such liquidated damages are grossly inconsistent with actual damages to such
persons. Nonetheless, as of June 30, 2008 we have accrued
approximately $12.0 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. On July 24, 2008, the SEC declared effective our
registration statement 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.
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, our President, Chairman,
Chief Executive Officer and a director. 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, our President, Chairman, Chief Executive Officer and a
director. Each such warrant provides its holder the broadest possible
unlimited piggyback registration rights with respect to any registration
statement filed by the Company.
In
connection with the private placement that we completed on March 8, 2006, we
have agreed to file a registration statement to effect the registration of 100%
of our shares of common stock issuable upon conversion of the notes and exercise
of the warrants within 30 days of the registration statement, which was declared
effective by the SEC on July 24, 2008. We have agreed to use our
reasonable best efforts to cause the registration statement of which this
prospectus is a part being to be declared effective no later than 180 days after
the date of the initial filing. If we fail to file a registration
statement with the SEC on or before July 22, 2008, the holders will be entitled
to liquidated damages from Applied DNA Operations Management, Inc. in an amount
equal to 2% per month for each month that we are delinquent in filing the
registration statement.
As part
of the Offshore Offering we have offered to enter into, and with respect to the
closing of the first and second tranches of the Offshore Offering on May 2, 2006
and June 15, 2006 have entered into, a registration rights agreement with
purchasers of notes and warrants in that offering that provides that we will
prepare and file a registration statement with the SEC covering the common stock
underlying the notes and the warrants sold in the Offshore Offering within 30
days of the registration statement of which this prospectus is a part being
declared effective by the SEC, and use our reasonable best efforts to have the
registration statement declared effective by the SEC by no later than 180 days
after filing. These obligations
to file and have the registration
statement declared effective would
terminate as to any holder of the units upon the
earlier of the date: (a) when all of such holder’s common stock underlying the
notes and the warrants may be sold during a single three
month period under Rule 144 of the Securities
Act; and (b) when all of such holder’s common stock underlying the
notes and the
warrants may be transferred under Rule 144(k) of the
Securities Act, unless such holder later becomes our
affiliate (as defined in Rule 144 of the
Securities Act) in which case our
obligation shall be revived until such holder’s rights otherwise terminate under clause (a) above.
On
September 1, 2006, we issued warrants to purchase an aggregate of 18,900,000
shares of the our common stock, including to James A. Hayward, our President,
Chairman, Chief Executive Officer and a director, Timpix International Limited,
a British Virgin Islands corporation, entities affiliated with Arjent, our
placement agent, and Sanford R. Simon and Yacov Shamash, each of whom is one of
our directors. Each of these warrants provides its holders unlimited
piggyback registration rights with respect to any registration statement filed
by the Company in the future.
Our
Articles of Incorporation, as amended, provide to the fullest extent permitted
by Nevada law, our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director’s or officer’s
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended, is to eliminate our rights and our shareholders (through
shareholders’ derivative suits on behalf of our company) to recover damages
against a director or officer for breach of the fiduciary duty of care as a
director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers. In addition, we have entered into indemnification agreements with our
officers and directors.
Insofar
as indemnification for liabilities arising under the Securities Act, may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC, such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
The
selling stockholders and any of their respective pledgees, donees, assignees and
other successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
|
●
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
|
|
●
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
●
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
●
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
●
|
privately-negotiated
transactions;
|
|
●
|
short
sales that are not violations of the laws and regulations of any state or
the United States;
|
|
●
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per share;
|
|
●
|
through
the writing of options on the shares;
|
|
●
|
a
combination of any such methods of sale; and
|
|
●
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus. The selling stockholders
shall have the sole and absolute discretion not to accept any purchase offer or
make any sale of shares if they deem the purchase price to be unsatisfactory at
any particular time.
The
selling stockholders may also engage in short sales against the box, puts and
calls and other transactions in our securities or derivatives of our securities
and may sell or deliver shares in connection with these trades.
The
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. VC Arjent, a
registered broker-dealer; Michael Morris, Susan Diamond and Ronald Heineman, all
of whom are employees of VC Arjent, are an “underwriter” as that term is defined
under the Securities Act, the Securities Exchange Act of 1934, as amended, and
the rules and regulations of such acts. Further, the other selling stockholders
and any brokers, dealers or agents, upon effecting the sale of any of the shares
offered in this prospectus, may be deemed to be “underwriters.” In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are
required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The
selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The
selling stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares. The
selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have
agreed to indemnify the selling stockholders, or their transferees or assignees,
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the selling stockholders or their respective pledgees,
donees, transferees or other successors in interest, may be required to make in
respect of such liabilities.
If the
selling stockholders notify us that they have a material arrangement with a
broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
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:
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that
a broker or dealer approve a person’s account for transactions in penny
stocks; and
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|
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
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obtain
financial information and investment experience objectives of the person;
and
|
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|
make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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●
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
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|
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
The table
below sets forth information concerning the resale of the shares of common stock
by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of warrants held by certain of the selling
stockholders, if and when exercised. Assuming all the shares
registered below are sold by the selling stockholders, none of the selling
stockholders will continue to own any shares of our common stock.
The
following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
For the
table set forth below, the following persons have investment and voting control
over the shares owned by the respective entities:
Entity
|
Control
Person
|
Allied
International Fund
|
Rosemary
DePalo
|
Alzeon
Ventures
|
George
Davenzo
|
Boyce
Equities Ltd.
|
AR
Boyce
|
BWSIPP
A.D. Smith Trust
|
Andrew
Smith
|
Fidecs
Trust Company Limited
|
Sebastian
Moerman
|
Global
Asset Management
|
Robert
Fallah
|
Gold
Group International Limited
|
PG
Unadkat
|
Saudry
LLC
|
Gary
Schonwald
|
Scotford
Trust
|
Brian
Smith
|
W.T.
Johnson & Sons (Huddersfield) Limited
|
PTA
Johnson
|
|
|
Beneficial
Ownership
Prior
to Offering (1)
|
|
|
|
|
|
Beneficial
Ownership
After
Offering (1)
|
|
Name
of Selling Security Holder
|
|
Shares
|
|
|
Percentage
(2)
|
|
|
Shares
Offered
|
|
Shares
|
|
|
Percentage
(2)
|
|
Alan
Crawford Muir
|
|
|
200,000 |
|
|
|
* |
|
|
|
200,000 |
(4) |
|
|
- |
|
|
|
* |
|
Alan
M Brookes
|
|
|
759,404 |
|
|
|
* |
|
|
|
759,404 |
(3) |
|
|
- |
|
|
|
* |
|
Alan
Marcus Brookes
|
|
|
300,000 |
|
|
|
* |
|
|
|
300,000 |
(8) |
|
|
- |
|
|
|
* |
|
Allied
International Fund
|
|
|
1,100,000 |
|
|
|
* |
|
|
|
1,100,000 |
(12) |
|
|
- |
|
|
|
* |
|
Alzeon
Ventures
|
|
|
400,000 |
|
|
|
* |
|
|
|
400,000 |
(9) |
|
|
- |
|
|
|
* |
|
Andrew
John Allan Dewar
|
|
|
100,000 |
|
|
|
* |
|
|
|
100,000 |
(3) |
|
|
- |
|
|
|
* |
|
Anthony
Woodward
|
|
|
162,500 |
|
|
|
* |
|
|
|
162,500 |
|
|
|
- |
|
|
|
* |
|
Bashir
Jafferali Dhalla
|
|
|
100,000 |
|
|
|
* |
|
|
|
100,000 |
(3) |
|
|
- |
|
|
|
* |
|
Boyce
Equities Ltd.
|
|
|
812,978 |
|
|
|
* |
|
|
|
812,978 |
(9) |
|
|
- |
|
|
|
* |
|
Brian
Cognet
|
|
|
300,000 |
|
|
|
* |
|
|
|
300,000 |
(8) |
|
|
- |
|
|
|
* |
|
BWSIPP
A.D. Smith Trust
|
|
|
603,244 |
|
|
|
* |
|
|
|
603,244 |
(3) |
|
|
- |
|
|
|
* |
|
Chaim
Stern
|
|
|
454,400 |
|
|
|
* |
|
|
|
454,400 |
(10) |
|
|
- |
|
|
|
* |
|
Charles
& Linda Moss
|
|
|
100,000 |
|
|
|
* |
|
|
|
100,000 |
(3) |
|
|
- |
|
|
|
* |
|
Chris
Mercer
|
|
|
1,518,807 |
|
|
|
* |
|
|
|
1,518,807 |
(4) |
|
|
- |
|
|
|
* |
|
Christopher
P. Mercer
|
|
|
729,150 |
|
|
|
* |
|
|
|
729,150 |
(9) |
|
|
- |
|
|
|
* |
|
Clive
D. Reader
|
|
|
100,000 |
|
|
|
* |
|
|
|
100,000 |
(3) |
|
|
- |
|
|
|
* |
|
Darren
M. Avey
|
|
|
200,000 |
|
|
|
* |
|
|
|
200,000 |
(4) |
|
|
- |
|
|
|
* |
|
David
A Donner
|
|
|
227,200 |
|
|
|
* |
|
|
|
227,200 |
(5) |
|
|
- |
|
|
|
* |
|
David
Ledsom
|
|
|
2,175,626 |
|
|
|
1.08 |
|
|
|
2,175,626 |
(14) |
|
|
- |
|
|
|
* |
|
Douglas
Green
|
|
|
100,000 |
|
|
|
* |
|
|
|
100,000 |
(3) |
|
|
- |
|
|
|
* |
|
Douglas
Roberts
|
|
|
100,000 |
|
|
|
* |
|
|
|
100,000 |
(3) |
|
|
- |
|
|
|
* |
|
Fidecs
Trust Company Limited
|
|
|
300,000 |
|
|
|
* |
|
|
|
300,000 |
(8) |
|
|
- |
|
|
|
* |
|
Gary
Schonwald
|
|
|
779,857 |
|
|
|
* |
|
|
|
732,500 |
(9) |
|
|
47,357 |
|
|
|
* |
|
Geoffrey
Walton
|
|
|
100,000 |
|
|
|
* |
|
|
|
100,000 |
(3) |
|
|
- |
|
|
|
* |
|
Giampiero
Mazza
|
|
|
100,000 |
|
|
|
* |
|
|
|
100,000 |
(3) |
|
|
- |
|
|
|
* |
|
Global
Asset Management
|
|
|
4,413,741 |
|
|
|
2.19 |
|
|
|
4,100,000 |
(15) |
|
|
313,741 |
|
|
|
* |
|
Gold
Group International Limited
|
|
|
2,175,626 |
|
|
|
1.08 |
|
|
|
2,175,626 |
(14) |
|
|
- |
|
|
|
* |
|
Howard
King
|
|
|
100,000 |
|
|
|
* |
|
|
|