Registration No. 333-158796
APPLIED
DNA SCIENCES, INC.
3,000,000
SHARES OF
COMMON
STOCK
This
prospectus relates to the resale of up to 3,000,000 shares of our common stock
by the selling stockholder named herein. For information about the selling
stockholder, see "Selling Stockholder" on page 53. We are not selling any
securities under this prospectus and will not receive any of the proceeds from
the sale of shares by the selling stockholder. 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 May 12, 2009, the closing sales price for
our common stock on the OTC Bulletin Board was $0.10 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
4.
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.
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The
Date of This Prospectus Is May 12, 2009.
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TABLE
OF CONTENTS
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 stockholder is 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
use the DNA of plants and innovative technologies to provide
anti-counterfeiting and product authentication solutions and to
manufacture ingredients for personal care products and textiles.
SigNature® DNA and BioMaterial™ Genotyping, our principal
anti-counterfeiting and product authentication solutions, allow users to
accurately and effectively protect branded products, artwork and
collectibles, fine wine, digital media, financial instruments, identity
cards and other official documents. Our BioActive™ Ingredients, which are
being used by our customers in personal care products, such as skin care
products, and in textiles, such as intimate apparel, are
custom-manufactured to address a customer’s specific need.
SigNature
DNA.
We use the DNA of plants to manufacture highly customized and encrypted
botanical DNA markers, or SigNature DNA Markers, which we believe are
virtually impossible to replicate. We have embedded SigNature DNA Markers
into a range of our customers’ products, including various inks, thermal
ribbon, thread, varnishes and adhesives. These items can then be tested
for the presence of SigNature DNA Markers through an instant field
detection or a forensic level authentication. Our SigNature DNA solution
provides a secure, accurate and cost-effective means for users to
incorporate our SigNature DNA Markers in, and then quickly and reliably
authenticate and identify, a broad range of items such as branded
products, artwork and collectibles, cash-in-transit, fine wine, digital
media, financial instruments, identity cards and other official documents.
Having the ability to reliably authenticate and identify counterfeit
versions of such items enables companies and governments to detect, deter,
interdict and prosecute counterfeiting enterprises and
individuals.
BioMaterial
GenoTyping.
Our BioMaterial GenoTyping solution refers to the development of genetic
assays to distinguish between varieties or strains of biomaterials, such
as cotton, wool, tobacco, fermented beverages, natural drugs and foods,
that contain their own source DNA. We have developed two proprietary
genetic tests (FiberTyping™ and PimaTyping™) to track American Pima cotton
from the field to finished garments. These genetic assays provide the
cotton industry with the first authentication tools that can be applied
throughout the U.S. and worldwide cotton industry from cotton growers,
mills, wholesalers, distributors, manufacturers and retailers through
trade groups and government agencies.
BioActive
Ingredients.
Our BioActive Ingredients program began in 2007, based on the
biofermentation expertise developed during the manufacturing of DNA for
our SigNature DNA and BioMaterial Genotyping solutions. Our BioActive
Ingredients have been used by our customers in personal care products,
such as skin care products, and in textiles, such as intimate
apparel.
For
the year ended September 30, 2008, we generated revenues of $873,010 and
had net losses of $6.8 million, and for the quarter ended December 31,
2008, we generated revenues of $146,575 and had net losses of $3.3
million. Our registered independent certified public accountants have
stated in their report dated December 15, 2008, that our financial
statements for the year ended September 30, 2008 were prepared assuming
that we would continue as a going concern, and that they have substantial
doubt about our ability to continue as a going concern. Our ability to
continue as a going concern is subject to our ability to generate a profit
and/or obtain necessary funding from outside sources, including by the
sale of our securities, obtaining loans from financial institutions, or
obtaining grants from various organizations or governments, where
possible.
Summary
Risks
Before
you invest in our stock, you should carefully consider all the information
in this prospectus, including matters set forth under the heading “Risk
Factors.” We believe that the following are some of the major risks and
uncertainties that may affect us:
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We
have a short operating history, a relatively new business model, and have
not produced significant revenues, which makes it difficult to evaluate
our future prospects and increases the risk that we will not be
successful;
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We
have a history of losses which may continue, and which may harm our
ability to obtain financing and continue our operations; |
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If
we are unable to obtain additional financing our business operations will
be harmed or discontinued, and if we do obtain additional financing our
stockholders may suffer substantial dilution; |
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Our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to obtain future
financing; |
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If
our existing products and services are not accepted by potential customers
or we fail to introduce new products and services, our business, results
of operations and financial condition will be harmed; |
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If
we are unable to retain the services of Drs. Hayward or Liang we may not
be able to continue our operations; |
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The
markets for our SigNature program are very competitive, and we may be
unable to continue to compete effectively in this industry in the
future; |
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We
need to expand our sales, marketing and support organizations and our
distribution arrangements to increase market acceptance of our products
and services; |
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A
manufacturer’s inability or willingness to produce our goods on time and
to our specifications could result in lost revenue and net losses and if
we need to replace manufacturers, our expenses could increase, resulting
in smaller profit margins; and |
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Our
intellectual property rights are valuable, and any inability to protect
them could reduce the value of our products, services and
brand. |
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| Corporate
Information
Our
principal offices are located at 25 Health Sciences Drive, Suite 113,
Stony Brook, New York 11790, and our telephone number is (631) 444-6370.
We are a Delaware corporation, which was initially formed in 1983 under
the laws of the State of Florida as Datalink Systems, Inc. In 1998, we
reincorporated in Nevada, and in 2002, we changed our name to our current
name, Applied DNA Sciences, Inc. In December 2008, we completed our
reincorporation from Nevada to the State of Delaware. We maintain a
website at www.adnas.com.
The information contained on that website is not deemed to be a part of
this prospectus.
Our
corporate headquarters are located at the Long Island High Technology
Incubator at Stony Brook University in Stony Brook, New York, where we
established laboratories for the manufacture of DNA markers and product
prototypes, and DNA authentication. To date, the company has a very
limited operating history, and as a result, the company’s operations have
not produced significant
revenues.
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The
Offering
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Common
stock offered by the selling stockholder
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Up
to 3,000,000 shares of our common stock.
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This
number represents less than 1% of our current outstanding
stock
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Common
stock to be outstanding after the offering
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Up
to 260,511,148 shares
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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.
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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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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 anti-counterfeiting and product
authentication solutions as well as ingredients for use in personal care and
other products. Our operations since inception have produced insignificant
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, we will derive most of such revenues from the sale of
anti-counterfeiting and product authentication solutions as well as ingredients,
which are immature industries. 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 $6.8 million for the year ended September 30, 2008 and
$3.3 million for the quarter ended December 31, 2008. 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.
We
will require additional financing which may require the issuance of additional
shares which would dilute the ownership held by our stockholders.
We will
need to raise funds through either debt or the sale of our shares in order to
achieve our business goals. Any sale of additional shares or securities
convertible into any such shares by us would further dilute the percentage
ownership by the stockholders. Furthermore, if we raise funds in equity
transactions through the issuance of convertible securities which are
convertible at the time of conversion at a discount to the prevailing market
price, substantial dilution is likely to occur resulting in a material decline
in the price of your shares.
If
we are unable to obtain additional financing our business operations will be
harmed or discontinued, and if we do obtain additional financing our
stockholders may suffer substantial dilution.
We
believe that our existing capital resources will enable us to fund our
operations until approximately June 2009. 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
stockholders.
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 December 15, 2008, our independent auditors stated that our
financial statements for the year ended September 30, 2008 were prepared
assuming that we would continue as a going concern, and that they have
substantial doubt about our ability to continue as a going concern. Our
auditors’ doubts are based on our incurring net losses of $6.8 million for the
year ended September 30, 2008. We continue to experience net operating losses.
Our ability to continue as a going concern is subject to our ability to 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.
General
economic conditions and the current global financial crisis may adversely affect
our business, operating results and financial condition.
The
current global economy and economic slowdown may have serious negative
consequences for our business and operating results. Since our customers
incorporate our products into a variety of consumer goods, the demand for our
products is subject to worldwide economic conditions and their impact on levels
of consumer spending. Some of the factors affecting consumer spending include
general economic conditions, unemployment, consumer debt, reductions in net
worth based on recent severe market declines, residential real estate and
mortgage markets, taxation, energy prices, interest rates, consumer confidence
and other macroeconomic factors. During a period of economic weakness or
uncertainty, demand for consumer goods incorporating our products may weaken,
and current or potential customers may defer purchases of our
products.
The
recent distress in the credit and financial markets has also resulted in extreme
volatility in security prices and diminished liquidity, and there can be no
assurance that our liquidity will not be affected by changes in the financial
markets and the global economy. Moreover, the current crisis has had a
significant material adverse impact on a number of financial institutions and
has limited access to capital and credit for many companies. This could, among
other things, make it more difficult for us to obtain, or increase our cost
of obtaining, capital and financing for our operations. Our access to
additional capital may not be available on terms acceptable to us or at
all.
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 anti-counterfeiting and product authentication solutions as well
as our BioActive Ingredients are very competitive, and we may be unable to
continue to compete effectively these industries in the future.
The
principal markets for our our anti-counterfeiting and product authentication
solutions as well as our BioActive Ingredients are intensely competitive. 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
December 31, 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 stockholders.
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 February 18, 2009 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 April 22, 2009, we
had 260,511,148 shares of common stock issued and outstanding and
outstanding options and warrants to purchase 113,105,964 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 stockholder 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.
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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•
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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 stockholder, except for funds received from the exercise of warrants
held by certain of the selling stockholder, 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
stockholders.
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, 2007 and September 30, 2008 and each of the fiscal quarters ended
December 31, 2008 and March 31, 2009. 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 9/30/07 |
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High
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Low
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December
31, 2006
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$ |
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 |
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June
30, 2007
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$ |
0.23 |
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$ |
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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Year
ended 9/30/08
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High
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Low
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December
31, 2007
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$ |
0.17 |
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$ |
0.09 |
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March
31, 2008
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$ |
0.22 |
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$ |
0.09 |
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June
30, 2008
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$ |
0.14 |
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$ |
0.09 |
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September
30, 2008
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$ |
0.10 |
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$ |
0.03 |
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Year
ended 9/30/09
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High
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Low |
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December
31, 2008
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$ |
0.07 |
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$ |
0.03 |
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| March
31, 2009 |
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$ |
0.12 |
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$ |
0.02 |
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Holders
As of
April 22, 2009, we had approximately 1,062 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 February 18, 2009, 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 was approved 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 April 22, 2009, a
total of 8,550,000 shares have been issued and options to purchase 44,330,000
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.
The
following table sets forth certain information regarding our compensation plans
as of April 22,
2009:
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Plan
Category
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Number
of Securities
to
be Issued Upon
Exercise
of
Outstanding
Options,
Warrants
and Rights
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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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(a) |
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(b) |
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(c) |
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2005
Incentive Stock Plan approved on January 26, 2005
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44,330,000
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$
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0.16
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47,120,000
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Total
|
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44,330,000
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$
|
0.16
|
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47,120,000
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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, was approved by our stockholders at the
2008 annual meeting of stockholders. In connection with the share increase
amendment, the Board of Directors granted and we issued options to purchase
a total of 37,670,000 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 was subject to
stockholder approval, which was obtained at the 2008 annual meeting of
stockholders held on December 16, 2008.
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 use
the DNA of plants and innovative technologies to provide anti-counterfeiting and
product authentication solutions and to manufacture ingredients for personal
care products and textiles. SigNature® DNA and BioMaterial™ Genotyping, our
principal anti-counterfeiting and product authentication solutions, allow users
to accurately and effectively protect branded products, artwork and
collectibles, fine wine, digital media, financial instruments, identity cards
and other official documents. Our BioActive™ Ingredients, which are being used
by our customers in personal care products, such as skin care products, and in
textiles, such as intimate apparel, are custom-manufactured to address a
customer’s specific need.
SigNature
DNA. We use the DNA of plants to manufacture highly customized and
encrypted botanical DNA markers, or SigNature DNA Markers, which we believe are
virtually impossible to replicate. We have embedded SigNature DNA Markers into a
range of our customers’ products, including various inks, thermal ribbon,
thread, varnishes and adhesives. These items can then be tested for the presence
of SigNature DNA Markers through an instant field detection or a forensic level
authentication. Our SigNature DNA solution provides a secure, accurate and
cost-effective means for users to incorporate our SigNature DNA Markers in, and
then quickly and reliably authenticate and identify, a broad range of items such
as branded products, artwork and collectibles, cash-in-transit, fine wine,
digital media, financial instruments, identity cards and other official
documents. Having the ability to reliably authenticate and identify counterfeit
versions of such items enables companies and governments to detect, deter,
interdict and prosecute counterfeiting enterprises and individuals.
BioMaterial
GenoTyping. Our BioMaterial GenoTyping solution refers to the development
of genetic assays to distinguish between varieties or strains of biomaterials,
such as cotton, wool, tobacco, fermented beverages, natural drugs and foods,
that contain their own source DNA. We have developed two proprietary genetic
tests (FiberTyping™ and PimaTyping™) to track American Pima cotton from the
field to finished garments. These genetic assays provide the cotton industry
with the first authentication tools that can be applied throughout the U.S. and
worldwide cotton industry from cotton growers, mills, wholesalers, distributors,
manufacturers and retailers through trade groups and government
agencies.
BioActive
Ingredients. Our BioActive Ingredients program began in 2007, based on
the biofermentation expertise developed from our experience with the manufacture
of DNA for our SigNature DNA and BioMaterial Genotyping solutions. We initially
targeted potential customers in the personal care products, industry, and we
developed DermalRx Hydroseal, which has been incorporated into the fabric of a
new line of intimate apparel currently being test marketed by a global marketer
of intimate apparel. In addition, we developed DermalRx SRC, Skin Resurfacing
Complex, an ingredient designed to promote smoother more radiant skin by
stimulating the skin’s own exfoliation process.
Plan
of Operations
General
We expect
to generate revenues principally from sales of our SigNature Program,
BioMaterial Genotyping and BioActive Ingredients. We are currently attempting to
develop business in the following target markets: art and collectibles,
cash-in-transit, fine wine, consumer products, digital recording media,
pharmaceuticals, and homeland security driven programs. We intend to pursue 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 June 2009. 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
stockholders.
Product
Research and Development
We
anticipate spending approximately $150,000 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 $30,000 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 13 full-time employees and two part-time employees, including two
in management, nine in operations, three in sales and marketing and one in
investor relations. The company expects to increase its staffing dedicated to
sales, product prototyping, manufacturing of DNA markers and forensic
authentication services. Expenses related to travel, marketing, salaries, and
general overhead will be increased as necessary to support our growth in
revenue. In order for us to attract and retain quality personnel, we anticipate
we will have to offer competitive salaries to future employees. We anticipate
that it may become desirable to add additional full and or part-time employees
to discharge certain critical functions during the next 12 months. This
projected increase in personnel is dependent upon our ability to generate
revenues and obtain sources of financing. There is no guarantee that we will be
successful in raising the funds required or generating revenues sufficient to
fund the projected increase in the number of employees. As we continue to
expand, we will incur additional costs for personnel.
Critical Accounting
Policies
Financial
Reporting Release No. 60, published by the SEC, recommends that all companies
include a discussion of critical accounting policies used in the preparation of
their financial statements. While all these significant accounting policies
impact our financial condition and results of operations, we view certain of
these policies as critical. Policies determined to be critical are those
policies that have the most significant impact on our consolidated financial
statements and require management to use a greater degree of judgment and
estimates. Actual results may differ from those estimates.
We
believe that given current facts and circumstances, it is unlikely that applying
any other reasonable judgments or estimate methodologies would cause a material
effect on our consolidated results of operations, financial position or
liquidity for the periods presented in this report.
The
accounting policies identified as critical are as follows:
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Equity
issued with registration rights;
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Revenue
recognition;
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Allowance
for Doubtful Accounts; and
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Fair
value of intangible assets.
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Use
of estimates
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Equity
Issued with Registration Rights
In
connection with placement of our convertible notes and warrants to certain
investors during the fiscal quarters ended December 31, 2003, December 31, 2004,
March 31, 2005, March 31, 2006 and June 30, 2006, we granted certain
registration rights that provide for liquidated damages in the event of failure
to timely perform under the agreements. Although these notes and warrants do not
provide for net-cash settlement, the existence of liquidated damages provides
for a defacto net-cash settlement option. Therefore, the common stock
underlying the notes and warrants subject to such liquidated damages does not
meet the tests required for shareholders’ equity classification in the past, and
accordingly has been reflected between liabilities and equity in our previous
consolidated balance sheet.
In
September 2007, we exchanged our common stock for the remaining Secured
Convertible Promissory Note that contained embedded derivatives such as certain
conversion features, variable interest features, call options and default
provisions.
We had an
accumulative accrual of $12,023,888 in liquidating damages in relationship to
the previously outstanding convertible promissory notes and related
warrants.
Revenue
Recognition
Revenues
are derived from research, development, qualification and production testing for
certain commercial products.
Revenue
from fixed price testing contracts is generally recorded upon completion of the
contracts, which are generally short-term, or upon completion of identifiable
contractual tasks. At the time the Company enters into a contract that includes
multiple tasks, the Company estimates the amount of actual labor and other costs
that will be required to complete each task based on historical experience.
Revenues are recognized which provide for a profit margin relative to the
testing performed. 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. To the extent management does not accurately forecast
the level of effort required to complete a contract, or individual tasks within
a contract, and the Company is unable to negotiate additional billings with a
customer for cost over-runs, the Company may incur losses on individual
contracts. All selling, general and administrative costs are treated as period
costs and expensed as incurred.
For
revenue from product sales, the Company recognizes revenue in accordance with
Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), and
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB101"). SAB 101 requires that four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred; (3) the selling price is fixed and determinable; and (4)
collectability is reasonably assured. Determination of criteria (3) and (4) are
based on management's judgments regarding the fixed nature of the selling prices
of the products delivered and the collectability of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances, and
other adjustments are provided for in the same period the related sales are
recorded. The Company defers any revenue for which the product has not been
delivered or is subject to refund until such time that the Company and the
customer jointly determine that the product has been delivered or no refund will
be required.
SAB 104
incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”), MULTIPLE
DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The effect of implementing EITF
00-21 on the Company’s financial position and results of operations was not
significant.
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.
Fair
Value of Intangible Assets
The
Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS
No. 144). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Events relating to recoverability
may include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period.
The
Company evaluates the recoverability of long-lived assets based upon forecasted
undiscounted cash flows. Should impairment in value be indicated, the carrying
value of intangible assets will be adjusted, based on estimates of future
discounted cash flows resulting from the use and ultimate disposition of the
asset. SFAS No. 144 also requires assets to be disposed of be
reported at the lower of the carrying amount or the fair value less costs to
sell.
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. Actual results could differ from those estimates.
Comparison
of the Year Ended September 30, 2008 to the Year Ended September 30,
2007
Revenues
For the
years ended September 30, 2008 and 2007, we generated $873,010 and $121,920 in
revenues from operations, respectively. Our cost of sales for the year ended
September 30, 2008 was $171,332, netting us a gross profit of $701,678. Our cost
of sales for the year ended September 30, 2007 was $23,073, netting us a gross
profit of $98,847.
Costs
and Expenses
Selling,
General and Administrative
Selling,
general and administrative expenses for the twelve months ended September 30,
2008 decreased 65% to $4.3 million from $12.1 million in the same period in
2007. Included within the selling, general and administrative expenses for the
years ended September 30, 2008 and 2007 were expenses relating to liquidation
damage accrual, fund raising and consultant costs of $1.1 million and $7.9
million, respectively.
Research
and Development
Research
and development expenses increased $34,987 for the twelve months ended September
30, 2008 compared to the same period in 2007 from $110,845 to $145,832,
primarily due to customer related activity in research and development with our
change in focus to marketing activities.
Depreciation
and Amortization
In the
twelve months ended September 30, 2008, depreciation and amortization increased
$1,834 for the period compared to 2007 from $432,582 to $434,416. The increase
is attributable to the increase of fixed assets acquired during the year ended
September 30, 2008.
Total
Operating Expenses
Total
operating expenses decreased to $4.9 million from $12.6 million, or a decrease
of $7.7 million, primarily due to the reduction in accrual for liquidation
damages and less consulting costs for the year ended September 30, 2008 as
compared to September 30, 2007.
Other
Income/Loss
Other
income for the twelve months ended September 30, 2008 decreased from a gain of
$1.4 million to $0 million. Other income for the year ended September 30, 2007
was a result primarily from the change in fair value of our recorded warrant
liabilities.
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, we reclassified the warrant liabilities
recorded in conjunction with the convertible promissory notes to equity as of
the conversion date of the remaining note
Interest
Expenses
Interest
expenses for the twelve months ended September 30, 2008, increased to $2.6
million from $2.2 million in the same period of 2007, an increase of $0.4
million as a result of additional borrowings.
Net loss
Net loss
for the twelve months ended September 30, 2008 decreased to a loss of $6.8
million from a loss of $13.3 million in the prior period as a result of the
combination of factors described above..
Comparison
of Results of Operations for the Three Months Ended December 31, 2008 and
2007
Revenues
For the
three months ended December 31, 2008, we generated $146,575 in revenues from
operations, principally from the sales of BioActive Ingredients, and our cost of
sales for the three months ended December 31, 2008 was $43,741, netting us a
gross profit of $102,834. For the three months ended December 31, 2007, we
generated $123,167 in revenues from operations and our cost of sales for the
three months ended December 31, 2008 was $27,890, netting us a gross profit of
$95,277.
Costs
and Expenses
Selling,
General and Administrative
Selling,
general and administrative expenses increased from $1,698,269 for the three
months ended December 31, 2007 to $2,764,009 for the three months ended
December 31, 2008. The increase of $1,065,740, or 62.8%, is primarily
attributable to the fair value of vested options granted to officers and
employees, net with a decrease in cost incurred in connection with professional
services.
Research
and Development
Research
and development expenses increased from $36,326 for the three months ended
December 31, 2007 to $62,529 for the three months ended December 31, 2008.
The increase of $26,203 is attributed to more research and development
activity related to the recent development and feasibility study
agreements.
Depreciation
and Amortization
In the
three months ended December 31, 2008, depreciation and amortization increased by
$1,180 from $107,804 for the three months ended December 31, 2007 to
$108,984 for the three months ended December 31, 2008. The
increase is attributable to the additions to our property and
equipment.
Total
Operating Expenses
Total
operating expenses increased to $2,935,522 from $1,842,399, or an increase
of $1,093,123 primarily attributable to the fair value of vested options
granted and additional R&D expenditures, net with a decrease in costs
incurred in connection with professional services.
Interest
Expenses
Interest
expense for the three months ended December 31, 2008 increased by
$97,207 to $482,829 from $385,622 in the same period of 2007. The
increase in interest expense was due to additional borrowing during the year
2008.
Net loss
for the three months ended December 31, 2008 increased to $3,316,014 from a
net loss of $2,132,744 in the prior period primarily attributable to
factors described above.
Liquidity
and Capital Resources
Our
liquidity needs consist of our working capital requirements, indebtedness
payments and research and development expenditure funding. Historically, we have
financed our operations through the sale of equity and convertible debt as well
as borrowings from various credit sources.
Our
registered independent certified public accountants have stated in their report
dated December 15, 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 and raise additional capital. These factors among others may raise
substantial doubt about our ability to continue as a going
concern..
As of
December 31, 2008, we had a working capital deficit of $13.7 million. For the
year ended September 30, 2008, we generated a net cash flow deficit from
operating activities of $2.9 million consisting primarily of year to date losses
of $6.8 million. Non cash adjustments included $3.2 million in depreciation and
amortization charges and $1.0 million for common stock issued in exchange for
services. Additionally we had a net increase in current assets of $0.05 million
and a net decrease in current liabilities of $0.3 million. Cash provided by
investing activities totaled $0.4 million, primarily provided by reduction in
cash held in escrow net with $0.02 million in acquisition of property and
equipment. Cash provided by financing activities for the year ended September
30, 2008 totaled $2.7 million consisting of proceeds from issuance of
convertible debt. For the
three months ended December 31, 2008, we generated a net cash flow deficit from
operating activities of $585,259 consisting primarily of year to date losses of
$3,316,014. Non-cash adjustments included $610,702 in
depreciation and amortization charges and the fair value of vested options for
services provided of $1,850,247. Additionally, we had a net decrease in current
assets of $35,401 and a net decrease in current liabilities of
$234,405. We met our cash flow needs by issuance of convertible notes
of $500,000, net, for the three months ended December 31,
2008.
We expect
capital expenditures to be less than $75,000 in fiscal 2009. 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, issuance of notes payable and other debt or a
combination thereof, depending upon the transaction size, market conditions and
other factors.
While we
have raised capital to meet our working capital and financing needs in the past,
additional financing is required within the next three months in order to meet
our current and projected cash flow deficits from operations and development. We
have sufficient funds to conduct our operations until
approximately June 2009. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, if at all.
By
adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial
condition.
We
presently do not have any available credit, bank financing or other external
sources of liquidity. Due to our brief history and historical operating losses,
our operations have not been a source of liquidity. We will need to obtain
additional capital in order to expand operations and become profitable. We
intend to pursue the building of a re-seller network outside the United States,
and if successful, the re-seller agreements would constitute a source of
liquidity and capital over time. In order to obtain capital, we may need to sell
additional shares of our common stock or borrow funds from private lenders.
There can be no assurance that we will be successful in obtaining additional
funding and execution of re-seller agreements outside the Unites
States.
We
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 stockholders.
Additional
investments are being sought, but we cannot guarantee that we will be able to
obtain such investments. Financing transactions may include the issuance of
equity or debt securities, obtaining credit facilities, or other financing
mechanisms. However, the trading price of our common stock and the downturn in
the U.S. stock and debt markets could make it more difficult to obtain financing
through the issuance of equity or debt securities. Even if we are able to raise
the funds required, it is possible that we could incur unexpected costs and
expenses, fail to collect significant amounts owed to us, or experience
unexpected cash requirements that would force us to seek alternative financing.
Further, if we issue additional equity or debt securities, stockholders may
experience additional dilution or the new equity securities may have rights,
preferences or privileges senior to those of existing holders of our common
stock. If additional financing is not available or is not available on
acceptable terms, we will have to curtail our operations.
Substantially
all of the real property used in our business is leased under operating lease
agreements.
Recent
Debt and Equity Financing Transactions
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 and Chief Executive
Officer.
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 is quoted 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 converted 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, into 4,967,646 shares of our common
stock. The September Warrant is exercisable for a four-year period commencing on
July 30, 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.
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
During
the year ended September 30, 2008, we sold an aggregate of thirty-six 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 $3,600,000. 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.
Fiscal
2009
On
October 21, 2008, we issued and sold to James A. Hayward a $500,000 principal
amount secured promissory note (“October Note”) bearing interest at a rate of
10% per annum and a warrant (“October Warrant”) to purchase 1,000,000 shares of
our common stock. The October 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 October 21, 2008, through October 20, 2009, and shall
automatically convert on October 21, 2009 at a conversion price of $0.026171520
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 October 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 October Warrant is
exercisable for a four-year period commencing on October 21, 2009, and expiring
on October 20, 2013, at a price of $0.50 per share. The October Warrant may be
redeemed at our option at a redemption price of $0.01 upon the earlier of (i)
October 20, 2011, and (ii) the date our common stock has traded on The Over the
Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading
days.
On
January 29, 2009, we issued and sold to James A. Hayward a $150,000 principal
amount secured promissory note (“January Note”) bearing interest at a rate of
10% per annum and a warrant (“January Warrant”) to purchase 300,000 shares of
our common stock. The January Note and accrued but unpaid interest
thereon shall automatically convert on January 29, 2010 at a conversion
price of $0.033337264 per share, which is equal to a 20% discount to the average
volume, weighted average 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 noteholder 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 January Note on three days written notice
(during which period the holder can elect to convert the note). The January
Note bears interest at the rate of 10% per annum and is due and payable in full
on January 29, 2010. Until the principal and accrued but unpaid interest
under the January Note are paid in full, or converted into our common stock, the
January Note will be secured by a security interest in all of our assets. The
January Warrant is exercisable for a four-year period commencing on January 29,
2010, and expiring on January 28, 2014, at a price of $0.50 per
share. The January Warrant may be redeemed at our option at a
redemption price of $0.01 upon the earlier of (i) January 29, 2012, and (ii) the
date our common stock has been quoted on The Over the Counter Bulletin Board at
or above $1.00 per share for 20 consecutive trading days.
On
February 27, 2009, we issued and sold a $200,000 principal amount secured
promissory note (“February Note”) bearing interest at a rate of 10% per annum to
James A. Hayward, our Chairman, President and Chief Executive
Officer. The February Note and accrued but unpaid interest thereon
shall automatically convert into shares of our common stock on February 27, 2010
at a conversion price of $0.046892438 per share, which is equal to a 20%
discount to the average volume, weighted average price of our common stock for
the ten trading days prior to issuance, and is convertible into shares of our
common stock at the option of the noteholder 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 February Note on three days
written notice (during which period the holder can elect to convert the February
Note). The February Note bears interest at the rate of 10% per annum
and is due and payable in full on February 27, 2010. Until the
principal and accrued but unpaid interest under the February Note are paid in
full, or converted into shares of our common stock, the February Note will be
secured by a security interest in all of our assets.
On March
30, 2009, we issued and sold a $250,000 principal amount secured promissory note
(“March Note”) bearing interest at a rate of 10% per annum to James A. Hayward,
our Chairman, President and Chief Executive Officer. The March Note
and accrued but unpaid interest thereon shall automatically convert into shares
of our common stock on March 30, 2010 at a conversion price of $0.043239467 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, and is
convertible into shares of our common stock at the option of the noteholder 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 March Note on three days written notice (during which period the
holder can elect to convert the March Note). The March Note bears
interest at the rate of 10% per annum and is due and payable in full on March
30, 2010. Until the principal and accrued but unpaid interest under
the March Note are paid in full, or converted into shares of our common stock,
the March Note will be secured by a security interest in all of our
assets.
On April
14, 2009, we issued and sold an aggregate of $300,000 principal amount secured
promissory notes (“April Notes”) bearing interest at a rate of 10% per annum to
certain investors. The April Notes and accrued but unpaid interest
thereon shall automatically convert into shares of our common stock on April 14,
2010 at a conversion price of $0.070756456 per share, which is equal to a 20%
discount to the average volume, weighted average price of our common stock for
the ten trading days prior to issuance, and is convertible into shares of our
common stock at the option of the noteholders 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 April Notes on
three days written notice (during which period the holders can elect to convert
the April Notes). The April Notes bear interest at the rate of 10%
per annum and are due and payable in full on April 14, 2010. Until
the principal and accrued but unpaid interest under the April Notes are paid in
full, or converted into shares of our common stock, the April Notes will be
secured by a security interest in all of our assets.
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 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 December 15, 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 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.
Overview
We use
the DNA of plants and innovative technologies to provide anti-counterfeiting and
product authentication solutions and to manufacture ingredients for personal
care products and textiles. SigNature® DNA and BioMaterial™ Genotyping, our
principal anti-counterfeiting and product authentication solutions, allow users
to accurately and effectively protect branded products, artwork and
collectibles, fine wine, digital media, financial instruments, identity cards
and other official documents. Our BioActive™ Ingredients, which are being used
by our customers in personal care products, such as skin care products, and in
textiles, such as intimate apparel, are custom-manufactured to address a
customer’s specific need.
SigNature
DNA. We use the DNA of plants to manufacture highly customized and
encrypted botanical DNA markers, or SigNature DNA Markers, which we believe are
virtually impossible to replicate. We have embedded SigNature DNA Markers into a
range of our customers’ products, including various inks, thermal ribbon,
thread, varnishes and adhesives. These items can then be tested for the presence
of SigNature DNA Markers through an instant field detection or a forensic level
authentication. Our SigNature DNA solution provides a secure, accurate and
cost-effective means for users to incorporate our SigNature DNA Markers in, and
then quickly and reliably authenticate and identify, a broad range of items such
as branded products, artwork and collectibles, cash-in-transit, fine wine,
digital media, financial instruments, identity cards and other official
documents. Having the ability to reliably authenticate and identify counterfeit
versions of such items enables companies and governments to detect, deter,
interdict and prosecute counterfeiting enterprises and individuals.
BioMaterial
GenoTyping. Our BioMaterial GenoTyping solution refers to the development
of genetic assays to distinguish between varieties or strains of biomaterials,
such as cotton, wool, tobacco, fermented beverages, natural drugs and foods,
that contain their own source DNA. We have developed two proprietary genetic
tests (FiberTyping™ and PimaTyping™) to track American Pima cotton from the
field to finished garments. These genetic assays provide the cotton industry
with the first authentication tools that can be applied throughout the U.S. and
worldwide cotton industry from cotton growers, mills, wholesalers, distributors,
manufacturers and retailers through trade groups and government
agencies.
Corporate
History
We are a
Delaware corporation, which was initially formed in 1983 under the laws of the
State of Florida as Datalink Systems, Inc. In 1998, we reincorporated in Nevada,
and in 2002, we changed our name to our current name, Applied DNA Sciences, Inc.
In December 2008, we completed our reincorporation from Nevada to the State of
Delaware. Our corporate headquarters are located at the Long Island High
Technology Incubator at Stony Brook University in Stony Brook, New York, where
we established laboratories for the manufacture of DNA markers and product
prototypes, and DNA authentication. To date, the company has a very limited
operating history, and as a result, the company’s operations have not produced
significant revenues.
BioActive
Ingredients. Our BioActive Ingredients program began in 2007, based on
the biofermentation expertise developed during the manufacturing of DNA for our
SigNature DNA and BioMaterial Genotyping solutions. Our BioActive Ingredients
have been used by our customers in personal care products, such as skin care
products, and in textiles, such as intimate apparel.
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 2007 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 was $650 billion in 2007.
Product
counterfeiting and diversion particularly harms manufacturers of consumer
products, especially for prestige and established brands, and the consumers who
purchase them. This total includes:
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$34
billion of software products;
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$12
billion of apparel and footwear;
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$193
million of cigarettes and tobacco products;
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$32
billion of pharmaceuticals;
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$18
million in wine;
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$500
million of sports equipment;
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$35
million of electronic equipment and supplies;
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$3
billion in cosmetics;
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$12
billion in automobile parts;
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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; and
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$123
million of other goods.
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The
artworks and collectibles markets are also particularly vulnerable to
counterfeiting, forgery and fraud. New works are produced and then passed off as
originating from a particular artistic period or source, authentic fragments are
pieced together to simulate an original work, and existing works are modified in
order to increase their purported value. Such phony artwork and collectibles are
then often sold with fake or questionable signatures and “provenance,” or
documented ownership histories that confirm authenticity.
Cash-in-transit
businesses transport and store cash and ATM cassettes. In the U.K. alone, there
is an estimated £500 billion being transported each year, or £1.4 billion per
day. The nature of this business makes cash-in-transit an attractive target for
criminals, and as a result the industry invests in excess of £100 million per
year in security equipment and devices. Currently, a system of cash degradation,
using a smoke or liquid dye to permanently mark and essentially destroy stolen
cash, is used. The incidence of cash-in-transit based crime has increased over
170% in London since 2006, according to the Metropolitan Police.
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 2008 the Business Software
Alliance (“BSA”) reported that in 2007, the United States lost $8.0 billion as a
result of software piracy. The BSA also estimated that 33 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 2007 study that for every two dollars worth of software purchased
legitimately, one dollar was obtained illegally.
The
pharmaceutical industry also faces major problems relative to counterfeit,
diluted, or falsely labeled drugs that make their way through healthcare systems
worldwide, posing a health threat to patients and a financial threat to
drugmakers and distributors. In 2006 the Center for Medicine in the Public
Interest predicted that counterfeit drug sales will reach $75 billion globally
in 2010, an increase of more than 90% from 2005. In February, 2006, the World
Health Organization (“WHO”) estimated that counterfeits account for more than
10% of the global pharmaceuticals market, 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.
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
cannot be replicated, and then identify these objects by detecting the absence
or presence of the DNA. Our scientific team was able to develop genetic based
assays and protocols to identify DNA markers that are endogenous to a particular
plant in order to differentiate between biological strains of cotton and we are
now employing the same methodology in wool, wine and other natural products. In
addition, in the case of Pima cotton, we have developed proprietary technologies
to differentiate between Pima ( G. barbadense ) and Non-Pima ( G. hirsutum )
cotton with absolute certainty. In the process, we were also able to develop an
approach to attach an exogenous DNA marker to a finished textile product. Cotton
classification and the authentication of cotton geographic origin are issues of
global significance, important to brand owners and to governments that must
regulate the international cotton trade. The use of DNA to identify the cotton
fiber content of finished textiles is a significant opportunity for license
holders to control their brand and for governments to improve their ability to
enforce compliance with trade agreements between nations. In addition to the
global cotton trade, the markets for BioMaterial Genotyping include
biotherapeutics, nutraceuticals, natural foods, wines and fermented alcohols and
other natural textiles.
The
global market for specialty raw materials for cosmetics and toiletries, which
includes BioActive Ingredients, was reported to be $5.9 billion in 2006 with an
estimated growth of 5% per year (Freedonia).
Our
Offerings
SigNature
DNA
We
believe our SigNature DNA offering 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. Each SigNature DNA Marker is first designed and manufactured to be a
highly customized and encrypted botanical 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 test for 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 DNA offering
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 polymerase chain reaction (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
We offer
rapid readers capable of instantly testing for the presence or absence of any of
our SigNature DNA Markers. In addition, when a forensic level of authentication
is necessary, we offer in-field or in-house forensic DNA authentication with a
handheld battery powered PCR-based device that will confirm authentication
sequences in approximately 10 minutes.
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. 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
SigNature 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 DNA solution 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.
BioMaterial
Genotyping
We
believe our BioMaterial Genotyping solution offers a unique means for
determining the authenticity of biomaterials, such as cotton, wool, tobacco,
fermented beverages, natural drugs and foods. Just as a person’s DNA specifies
all of their unique qualities, biomaterials typically contain genomic DNA or
fragments thereof that can be utilized to authenticate originality. We have
initially developed two proprietary genetic-based assays and protocols to
identify DNA markers that are endogenous (internal) to a particular product in
order to differentiate between biological strains. In a process we call
Fibertyping™, we are able to differentiate between Pima cotton ( G. barbadense )
and upland cotton ( G. hirsutum ). Our FiberTyping offering enables our
customers and potential clients to cost-effectively give assurance to
manufacturers, suppliers, distributors, retailers and end-users that their
products are authentic, that they are made from the fibers and textiles as
labeled. In a process we call Pimatyping™, we are able to differentiate between
Pima cotton grown in different regions of the world. Cotton classification and
the authentication of cotton geographic origin are issues of global
significance, important to brand owners and to governments that must regulate
international cotton trade. Similar offerings are currently being developed for
use in biomaterials other than cotton. Biomaterials can now be tracked from
field to final purchase guaranteeing the authenticity of the item. As we are
testing for innate genomic DNA, we believe these assays cannot be
counterfeited.
We
believe our BioMaterial Genotyping allows us to:
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Identify
U.S. produced Pima cotton;
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Establish
an authentication protocol for cotton and other biomaterials;
and
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Deter
counterfeits and protect the integrity of
brands.
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We
believe our two genetic assays accurately distinguish between:
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Pima
cotton (G. barbadense) and upland cotton (G. hirsutum) cultivars in mature
cotton fibers and in cotton fabrics (Fibertyping); and
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American
Pima and Extra Long Staple (ELS) Pima cotton
(Pimatyping),
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We
believe that our new DNA extraction protocol and methodologies are more
effective than existing forensic systems. We believe that the combination of our
SigNature DNA and BioMaterial Genotyping solutions covers the total
authentication market, is applicable to multiple industry verticals, and can
mark physical products on the front end and authenticate forensic DNA sequences
on the back end.
BioActive
Ingredients
Our
BioActive Ingredients program began in 2007, based on the biofermentation
expertise developed from our experience with the manufacture of DNA for our
SigNature DNA and BioMaterial Genotyping solutions. We initially targeted
potential customers in the personal care products industry, and we developed
DermalRx, a range of high performance ingredients used by our customers for skin
care applications. We subsequently developed DermalRx HydroSeal, which has been
incorporated into the fabric of a new line of intimate apparel currently being
test marketed by a global marketer of intimate apparel. In addition, we
developed DermalRx SRC, Skin Resurfacing Complex, an ingredient designed to
promote smoother more radiant skin by stimulating the skin’s own exfoliation
process.
Our
Strategy
We have
begun to generate revenues principally from sales of our SigNature DNA,
BioMaterial Genotyping and BioActive Ingredients offerings. Key aspects of our
strategy include:
Customize
and Refine our Solutions to Meet Potential Customers’ Needs
We are
continuously attempting to improve our SigNature DNA solution by testing the
incorporation of our SigNature 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,
cash-in-transit, fine wine, consumer products, digital and recording media,
pharmaceuticals, textile and apparel authentication and secure
documents/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 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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Cash-in-Transit
Cash-in-transit
businesses transport and store bank notes and ATM cassettes. In the U.K. alone,
there is an estimated £500 billion being transported each year, or £1.4 billion
per day. The nature of this business makes cash-in-transit an attractive target
for criminals, and as a result the industry invests in excess of £100 million
per year in security equipment and devices. Currently, a system of cash
degradation, using a smoke or liquid dye to permanently mark and essentially
destroy stolen bank notes, is used. The incidence of cash-in-transit based crime
has increased over 170% in London since 2006, according to the Metropolitan
Police and the UK boasts the highest levels of cash-in-transit crime in
Europe.
We are
able to incorporate our SigNature DNA Markers in cash degradation ink that is
used in the cash-in-transit industry. This solvent-based ink marks bank notes if
the cash box is compromised and has the ability to penetrate the bank notes
rapidly and permanently. We believe our SigNature DNA Markers are more resilient
and detectable than other competing products.
Fine
Wine
Vintners
and purveyors of fine wine are also vulnerable to counterfeiting or product
diversion. We believe our SigNature and BioMaterial Genotyping solutions 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 and BioMaterial Genotyping solutions 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; BioMaterial Genotyping allows the identification of wine based
on the varietal of grape and the region where it is
grown.
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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 World
Customs Organization, up to $12 billion worth of clothing and accessories
worldwide are fake, and Interpol reported $3 billion 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 DNA solution 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 2008 the
Business Software Alliance (“BSA”) reported that in 2007, the United States
software industry lost $8.9 billion as a result of software piracy, an increase
of $1.6 billion over the previous year. An independent study conducted by IDC
for the BSA reported that 33 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 U.S. Food and Drug Administration 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. The U.S. Food and Drug
Administration’s 2004 Report acknowledged the importance of using one or more
authentication technologies for drug products.
Secure
Documents/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 DNA solution 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 solution 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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Textile
and Apparel Authentication
Cotton
classification and the authentication of cotton geographic origin are issues of
global significance, important to brand owners and to governments that must
regulate international cotton trade. We believe that our SigNature DNA and
BioMaterial Genotyping solutions could have significant potential applications
for the enforcement of cotton trade quotas in the U.S. and across the globe, and
for legislated quality improvement within the industry. We believe that similar
issues face the wool and other natural product industries which is the next area
we plan to target
Our
Technology
Every
living organism has a unique DNA code that determines the character and
composition of its cells. The core technologies of our business allow us to use
the DNA of everyday plants to mark objects in a unique manner that we believe
can only be replicated at great expense, and then identify these objects by
detecting the absence or presence of the DNA.
SigNature
DNA Encryption
Our
patent pending encryption system allows us to isolate strands of botanical DNA
and then fragment and reconstitute them to form unique “DNA chimers”, or
encrypted DNA segments, whose sequences are known only to us.
SigNature
DNA Encapsulation
Our
patented encapsulation system allows us to apply a protective coating to
encrypted DNA chimers, creating a SigNature DNA Marker that is resistant to
heat, organic solvents, chemicals and UV radiation, and so can be identified for
hundreds of years after being embedded directly, or into media applied or
attached to the item to be marked.
SigNature
DNA Embedment
Our
patented embedment system allows us to incorporate our SigNature DNA Markers
into a broad variety of media, such as petroleum and petroleum derivatives,
inks, dyes, laminates, glues, threads, and textiles.
SigNature
DNA Authentication
Our
patent pending forensic level authentication methods allow us to unlock the
encrypted DNA chimers by using PCR techniques and proprietary primers that were
specifically designed by us to detect the DNA sequences we encrypted and
embedded into the product or other item. Detection of the DNA chimers unique to
a particular item or series of items allows us to authenticate its or their
origin.
Products
and Services
Our
SigNature DNA solution 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. Sporting event tickets have been prototyped using our SigNature
DNA Ink. In addition, our SigNature DNA Ink is being tested in government
documents, auto parts, luxury goods and consumer products. Other examples of
where our SigNature DNA Inks can be used 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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We have
also developed a portfolio of SigNature DNA containing thermal transfer ribbons.
These products will allow retailers to protect at the point-of-sale by printing
price labels, hang tags, event tickets and even credentials with customized
SigNature markers. We are also able to mark cartridges of laser printers with
SigNature DNA.
AzSure™ Security Ink: We have
developed AzSure bank note marking ink at the request of our cash-in-transit
customer. This security ink is being marketed to governments and industry to
protect bank notes and other financial instruments. We believe the unique
visible and fluorescent blue signature of our highly substantive dye/DNA system
distinguishes AzSure from all other dyes used within the cash-in-transit
industry.
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. We are currently working
with the Textile Centre of Excellence consortium of companies (Leeds, UK) to
demonstrate how our SigNature DNA can be used to authenticate textiles at all
points of the supply chain through to the end user. In addition, we are working
to demonstrate the integration of SigNature DNA with existing manufacturing
processes to produce threads, labels and fabrics manufactured by Yorkshire-based
companies.
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
We now
offer a full range of detection options from instant rapid screening to more
detailed forensic level authentication:
Level 1 “Spot Test”
Detection: We offer rapid readers capable of instantly testing for the
presence or absence of any of our SigNature DNA Markers.
Level 2 Forensic DNA
Authentication: When a forensic level of authentication is necessary, we
offer in-field or in-house forensic DNA authentication with a handheld battery
powered PCR-based device that will confirm authentication sequences in
approximately 10 minutes.
Sales
and Marketing
As of
April 22, 2009, we had three employees engaged in sales and marketing. 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. We are also focused on the identification of
additional genotyping markers and on the development of new ingredients for the
personal care products industry. 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. We also have in-house
capabilities to manufacture all BioActive Ingredients and to complete all
BioMaterial Genotyping authentications.
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 States in 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 level 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 it 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. 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.
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.
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 2009 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.
Textile Centre of Excellence.
On August 11, 2008, we entered into an Agreement with Huddersfield and District
Textile Training Company Limited. We have agreed to undertake a study to
demonstrate how our SigNature DNA can be used to authenticate textiles at all
points of the supply chain through to the end user. In addition, this study will
demonstrate the integration of SigNature DNA with existing manufacturing
processes to produce threads, labels and fabrics manufactured by Yorkshire-based
companies. The funding for Phase I of the study, which runs through December
2008, totals £50,000. Upon successful completion of Phase I of the study, we
anticipate beginning Phase II, which could result in continued
funding.
Biowell Agreement. 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.L.) Inc., a British
Virgin Islands company. The shareholders of Rixflex Holdings Limited recieved 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 license 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 coverred by the license.
Competition
The
principal markets for our offerings are intensely competitive. We compete with
many existing suppliers and new competitors continue to enter the market. Many
of our competitors, both in the United States and elsewhere, are major
pharmaceutical, chemical and biotechnology companies, or have strategic
alliances with such companies, and many of them have substantially greater
capital resources, marketing experience, research and development staff, and
facilities than we do. Any of these companies could succeed in developing
products that are more effective than the products that we have or may develop
and may be more successful than us in producing and marketing their existing
products. Some of our competitors that operate in the anti-counterfeiting and
fraud prevention markets include: Applied Optical Technologies, Authentix,
ChemTAG, Collectors Universe Inc., Collotype, Data Dot Technology, Digimarc
Corp., DNA Technologies, Inc., ID Global, Informium AG, Inksure Technologies,
Kodak, L-1 Identity Solutions, Manakoa, SmartWater Technology, Inc., Sun
Chemical Corp, Tracetag and Warnex.
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, 14 patents pending, 2 registered trademarks, and 2
registered trademarks pending, which are described in the table below, and our
trademarks, trade secrets, copyrights and other intellectual property rights are
important assets for us.
Patents
Issued:
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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
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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.
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August
11, 2003
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Taiwan
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A
Method of Utilizing Nucleic Acids as Markers for Product Anti-Counterfeit
Labeling and Verification
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US
7,115,301 B2
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Rixflex
Holdings Limited (2)
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October
3, 2006
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United
States
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Patents
Pending:
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Patent
Name
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Application
No.
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Filed
in the Name of
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Dated
Filed
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Jurisdiction
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Method
for Mixing Nucleic Acid in Water Insoluble Media and Application Thereof
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2002-294229
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Biowell
(1)
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August
31, 2002
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Japan
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03007023.9
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Rixflex
Holdings Limited (2)
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March
27, 2003
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EU
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10/645,602
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Rixflex
Holdings Limited (2)
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August
22, 2003
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United
States
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Method
of dissolving nucleic acid in water insoluble medium and its
application
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03155949.2
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APDN
(B.V.I.) Inc.
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August
27, 2003
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China
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Novel
nucleic acid based steganography system and application
thereof
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10/909,431
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Rixflex
Holdings Limited (2)
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August
3, 2004
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United
States
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Cryptic
method of secret information carried in DNA molecule and its deencryption
method
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921221490
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APDN
(B.V.I.) Inc.
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August
6, 2003
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Taiwan
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A
novel nucleic acid based steganography system and application
thereof
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03127517.6
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Biowell
(1)
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August
6, 2003
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China
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61387/2004
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Rixflex
Holdings Limited (2)
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August
4, 2004
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Korea
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Patent
Name
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Application
No.
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Filed
in the Name of
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Dated
Filed
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Jurisdiction
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A
novel method for coding based on nucleic acids and utility
thereof
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04018374.1
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Rixflex
Holdings Limited (2)
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August
3, 2004
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EU
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1-2004-00742
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Rixflex
Holdings Limited (2)
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August
4, 2004
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Vietnam
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A
novel nucleic acid based steganography system and applications
thereof
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092819
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Rixflex
Holdings Limited (2)
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August
4, 2004
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Thailand
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PI20043145
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Biowell
(1)
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August
4, 2004
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Malaysia
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2004-225987
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Rixflex
Holdings Limited (2)
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August
2, 2004
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Japan
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P-00200400374
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Rixflex
Holdings Limited (2)
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August
4, 2004
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Indonesia
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764/CHE/2004
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Rixflex
Holdings Limited (2)
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August
4, 2004
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India
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Method
for classifying group ID of shoppers and transferring the shopping
discount to group development funds development
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92119302
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APDN
(B.V.I.) Inc.
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July
15, 2003
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Taiwan
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Method
for transferring feedback foundation capable of identifying multiple
objects
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03150071.4
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APDN
(B.V.I.) Inc.
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July
31, 2003
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China
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Method
of Classifying Group ID of Shoppers and Transferring the Shopping Discount
to Group Development Funds
|
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PI20042889
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Rixflex
Holdings Limited (2)
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August
4, 2004
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Malaysia
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092217
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Rixflex
Holdings Limited (2)
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July
12, 2004
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Thailand
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2004-200730
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Biowell
(1)
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July
7, 2004
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Japan
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System
and Method for authenticating multiple components associated with a
particular product.
|
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11/437,265
PCT/US2006/019660
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APDN
(B.V.I.) Inc.
APDN
(B.V.I.) Inc.
|
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May
19, 2005
May
19, 2006
|
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US
PCT
|
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|
|
|
|
|
|
|
|
System
and Method for Marking Textiles with Nucleic Acid
|
|
10/825,968
|
|
APDN
(B.V.I.) Inc.
|
|
April
15, 2004
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
System
and Method for Marking Textiles with Nucleic Acids
|
|
Publication
#20050112610
|
|
APDN
(B.V.I.) Inc
|
|
4/16/2003
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
System
and Method for Authenticating Multiple Components Associated with a
Particular Good
|
|
Publication
# 22070048761
|
|
APDN
(B.V.I.) Inc
|
|
5/20/2005
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
System
and Method for Secure Document Printing and Detection
|
|
Application
# 60/874,425
|
|
APDN
(B.V.I.) Inc
|
|
12/12/2006
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
System
and Method for Authenticating Tablets
|
|
Application
#60/877,875
|
|
APDN
(B.V.I.) Inc
|
|
12/26/2006
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
System
and Method for Authenticating Sports Identification Goods
|
|
Application
# 60/877,869
|
|
APDN
(B.V.I.) Inc.
|
|
12/29/2006
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
Patent
Name
|
|
Application
No.
|
|
Filed
in the Name of
|
|
Dated
Filed
|
|
Jurisdiction
|
|
Optical
Reporter Compositions
|
|
11/954,030
|
|
APDN
(B.V.I.) Inc.
|
|
12/11/2007
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
Methods
for Covalent Linking of Optical Reporters
|
|
11/954,009
|
|
APDN
(B.V.I.) Inc.
|
|
12/11/2007
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
Method
for Authenticating Articles with Optical Reporters
|
|
11/954,038
|
|
APDN
(B.V.I.) Inc.
|
|
12/11/2007
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
Method
for Secure Document Printing and Detection
|
|
11/954,044
|
|
APDN
(B.V.I.) Inc.
|
|
12/11/2007
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
Method
for Authenticating Sports Identification Goods
|
|
11/954,051
|
|
APDN
(B.V.I.) Inc.
|
|
12/11/2007
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
Method
for Authenticating Tablets
|
|
11/954,055
|
|
APDN
(B.V.I.) Inc.
|
|
12/11/2007
|
|
United
States
|
(1) 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
|
|
|
|
|
|
|
|
|
|
|
|
FIBERTYPING
|
|
77/488,647
|
|
APDN
(B.V.I.) Inc.
|
|
June
2, 2008
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
PIMATYPING
|
|
77/488,531
|
|
APDN
(B.V.I.) Inc.
|
|
June
2, 2008
|
|
United
States
|
However,
there are events that are outside of our control that pose a threat to 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
We
currently have 13 full-time employees and two part-time employees, including two
in management, nine in operations, three in sales and marketing and one 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.
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-K, Quarterly Reports on Form 10-Q, 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 and our
President and the Chairman of the Board of Directors since June 12, 2007. He was
previously our acting Chief Executive Officer since October 5, 2005. From
January 2006 until August 2008, Dr. Hayward 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 had
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.
Overview
We
currently have three named executive officers, Dr. James A. Hayward, our Chief
Executive Officer, President and Chairman of the Board of Directors, Mr. Kurt H.
Jensen, who was appointed our Chief Financial Officer on December 21, 2007, and
Dr. Ming-Hwa Ben Liang, our Chief Technology Officer and Secretary.
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, our
financial and operating performance and prospects and the contributions made by
Mr. Jensen and Dr. Liang to the success of the Company.
Summary
Compensation Table
The
following table sets forth the compensation of our principal executive officer
and our two other executive officers for the two fiscal years ended September
30, 2008. We refer to these executive officers as our “named executive
officers.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and
Principal
Position
(a)(1)
|
Year
(b)
|
|
Salary
($)(2)
(c)
|
|
|
Bonus
($)
(d)
|
|
|
Stock
Awards
($)
(e)
|
|
|
Option
Awards
($)(3)
(f)
|
|
|
Non-Equity
Incentive
Plan
Compensation ($)
(g)
|
|
|
Non-qualified
Deferred Compensation
Earnings
($)
(h)
|
|
|
All
Other
Compensation
($)
(i)
|
|
|
Total
($)
(j)
|
|
|
James
A. Hayward
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman,
President and
|
2008
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,666,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,666,000 |
|
|
Chief
Executive Officer
|
2007
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Kurt
H. Jensen
|
2008
|
|
|
135,871 |
|
|
|
— |
|
|
|
— |
|
|
|
490,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
625,871 |
|
|
Chief
Financial Officer
|
2007
|
|
|
108,077 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
108,077 |
|
|
Ming-Hwa
Liang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Technology Officer
|
2008
|
|
|
123,382 |
|
|
|
— |
|
|
|
— |
|
|
|
686,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
809,382 |
|
|
and
Secretary
|
2007
|
|
|
103,027 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
103,027 |
|
(1) We
have no employment agreements with our named executive officers.
(2) Dr.
Hayward has elected not to receive cash compensation until there is an
improvement in the Company’s financial and operating performance and
prospects.
(3) The
amounts in column (f) represent the grant date fair value under SFAS 123R based
on the average of the bid and asked prices of our common stock on the grant
date. The grant date for the stock options was June 17, 2008, and the average of
the bid and asked prices of our common stock was $0.11. The grant date fair
value for the stock options was $0.098. The options granted to the named
executive officers vested with respect to 25% of the underlying shares on the
date of grant, and the remaining will vest ratably each anniversary thereafter
until fully vested on the third anniversary of the date of grant. The exercise
of the stock options by the named executive officers was subject to stockholder
approval, which was obtained at the 2008 annual meeting of stockholders held on
December 16, 2008.
Outstanding
Equity Awards at Fiscal Year-End
The
following table shows information concerning outstanding equity awards as of
September 30, 2008 held by the Named Executive Officers.
|
|
|
Option
Awards
|
|
Name
(a)
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(1)
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(1)
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
Option
Exercise
Price
($)
(1)
|
|
Option
Expiration
Date
(1)
|
|
James
A. Hayward
|
|
0
|
|
17,000,000
|
|
|
|
$0.11
|
|
6/17/2013
|
|
Kurt
H. Jensen
|
|
|
|
500,000
|
|
|
|
$0.09
|
|
9/01/2011
|
|
|
|
0
|
|
5,000,000
|
|
|
|
$0.11
|
|
6/17/2013
|
|
Ming-Hwa
Liang
|
|
0
|
|
7,000,000
|
|
|
|
$0.11
|
|
6/17/2013
|
(1) On
June 17, 2008, the Board of Directors of the Company granted nonstatutory stock
options under the 2005 Incentive Stock Plan to certain key employees, including
our named executive officers. The options granted to the named executive
officers 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 exercise of the
stock options by the named executive officers was subject to stockholder
approval, which was obtained at the 2008 annual meeting of stockholders held on
December 16, 2008.
Pension
Benefits
None of
our named executive officers participates in or has account balances in
qualified or non-qualified defined benefit plans sponsored by us.
Nonqualified
Contribution Plans
None of
our named executive officers participate in or have account balances in
non-qualified defined contribution plans maintained by us.
Deferred
Compensation
None of
our named executive officers participates in or has account balances in deferred
compensation plans or arrangements maintained by us.
Employment
Agreements
We have
no employment agreements with our named executive officers.
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.
Director
Compensation Table for Fiscal 2008
We
currently have no policy in effect for providing compensation to our directors
for their services on our Board of Directors. During the year ended September
30, 2008, we did not provide any cash compensation to our directors for their
service on our Board of Directors.
The
following table sets forth summary information concerning compensation paid or
accrued to the members of our Board of Directors (other than Dr. Hayward,
our Chief Executive Officer, who is a named executive officer) for services
rendered to us in all capacities for the fiscal year ended September 30,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees
Earned or
Paid
in Cash ($)
|
|
Stock
Awards ($)
|
|
Option
Awards
($)(1)
|
|
All
Other Compensation
($)
|
|
Total
($)
|
|
|
Yacov
Shamash
|
|
$
|
—
|
|
$
|
—
|
|
$
|
49,000
|
|
$
|
—
|
|
$
|
49,000
|
|
|
Sanford
R. Simon
|
|
$
|
—
|
|
$
|
—
|
|
$
|
49,000
|
|
$
|
—
|
|
$
|
49,000
|
|
(1) The
amount reported in column (l) represents the grant date fair value under SFAS
123R based on the average of the bid and asked prices of our common stock on the
grant date. The grant date for the stock options was June 17, 2008, and the
average of the bid and asked prices of our common stock was $0.11. The grant
date fair value for the stock options was $0.098.
Since
September 30, 2007, we issued and sold an aggregate principal amount of $650,000
in secured convertible promissory notes bearing interest at 10% per annum and
warrants to purchase an aggregate of 1,300,000 shares of our common stock
to James A. Hayward, our President, Chairman and Chief Executive
Officer.
On
October 21, 2008, we issued and sold to James A. Hayward a $500,000 principal
amount secured promissory note (“October Note”) bearing interest at a rate of
10% per annum and a warrant (“October Warrant”) to purchase 1,000,000 shares of
our common stock. The October 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 October 21, 2008, through October 20, 2009, and shall
automatically convert on October 21, 2009 at a conversion price of $0.026171520
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 October 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 October Warrant is
exercisable for a four-year period commencing on October 21, 2009, and expiring
on October 20, 2013, at a price of $0.50 per share. The October Warrant may be
redeemed at our option at a redemption price of $0.01 upon the earlier of (i)
October 20, 2011, and(ii) the date our common stock has traded on The Over the
Counter Bulletin Board at or above $1.00 per share for 20 consecutive trading
days.
Until
the principal and interest under the October Note is paid in full, or converted
into our common stock, the October Note will be secured by a security interest
in all of our assets.
On
January 29, 2009, we issued and sold to James A. Hayward a $150,000 principal
amount secured promissory note (“January Note”) bearing interest at a rate of
10% per annum and a warrant (“January Warrant”) to purchase 300,000 shares of
our common stock. The January Note and accrued but unpaid interest
thereon shall automatically convert on January 29, 2010 at a conversion
price of $0.033337264 per share, which is equal to a 20% discount to the average
volume, weighted average 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 noteholder 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 January Note on three days written notice
(during which period the holder can elect to convert the note). The January
Note bears interest at the rate of 10% per annum and is due and payable in full
on January 29, 2010. Until the principal and accrued but unpaid interest
under the January Note are paid in full, or converted into our common stock, the
January Note will be secured by a security interest in all of our assets. The
January Warrant is exercisable for a four-year period commencing on January 29,
2010, and expiring on January 28, 2014, at a price of $0.50 per
share. The January Warrant may be redeemed at our option at a
redemption price of $0.01 upon the earlier of (i) January 29, 2012, and (ii) the
date our common stock has been quoted on The Over the Counter Bulletin Board at
or above $1.00 per share for 20 consecutive trading days.
On
February 27, 2009, we issued and sold a $200,000 principal amount secured
promissory note (“February Note”) bearing interest at a rate of 10% per annum to
James A. Hayward, our Chairman, President and Chief Executive
Officer. The February Note and accrued but unpaid interest thereon
shall automatically convert into shares of our common stock on February 27, 2010
at a conversion price of $0.046892438 per share, which is equal to a 20%
discount to the average volume, weighted average price of our common stock for
the ten trading days prior to issuance, and is convertible into shares of our
common stock at the option of the noteholder 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 February Note on three days
written notice (during which period the holder can elect to convert the February
Note). The February Note bears interest at the rate of 10% per annum
and is due and payable in full on February 27, 2010. Until the
principal and accrued but unpaid interest under the February Note are paid in
full, or converted into shares of our common stock, the February Note will be
secured by a security interest in all of our assets.
On March
30, 2009, we issued and sold a $250,000 principal amount secured promissory note
(“March Note”) bearing interest at a rate of 10% per annum to James A. Hayward,
our Chairman, President and Chief Executive Officer. The March Note
and accrued but unpaid interest thereon shall automatically convert into shares
of our common stock on March 30, 2010 at a conversion price of $0.043239467 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, and is
convertible into shares of our common stock at the option of the noteholder 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 March Note on three days written notice (during which period the
holder can elect to convert the March Note). The March Note bears
interest at the rate of 10% per annum and is due and payable in full on March
30, 2010. Until the principal and accrued but unpaid interest under
the March Note are paid in full, or converted into shares of our common stock,
the March Note will be secured by a security interest in all of our
assets.
Director
Independence
Although
our securities are not currently listed on a national securities exchange or in
an inter-dealer quotation system, which would subject us to the listing
standards pertaining to director independence, the Board of Directors has
determined that Drs. Shamash and Simon, representing two of our three directors,
are “independent” as defined by the listing standards of the Nasdaq Stock
Market, constituting a majority of independent directors of our Board of
Directors as required by the rules of the Nasdaq Stock Market. The Board of
Directors considers in its evaluation of independence whether any director has a
relationship with us that could interfere with the exercise of independent
judgment in carrying out his responsibilities of a director.
We
currently have no policy regarding entering into transactions with affiliated
parties.