-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NhnpOOFSQuHjHczr10Drn9j6LE/oCMRXo0Nsye+rjRZ8zcPAmTlXsQCa+EaOvTwl nlud9clYZbogg3EF1e+QEQ== 0001013762-05-000218.txt : 20050215 0001013762-05-000218.hdr.sgml : 20050215 20050215171157 ACCESSION NUMBER: 0001013762-05-000218 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20050215 DATE AS OF CHANGE: 20050215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED DNA SCIENCES INC CENTRAL INDEX KEY: 0000744452 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 592262718 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122848 FILM NUMBER: 05618119 BUSINESS ADDRESS: STREET 1: 9229 WEST SUNSET BOULEVARD, SUITE 830 CITY: LOS ANGELES STATE: CA ZIP: 90069 BUSINESS PHONE: 3108601362 MAIL ADDRESS: STREET 1: 9229 WEST SUNSET BLVD, SUITE 830 CITY: LOS ANGELES STATE: CA ZIP: 90069 FORMER COMPANY: FORMER CONFORMED NAME: PROHEALTH MEDICAL TECHNOLOGIES INC DATE OF NAME CHANGE: 20010504 FORMER COMPANY: FORMER CONFORMED NAME: DCC ACQUISITION CORP DATE OF NAME CHANGE: 19990211 FORMER COMPANY: FORMER CONFORMED NAME: DATALINK CAPITAL CORP/TX/ DATE OF NAME CHANGE: 19980306 SB-2 1 feb122005sb2.txt As filed with the Securities and Exchange Commission on February 15, 2005 An Exhibit List can be found on page II-7. Registration No. 333- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ---------------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------------- APPLIED DNA SCIENCES, INC. (Name of small business issuer in its charter) Nevada 2836 59-2262718 (State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Classification Code Number) Identification No.) Organization) 9229 W. Sunset Boulevard, Suite 830 Los Angeles, California 90069 (310) 860-1362 (Address and telephone number of principal executive offices and principal place of business) Rob Hutchison, Chief Executive Officer APPLIED DNA SCIENCES, INC. 9229 W. Sunset Boulevard, Suite 830 Los Angeles, California 90069 (310) 860-1362 (Name, address and telephone number of agent for service) Copies to: Andrea Cataneo, Esq. Sichenzia Ross Friedman Ference LLP 1065 Avenue of the Americas, 21st Flr. New York, New York 10018 (212) 930-9700 (212) 930-9725 (fax) APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after this Registration Statement becomes effective. If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. _________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. _________ 2
CALCULATION OF REGISTRATION FEE - ------------------------------- -------------------- ---------------- ------------------ -------------------- Title of each class of Amount to be Proposed Proposed Amount of securities to be registered registered maximum maximum registration fee offering aggregate price per offering price share (1) - ------------------------------- -------------------- ---------------- ------------------ -------------------- Common Stock, $.50 par value 25,608,326 $1.215 $31,114,116.09 $3,662.13 - ------------------------------- -------------------- ---------------- ------------------ -------------------- Common Stock, $.50 par value 285,000 $1.215 $346,275 $40.76 issuable upon exercise of Warrants exercisable at $0.10 per share - ------------------------------- -------------------- ---------------- ------------------ -------------------- Common Stock, $.50 par value 5,000 $1.215 $6,075 $0.72 issuable upon exercise of Warrants exercisable at $0.20 per share - ------------------------------- -------------------- ---------------- ------------------ -------------------- Common Stock, $.50 par value 1,500,000 $1.215 $1,822,500 $214.51 issuable upon exercise of Warrants exercisable at $0.60 per share - ------------------------------- -------------------- ---------------- ------------------ -------------------- Common Stock, $.50 par value 750,000 $1.215 $911,250 $107.25 issuable upon exercise of Warrants exercisable at $0.70 per share - ------------------------------- -------------------- ---------------- ------------------ -------------------- Common Stock, $.50 par value 17,807,000 $1.215 $21,635,505 $2,546.50 issuable upon exercise of Warrants exercisable at $0.75 per share - ------------------------------- -------------------- ---------------- ------------------ -------------------- Total 45,955,326 $55,835,721.09 $6,571.87 - ------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the average of the high and low price as reported on the Over-The-Counter Bulletin Board on February 14, 2005, which was $1.215 per share. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. 3 PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 15, 2005 APPLIED DNA SCIENCES, INC. 45,955,326 SHARES OF COMMON STOCK This prospectus relates to the resale by the selling stockholders of up to 45,955,326 shares of our common stock, including up to 20,347,000 shares issuable upon the exercise of common stock purchase warrants and 25,608,326 shares of common stock. The selling stockholders may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. We will pay the expenses of registering these shares. The following selling stockholders are deemed an "underwriter" within the meaning of the Securities Act of 1933 in connection with the sale of their common stock under this prospectus: Vertical Capital Partners, Inc., a registered broker-dealer; Michael Morris, Susan Diamond; Ronald Heineman and Michael Gochman; all of whom are employees of Vertical Capital Partners. With the exception of Vertical Capital Partners, Inc., Michael Morris, Susan Diamond, Ronald Heineman and Michael Gochman, no other underwriter or person has been engaged to facilitate the sale of shares of common stock in this offering. Our common stock is registered under Section 12(g) of the Securities Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the symbol "APDN". The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on February 14, 2005, was $1.21. Investing in these securities involves significant risks. See "Risk Factors" beginning on page 4. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is February 15, 2005. The information in this Prospectus is not complete and may be changed. This Prospectus is included in the Registration Statement that was filed by Applied DNA Sciences, Inc. with the Securities and Exchange Commission. The selling stockholders may not sell these securities until the registration statement becomes effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the sale is not permitted. 4 PROSPECTUS SUMMARY The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the "risk factors" section, the financial statements and the secured convertible notes to the financial statements. APPLIED DNA SCIENCES, INC. We are a provider of proprietary DNA-embedded biotechnology security products that protect corporate and intellectual property from counterfeiting, fraud, piracy, product diversion and unauthorized intrusion. We offer a cost effective method to detect, deter, interdict and prosecute counterfeiting enterprises. We provide proprietary DNA-embedded biotechnology solutions to companies to protect corporate and intellectual property from counterfeiting, fraud, piracy, product diversion and unauthorized intrusion. We use segments of naturally occurring botanical DNA that have unique characteristics, which are one-of-a-kind sequences. Using various anti-counterfeit mediums, or substrates, such as ink, microchips, glue, paints and holograms, we can authenticate the unique DNA characters to ensure that the product has not been counterfeited or tampered with. For the year ended September 30, 2004, we did not generate any revenues and had a net loss of $19,358,259. As a result of recurring losses from operations and a net deficit in both working capital and stockholders' equity, our auditors, in their report dated January 11, 2005, have expressed substantial doubt about our ability to continue as going concern. Our principal offices are located at 9229 W. Sunset Boulevard, Suite 830, Los Angeles, California 90069, and our telephone number is (310) 860-1362. We are a Nevada corporation.
The Offering Common stock offered by selling stockholders...................... Up to 45,955,326 shares, including the following: - 25,608,326 shares of common stock, including 14,722,000 shares of common stock that are currently underlying $7,361,000 in convertible promissory notes which shall automatically be converted into shares of common stock at a price of $.50 per share upon the filing of this registration statement; - up to 285,000 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $.10 per share; - up to 5,000 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $.20 per share; - up to 1,500,000 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $.60 per share; - up to 750,000 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $.70 per share; and - up to 17,807,000 shares of common stock issuable upon the exercise of common stock purchase warrants at an exercise price of $.75 per share. This number represents 55.80% of our current outstanding stock. Common stock to be outstanding after the offering................. Up to 82,349,993 shares Use of proceeds................................................ We will not receive any proceeds from the sale of the common stock. However, we will receive the sale price of any common stock we sell to the selling stockholders upon exercise of the warrants. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes. Over-The-Counter Bulletin Board Symbol............................ APDN
The above information regarding common stock to be outstanding after the offering is based on 47,280,993 shares of common stock outstanding as of February 8, 2005 and assumes the subsequent exercise of warrants by our selling stockholders. 5 RISK FACTORS This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment. Risks Relating to Our Business: We Have a History Of Losses Which May Continue, Which May Negatively Impact Our Ability to Achieve Our Business Objectives. We incurred net losses of $19,358,259 for the year ended September 30, 2004 and $3,445,164 for the year ended December 31, 2003. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to generate revenue. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us. If We Are Unable to Obtain Additional Funding Our Business Operations Will be Harmed and If We Do Obtain Additional Financing Our Then Existing Shareholders May Suffer Substantial Dilution. We will require additional funds to sustain and expand our research and development activities. We anticipate that we will require up to approximately $3,000,000 to fund our anticipated research and development operations for the next twelve months, depending on revenue from operations. Additional capital will be required to effectively support the operations and to otherwise implement our overall business strategy. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our research and development plans. Any additional equity financing may involve substantial dilution to our then existing shareholders. Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future Financing. In their report dated January 11, 2005, our independent auditors stated that our financial statements for the year ended December 31, 2004 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised due to our incurring net losses of $22,803,423 during the period September 16, 2002 through September 30, 2004. In addition, we have a deficiency in stockholder's equity of $4,706,508. 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 obtaining additional funding from the sale of our securities, generating sales or obtaining loans and grants from various financial institutions where possible. Our continued net operating losses increases the difficulty in meeting such goals and there can be no assurances that such methods will prove successful. Our Research and Development Efforts for New Products May be Unsuccessful. We incur significant research and development expenses to develop new products and technologies. There can be no assurance that any of these products or technologies will be successfully developed or that if developed they will be commercially successful. In the event that we are unable to develop commercialized products from our research and development efforts or we are unable or unwilling to allocate amounts beyond our currently anticipated research and development investment, we could lose our entire investment in these new products and this may materially and adversely affect our business operations. 6 Failure to License New Technologies Could Impair Our New Product Development. To generate broad product lines, it is advantageous to sometimes license technologies from third parties rather than depend exclusively on 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 or discontinue our products. There can be no assurance that we will be able to continue 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. Our licenses 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. We may not receive significant indemnification from a licensor against third party claims of intellectual property infringement. Our Future Success May Depend on the Timely Introduction of New Products and the Acceptance of These New Products in the Marketplace. Our ability to gain access to technologies needed for new products and services depends in part on our ability to convince licensors that we can successfully commercialize their inventions. We cannot assure that we will be able to continue to 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 Fail to Introduce New Products, or Our existing Products are not Accepted by Potential Customers, We May Not Gain or May Lose Market Share. Rapid technological changes and frequent new product introductions are typical for the markets we serve. Our future success will depend in part on continuous, timely development and introduction of new products that address evolving market requirements. We believe successful new product introductions 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 market share 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 cannot assure that we will keep pace with the rapid rate of change in life sciences research or that our new products will adequately meet the requirements of the marketplace or achieve market acceptance. Some of the factors affecting market acceptance of new products include: o Availability, quality and price relative to competitive products; o The timing of introduction of the product relative to competitive products; o Customers' opinions of the products' utility; o Ease of use; o Consistency with prior practices; o Scientists' opinions of the products' usefulness; o Citation of the product in published research; and o General trends in life sciences research. The expenses or losses associated with unsuccessful product development or lack of market acceptance of our new products could materially adversely affect our business, operating results and financial condition. 7 The Failure To Manage Our Growth In Operations And Acquisitions Of New Product Lines And New Businesses Could Have A Material Adverse Effect On Us. The expected growth of our operations (as to which no representation can be made) will place a significant strain on our current management resources. To manage this expected growth, we will need to improve our: o operations and financial systems; o procedures and controls; and o training and management of our employees. Our future growth may be attributable to acquisitions of and new product lines and new businesses. We expect that future acquisitions, if successfully consummated, will create increased working capital requirements, which will likely precede by several months any material contribution of an acquisition to our net income. If We Are Unable to Retain the Services of Messrs. Hutchison, Brockelsby, Botash or Klemm, or If We Are Unable to Successfully Recruit Qualified Managerial and Sales Personnel Having Experience in Business, We May Not Be Able to Continue Our Operations. Our success depends to a significant extent upon the continued service of Mr. Rob Hutchison, our Chief Executive Officer, Mr. Peter Brockelsby, our President, Mr. Adrian Botash, our Chief Marketing Officer and Ms. Karin Klemm, our Chief Operating Officer. Loss of the services of Messrs. Hutchison, Brockelsby, Botash or Klemm could have a material adverse effect on our growth, revenues, and prospective business. We do not maintain key-man insurance on the life of Messrs. Hutchison, Brockelsby, Botash or Klemm. In addition, in order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified managerial and sales personnel having experience in business. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms. Failure to Attract and Retain Qualified Scientific or Production Personnel Could Have a Material Adverse Effect On Us. Recruiting and retaining qualified scientific and production personnel to perform research and development work and product manufacturing is critical to our success. 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, there is no assurance that we will be able to continue to successfully attract qualified personnel. In addition, our anticipated 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. The failure to attract and retain these personnel or, alternatively, to develop this expertise internally would adversely affect our business. We generally do not enter into employment agreements requiring these employees to continue in our employment for any period of time. We Need to Expand Our Sales and Support Organizations to Increase Market Acceptance of Our Products. We currently have a small customer service and support organization and will need to increase our staff to support new customers and the expanding needs of existing customers. The employment market for sales personnel, and customer service and support personnel in this industry is very competitive, and we may not be able to hire the kind and number of sales personnel, customer service and support personnel we are targeting. Our inability to hire qualified sales, customer service and support personnel may materially adversely affect our business, operating results and financial condition. 8 The Biomedical Research Products Industry is Very Competitive, and We may be Unable to Continue to Compete Effectively in this Industry in the Future. We are engaged in a segment of the biomedical research products industry that is highly competitive. We compete with many other 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, 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 products. We expect this competition to continue and intensify in the future. Competition in our markets is primarily driven by: o Product performance, features and liability; o Price; o Timing of product introductions; o Ability to develop, maintain and protect proprietary products and technologies; o Sales and distribution capabilities; o Technical support and service; o Brand loyalty; o Applications support; and o Breadth of product line. If a competitor develops superior technology or cost-effective alternatives to our products, our business, financial condition and results of operations could be materially adversely affected. Our Trademark and Other Intellectual Property Rights May not be Adequately Protected Outside the United States, Resulting in Loss of Revenue. We believe that our trademarks, whether licensed or owned by us, and other proprietary rights are important to our success and our competitive position. In the course of our international expansion, we may, however, experience conflict with various third parties who acquire or claim ownership rights in certain trademarks. We cannot assure that the actions we have taken to establish and protect these trademarks and other proprietary rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the trademarks and proprietary rights of others. Also, we cannot assure you that others will not assert rights in, or ownership of, trademarks and other proprietary rights of ours or that we will be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent, as do the laws of the United States. 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. 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. 9 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. We carry product liability insurance coverage which is limited in scope and amount but which we believe to be adequate. We cannot assure, however, that we will be able to maintain this insurance at reasonable cost and on reasonable terms. We also cannot assure that this insurance will be adequate to protect us against a product liability claim, should one arise. We Are Currently Subject to Governmental Regulation. Our business is currently subject to regulation, supervision and licensing by federal, state and local governmental authorities. We must also expend resources from time to time to comply with newly adopted regulations, as well as changes in existing regulations. If we fail to comply with these regulations, we could be subject to disciplinary actions or administrative enforcement actions. These actions could result in penalties, including fines. New Corporate Governance Requirements are Likely to Increase Our Costs and Make it More Difficult to Attract Qualified Directors. We face new corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well as rules adopted by the Securities and Exchange Commission. We expect that these laws, rules and regulations will increase our legal and financial compliance costs and make some activities more difficult, time-consuming and costly. We also expect that these new requirements may make it more difficult and more expensive for us to obtain director and officer liability insurance. We may be required to accept reduced coverage or incur significantly higher costs to obtain coverage. These new requirements may also make it more difficult for us to attract and retain qualified individuals to serve as members of our board of directors or committees of the board. Risks Relating to Our Common Stock: There Are a Large Number of Shares Underlying Our Warrants That May be Available for Future Sale and the Sale of These Shares May Depress the Market Price of Our Common Stock and Cause Immediate and Substantial Dilution to Our Existing Stockholders. As of February 8, 2005, we had 47,280,993 shares of common stock issued and outstanding, 14,722,000 shares of common stock that are currently underlying $7,361,000 in convertible promissory notes which shall automatically be converted into shares of common stock at a price of $.50 per share upon the filing of this registration statement and outstanding warrants to purchase 20,347,000 shares of common stock. All of the shares issuable upon exercise of our 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 warrants may result in substantial dilution to the interests of other stockholders since the selling stockholders may convert and sell the full amount issuable on exercise. If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to Sell Our Securities and the Ability of Stockholders to Sell Their Securities in the Secondary Market. Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. 10 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 Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: o that a broker or dealer approve a person's account for transactions in penny stocks; and o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must: o obtain financial information and investment experience objectives of the person; and o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: o sets forth the basis on which the broker or dealer made the suitability determination; and o that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. 11 USE OF PROCEEDS This prospectus relates to shares of our common stock that may be offered and sold from time to time by the selling stockholders. We will not receive any proceeds from the sale of shares of common stock in this offering. However, we will receive the sale price of any common stock we sell to the selling stockholders upon exercise of the warrants. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock is traded over-the-counter on the Over the Counter Bulletin Board maintained by the National Association of Securities Dealers under the symbol "APDN". There is no certainty assurance that the Common Stock will continue to be quoted or that any liquidity exists for our shareholders. The following table sets forth the quarterly quotes of high and low prices for our Common Stock on the OTC Bulletin Board during the fiscal years September 30, 2003 and September 30, 2004. In February of 2003, we changed our year end to September 30. Year ended 9/30/03* High Low December 31, 2002 $2.55 $0.02 March 31, 2003 $2.85 $2.00 June 30, 2003 $2.85 $2.25 September 30, 2003 $2.80 $2.40 Year ended 9/30/04 High Low December 31, 2003 $3.54 $2.45 March 31, 2004 $3.55 $1.51 June 30, 2004 $2.55 $0.71 September 30, 2004 $0.96 $0.43 Year ended 9/30/05 High Low December 31, 2004 $2.39 $0.42 March 31, 2005 (1) $1.83 $1.12 (1) As of February 14, 2005. * We have disclosed the numbers with years ending on September 30 for comparative purposes. Effective January 31, 2003, we changed our fiscal year from December 31 to September 30. HOLDERS As of February 8, 2005, we had approximately 527 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. 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. 12 EQUITY COMPENSATION PLAN INFORMATION Stock Option 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. The plan is called the Professional/Employee/Consultant 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. The Compensation Plan was designed by the Board to meet our important team building objectives in our early stages, and to be temporary. As of December 31, 2004, a total of 1,440,003 shares have been issued from the Compensation Plan and 560,000 options, 264,000 of which were exercised as of as of December 31, 2004. 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. We feel that this carefully designed Compensation Plan was successful in attracting and retaining a strong team at a time when we had no established revenue stream and limited or no outside financing. Because recipients sold their respective shares in a controlled manner, there was also no apparent negative impact to the market from sales of these unrestricted securities, which was an important objective of the Board when the Compensation Plan was contemplated. In our financial statements, shares that were issued from November 2002 through June 30, 2003 that were valued at $0.065 per share were shares issued from this Compensation Plan created in November of 2002 on the basis of contracts executed at that time for previously rendered services. Common Stock disclosed as being issued in exchange for cash at $1.00 per share represents options that were exercised under this Plan. In December of 2004, we adjusted the exercise price to $0.60 per share. Any other unrestricted shares that were issued either before or after July 1, 2003 were valued at the fair market value.
- ----------------------- -------------------------- ------------------------- --------------------- Plan Category Number of Securities to be Weighted Average Exercise Number of Securities Issued Upon Exercise of Price of Outstanding Remaining Available Outstanding Options, Options, Warrants and for Future Issuance Warrants and Rights Rights - ----------------------- -------------------------- ------------------------- --------------------- (a) (b) (c) - ----------------------- -------------------------- ------------------------- --------------------- Professional/Consultant/ Employee Stock and Stock Option Compensation Plan 2,000,000 $177,600 -0- - ----------------------- -------------------------- ------------------------- --------------------- Total 2,000,000 $177,600 -0- - ----------------------- -------------------------- ------------------------- ---------------------
As of December 31, 2004, a total of 1,440,000 shares have been issued from the Compensation Plan and 560,000 options have been issued, 264,000 of which were exercised as of that date. On January 26, 2005, the majority stockholders approved the 2005 Stock Incentive Plan and authorized 16,000,000 shares of Common Stock for issuance of stock awards and stock options thereunder. We filed a preliminary information statement with the Securities and Exchange Commission on February 3, 2005 containing the information on the 2005 Stock Incentive Plan, which shall become effective 20 days after the mailing of the definitive information statement. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS Some of the information in this Form SB-2 contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they: o discuss our future expectations; o contain projections of our future results of operations or of our financial condition; and o state other "forward-looking" information. We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this prospectus. See "Risk Factors." PLAN OF OPERATIONS Business Strategy and Approach We have established integrated business operations addressing and servicing the needs of the global security marketplace on the part of corporations and governments for; anti-counterfeiting, fraud prevention, product authentication, brand protection, supply chain management and protection. Intellectual Property Development, Product Operations & Partnerships We have proprietary DNA security technology, and develop security solutions that protect corporate and intellectual property from counterfeiting, fraud, piracy and product diversion using botanical DNA as an encrypted/code molecule that can be embedded in inks, paper, substrates, liquids, textiles, thread, plastics, holograms and microchips. We produce security solutions customized to our customer's needs. We market and sell DNA anti-counterfeit and fraud prevention solutions that integrate into, and layer with, existing security solutions. These DNA security features are integrated at the OEM level with ink, paper, liquids, thread and hologram producers, who in turn sell/supply finished security products such as primary and secondary product packaging for pharmaceuticals, beauty products, textiles, currency, passports, ID cards, etc. We have strict protocols for specifying, integrating, testing, shipping and confirming the presence of DNA in any given product. We use highly reputable outside labs to provide independent third party validation testing to assure maximum quality control, objectivity and strict security procedures in handling and shipping. No compromise can enter the security chain of our product(s). We plan to develop new product lines that will address specific new challenges in the security marketplace, and bring these advances to target industries, customers and countries. Additionally, we will identify strategic partnerships and co-marketing ventures, and licensees to work with us to develop, market and sell our biotechnological security products. This will include sub-licensing the technology to key partners in specific sectors with an established base of customers. These partners will be able to enhance their product lines and client services by adding our technology to the existing security matrix in their products, providing an enhanced solution to deter fraud and counterfeiting. Consultant & Enforcement Operations We will consult with our clients on a total security service offering; how to protect their brands, intellectual property, products and physical security access and how to reduce risk exposure, product liability exposure and product recall liabilities. We plan to offer worldwide DNA analysis services supporting the authentication of products and the detection, interdiction, deterrence and prosecution of counterfeiters and related crimes, through our subcontractors, sub-licensees and security industry collaborative partners. 14 International Sub-License Operations This division will oversee the activities of all international sub-licensees and partnerships. This division will also develop a corporate policy for all marketing and promotional activities. We intend to establish alliances with existing anti-counterfeit experts, agencies and companies in each market. This collaborative security consortium will employ DNA technology to detect illegal activities, counterfeiting and fraud, and provide a high standard in security for corporations and government agencies. These operations will provide multiple security solutions. Each sub-licensee or collaborative partnership will produce separate revenue streams and be operational via integrated organizational structures. Our management and advisory board and strategic consultants have the knowledge, experience, contacts and skills to provide a comprehensive DNA security business, with advanced anti-counterfeit and fraud prevention systems for the protection and tracking of currency, documents, consumer products, and intellectual property. Strong Security Knowledge Base -- Our executives and consultants have the requisite experience to provide solutions that address the security needs of major companies in such diverse markets as pharmaceuticals, automotive, cosmetics, apparel and accessories, aerospace, luxury goods, among others. Developing Technology - We plan to acquire all rights, title and interest in all patents, patents pending, developing, DNA anti-counterfeit, and fraud prevention technologies created by Biowell. We also have an in-depth understanding of DNA microchip design and applications. We will jointly develop DNA-holograms and DNA-Hologram-RFID devices, DNA-inks, DNA-dyes and DNA-security labels with leading OEM's in these specialist fields. Strategic Corporate Relationships - Our management has personal and corporate relationships with leaders in key industries such as: pharmaceuticals, cosmetics/beauty, fashion, retail, computers, entertainment, automobiles, petroleum, fine arts and collectibles. We will utilize our existing relationships and develop new ones to introduce our anti-counterfeiting technology to generate business. Each industry has unique requirements and needs for their anti-counterfeit solutions, and we believe our DNA technology will provide maximum security technologies. For example, our smart packaging solutions with DNA security markers in ink, paper and holograms has widespread application in packaging for pharmaceuticals, cosmetics, automotive markets, passports, ID's and currency. Our proprietary technology offers immediate and affordable detection and security for their brands and products. Strong Technology Alliances - Our technology can also provide advanced security dimensions to: o Electronics security: access and physical/plant security (biometric security cards enhanced with DNA) o Security Holograms (DNA enhanced) o Radio Frequency Identification systems (DNA + RFID) o Security papers and printing o Holograms (DNA holograms) o Other security-related products and systems Law Enforcement Expertise - The resources of our collaborative partners in the security industry include former federal law enforcement, security, and intelligence officers who provide the company with extensive contacts and hands-on experience in: o Intellectual property investigation o Counter-intelligence o Personal security services o Anti-counterfeit technologies o Secure communications and data management 15 Critical Accounting Policies The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policy involve the most complex, difficult and subjective estimates and judgments: o stock-based compensation Stock-Based Compensation In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS No. 123 - Accounting for Stock-Based Compensation, providing alternative methods of voluntarily transitioning to the fair market value based method of accounting for stock based employee compensation. FAS 148 also requires disclosure of the method used to account for stock-based employee compensation and the effect of the method in both the annual and interim financial statements. The provisions of this statement related to transition methods are effective for fiscal years ending after December 15, 2002, while provisions related to disclosure requirements are effective in financial reports for interim periods beginning after December 31, 2003. We elected to continue to account for stock-based compensation plans using the intrinsic value-based method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under the provisions of APB No. 25, compensation expense is measured at the grant date for the difference between the fair value of the stock and the exercise price. Revenues We have not generated any revenues from operations from our inception. We believe we will begin earning revenues from operations during fiscal year 2005 as we transition from a development stage company to that of an active growth and acquisition stage company. Costs and Expenses From our inception through September 30, 2004, we have incurred losses of $22,803,423. These expenses were associated principally with equity-based compensation to employees and consultants, product development costs and professional services. Recent Accounting Pronouncements In April 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends SFAS No. 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The provisions of SFAS 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the Company's results of operations or financial position. 16 In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company's results of operations or financial position. In December 2003, the FASB issued a revision of SFAS No. 132, "Employers' Disclosures About Pensions And Other Postretirement Benefits." This pronouncement, SFAS No. 132-R, expands employers' disclosures about pension plans and other post-retirement benefits, but does not change the measurement or recognition of such plans required by SFAS No. 87, No. 88, and No. 106. SFAS No. 132-R retains the existing disclosure requirements of SFAS No. 132, and requires certain additional disclosures about defined benefit post-retirement plans. Except as described in the following sentence, SFAS No. 132-R is effective for foreign plans for fiscal years ending after June 15, 2004; after the effective date, restatement for some of the new disclosures is required for earlier annual periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such as the components of net periodic benefit cost, and certain key assumptions) are effective for foreign plans for quarters beginning after December 15, 2003; other interim-period disclosures will not be required for the Company until the first quarter of 2005. Since the Company does not have any defined benefit post-retirement plans, the adoption of this pronouncement did not have any impact on the Company's results of operations or financial condition. In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . ." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this Statement will have any immediate material impact on the Company. In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS 152) The amendments made by Statement 152 This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. with earlier application encouraged. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows. On December 16, 2004, the Financial Accounting Standards Board ("FASB") published Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R are effective as of the first interim period that begins after June 15, 2005. Accordingly, the Company will implement the revised standard in the third quarter of fiscal year 2005. Currently, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. Management is assessing the implications of this revised standard, which may materially impact the Company's results of operations in the third quarter of fiscal year 2005 and thereafter. 17 On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (" SFAS 153"). This statement amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for nonmonetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows. Liquidity and Capital Resources As of December 31, 2004, we had a deficiency in working capital of $5,942,000. For the three months ended December 31, 2004, we generated a net cash flow deficit from operating activities of ($1,587,000), consisting primarily of year to date losses of ($12,365,000), $8,724,000 in net stock issued for consulting services, $1,515,000 for beneficial conversion of convertible notes payable and warrants, $395,000 for warrants issued to consultants as well as a net increase in current liabilities and other of $144,000. Cash used in investing activities totaled $28,000, which was utilized for patent filings and, facility lease deposits. Cash provided by financing activities totaled $1,676,000 consisting of $1,390,000 in proceeds from loans, and $250,000 and $36,000 in common stock and exercised options proceeds, respectively. We expect capital expenditures to be nominal for fiscal 2005. These anticipated expenditures are for continued investments in property and equipment used in our business. While we have raised capital to meet our working capital and financing needs in the past, additional financing is required in order to meet our current and projected cash flow deficits from operations and development. By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition. Our registered independent certified public accountants have stated in their report dated January 11, 2005, that we have incurred operating losses in the last two years, and that we are dependent upon management's ability to develop profitable operations. These factors among others may raise substantial doubt about our ability to continue as a going concern. To obtain funding for our ongoing operations, we sold $1,465,000 in convertible promissory notes to 13 investors in December 2004. Each promissory note was automatically convertible into shares of our common stock, at a price of $0.50 per share, upon the closing of a private placement for $1 million or more. On January 28, 2005, we closed upon a private placement transaction in excess of $1 million, and on February 2, 2005, the promissory notes were converted into an aggregate of 2,930,000 shares of common stock. This prospectus includes the resale of the common stock issued upon conversion of the promissory notes. In connection with the sale of the convertible promissory notes, we issued 2,930,000 warrants to purchase shares of common stock. The warrants are exercisable until three years from the date of issuance at a purchase price of $0.75 per share. To obtain funding for our ongoing operations, we conducted a private placement offering in January and February 2005, in which we sold $7,361,000 of 10% Secured Convertible Promissory Notes to 61 investors. The 10% Secured Convertible Promissory Notes automatically convert into shares of our common stock, at a price of $0.50 per share, upon the filing of this registration statement. This prospectus includes the resale of the common stock to be issued upon conversion of the 10% Secured Convertible Promissory Notes. In connection with the private placement offering, we have issued 15,222,000 warrants. The warrants are exercisable until five years from the date of issuance at a purchase price of $0.75 per share. 18 Since the conversion price will be less than the market price of the common stock at the time the secured convertible notes are issued, we anticipate recognizing a charge relating to the beneficial conversion feature of the secured convertible notes during the quarter in which they are issued, including the fourth quarter of fiscal 2004 when $1,465,000 of secured convertible notes were issued and the first quarter of fiscal 2005 when $7,361,000 of secured convertible notes were issued We will still need additional investments in order to continue operations to cash flow break even. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations. Product Research and Development We anticipate continuing to incur research and development expenditures in connection with the development of our DNA embedded biotechnology security products and solutions during the next twelve months. This includes, but is not limited to projects involving the following agencies and companies: o Department of Energy; o Department of Agriculture; o Oakridge National Laboratories; and o Holo-Mex. These projected expenditures are dependent upon our generating revenues and obtaining sources of financing in excess of our existing capital resources. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected costs of research and development during the next twelve months 19 BUSINESS OVERVIEW We are a provider of proprietary DNA-embedded biotechnology security products that protect corporate and intellectual property from counterfeiting, fraud, piracy, product diversion and unauthorized intrusion. We offer a cost effective method to detect, deter, interdict and prosecute counterfeiting enterprises. We provide proprietary DNA-embedded biotechnology solutions to companies to protect corporate and intellectual property from counterfeiting, fraud, piracy, product diversion and unauthorized intrusion. We use segments of naturally occurring botanical DNA that have unique characteristics, which are one-of-a-kind sequences. Using various anti-counterfeit mediums, or substrates, such as ink, microchips, glue, paints and holograms, we can authenticate the unique DNA characters to ensure that the product has not been counterfeited or tampered with. Sectors of commerce benefiting from our products include: corporations, federal government agencies, information technology, security and surveillance, entertainment media, the arts, cosmetics, pharmaceutical and biometrics, as well as vertical retail markets. Our applications also enhance capabilities of product origination, identification verification, and validation of the source of components for critical manufacturing, defense, medical and other highly-integrity or secure products. Our mission is to become the recognized standard in providing total security solutions to protect corporate and intellectual property from counterfeiting and fraud. We intend to deliver our products to a global market via existing and emerging strategic business development agreements with recognized leaders in the security industry and through collaborations with leading security consultancy companies. We have acquired the exclusive license to sell, market, and sub-license all of Biowell's DNA anti-counterfeit and fraud prevention biotechnology and products in North America (U.S. and Canada), Latin America and Europe. The exclusive license also gives us the initial rights to future biotechnologies developed by Biowell and also new applications for the existing technology that may be developed for the marketplace. Biowell has selected us to be its marketing and licensing partner to introduce the DNA biotechnology products to the world's largest consumer markets. In addition to marketing the DNA products in our territories, we will develop DNA production laboratories in the United States, as well as develop capabilities in DNA authentication, analysis and detection products with ongoing relationships with the Department of Energy's national laboratory system. We have a very seasoned and experienced management team. This was a key factor in establishing the partnership with Biowell. Our combined executive team has professional experience totaling more than 100 years in the areas of anti-counterfeiting technology, microchip development, security, printing, marketing, and corporate sub-licensing development. Our management team has also been active in the International Anti-Counterfeiting Coalition, Homeland Security technology communities, and the anti-fraud investigation industry. Our executives have developed strong links with major international corporations, intellectual property and copyright holders, U.S. Government affiliations, and international anti-fraud organizations. License Agreement with Biowell Technology In consideration for the granting of the exclusive license to us, Biowell received 1.5 million shares of our common stock, with the option to purchase another 500,000 shares. In return, we received the option to purchase 500,000 shares of Biowell common stock. License Agreement with Biowell Technology In consideration for the granting of the exclusive license to us, Biowell received 1.5 million shares of our common stock, with the option to purchase another 500,000 shares. In return, we received the option to purchase 500,000 shares of Biowell common stock. 20 Biowell DNA Technologies Every living thing has a unique DNA code in its cellular composition. By taking the DNA from a plant material, Biowell is able to create a group of DNA codes that can be turned into a unique and traceable marking for any product. In the early 1980's the primary emphasis in DNA research was applied to pharmaceutical applications. There was very little focus in the living biotechnology arena. During the l990's, a group of elite scientists, led by Dr. Sheu Jun-Jei of Taiwan, focused on the first research and development of a DNA based anti-counterfeit biotechnology. In the late 1990's, Dr. Sheu made a major breakthrough in biotechnology, and patents with commercial applications were filed. Biowell was formed in Taiwan in October of 1999 to hold these pending patents and continues to advance in the areas of DNA anti-counterfeiting biotechnology. The key to this exclusive biotechnology is the ability to mix or attach scientifically selected and processed DNA to specific media such as paint, glue, polymer, and ink. In doing this, the characteristics of DNA are used to distinguish genuine products from counterfeits. This technology can also be used to authenticate microchips and circuit boards that contain them. The DNA AC (anti-counterfeit) biochip is a Biowell product in which DNA is embedded into a microchip. When biochips are embedded into circuitry, the biological data can be read electronically and the component can be authenticated. Without authentication, the device will not operate. Intellectual Property Key to our success is ongoing research and development. Biowell has over 10 patents pending and we have filed two new patent applications. While patents are an important asset, they are not the only instruments used to sequester a competitive position for us. We are developing numerous tools to maintain technical superiority, which includes licensing other component and complementary technologies that will keep pace with our speed to market efforts. We regard our patents, trademarks, trade secrets and other intellectual property as an integral component of our success. We rely on patent law, trademark law, trade secret protection and confidentiality and/or license agreements with employees, customers, partners and others to protect our intellectual property. Effective patent, trademark and trade secret protection may not be available in every country in which our products are available. We cannot be certain that we have taken adequate steps to protect our intellectual property, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, if our third-party confidentiality agreements are breached there may not be an adequate remedy available to us. If our trade secrets become publicly known, we may lose our competitive position. 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. Global Market Penetration We have redirected our sales and marketing strategy to place a premium on business-to-business opportunities. In order to effectively service our products globally, we may enter into both exclusive and non-exclusive agreements. Each of these agreements will have time limits and have very specific revenue targets set against them. In the case of an exclusive agreement, we may further limit our relationship to certain products that are offered for sale in a specific region. All exclusive agreements will have time limits with specific targets for revenue to be derived out of a given region. Additionally, we have and will retain the right to allow certain global partners (as we decide from time to time) to sell into a restricted exclusive market with the provision that a fee be paid to the exclusive licensee in a given region for products sold in that region that are covered under their exclusive license. This provision was adopted to allow for certain Fortune 50 companies to pursue selling our products and services globally without restrictions and encumbrances with specific geographical regions. 21 Our Products With our exclusive licensing of Biowell's DNA technologies, we will be working to provide complete DNA anti-counterfeit and fraud prevention solutions. We will offer comprehensive and price-competitive products and solutions. The key characteristics of the DNA biotechnology are as follows: Unique and Impossible to Replicate DNA Codes -- specially processed DNA fragments, with unique characteristics and one-of-a-kind sequences, are used. The embedded DNA concentration is extremely small (3-5 micron) and cannot be analyzed unless proprietary biochemistry and reagents are used, along with our proprietary DNA reader systems. Easy to Customize -- We can tailor the DNA tagging to meet the customer's product requirements. For example, the DNA codes can be generated based on one or more DNA sources and one or more anti-counterfeit technologies. Easy and Quick to Use -- With the DNA instant verification kit or scanner, instant verification can be obtained at the point-of-purchase. Hence, the authentication process can be performed quickly. Traditional anti-counterfeit technology analysis requires anywhere from 24 to 48 hours. Our technology will achieve an effective and timesaving deterrent against counterfeiters. Broad Applications -- DNA anti-counterfeiting technology can be applied to almost any product on the market. The DNA ink is edible and can be used on tablets or capsules ensuring against counterfeiting pharmaceuticals. DNA Marker Our first anti-counterfeiting product is the DNA Marker, an agent that can be used to authenticate textile products. The DNA Marker can be applied at any point in the manufacturing process, from the freshly cut raw fibers through to the finished garment. As the DNA Marker can be applied to any fabric from cotton to wool, this will help textile vendors and governments determine the origin of thread, yarn and fabric through to the high-end garment manufacturers who suffer lost sales at the hands of counterfeiters. DNA Marker protection will also help preserve jobs at the legitimate textile and clothing manufacturers as well as ensuring that the proper taxes are collected on textiles and garments from authorities. The DNA Marker will remain effective into the 22nd century and will be detectable throughout the different manufacturing stages without degrading. It can be detected in a variety of manners from inspection under infrared light to laboratory forensic analysis that authenticates it to a certainty of 99.9999 percent Driven by market needs, this is the first of what is expected to be a number of products and services based upon the DNA marker technology. We will continuously assess the anti-counterfeit needs of markets, companies and governmental organizations and will develop proprietary technologies, solutions and products for these opportunities. Inks DNA anti-counterfeit ink has been developed as two major applications. The first ink is Biowell's unique anti-counterfeit ink (covert ink), which can be authenticated at a forensic-science level of certainty, in a lab, with detailed DNA analysis. The second application is an enhanced version of the first, integrating into the original anti-counterfeit ink an additional instant detection function for on-site authentication (overt ink). 22 This instant verification process has been designed to allow sampling at any point in the product supply chain. By swabbing testing fluid containing a special activation buffer across the authentic DNA ink surface, a biochemical reaction occurs between the coating of the DNA molecules in the ink and the buffer fluid. This reaction manifests as a reversible color change, with the ink changing color from blue to pink, and back to blue within seconds. Testing can be repeated at various checkpoints throughout the product supply chain. Proprietary production techniques are used to manufacture DNA with the unique property for integration with ink. The key to utilizing DNA for anti-counterfeit purposes lies in the preservation of DNA. The system of production ensures that DNA can survive for over 100 years. In addition, special materials are used to shield purified DNA from environmental variation, which allows perpetual preservation of DNA and permanent proof of authenticity for genuine products. DNA ink can be applied to: o General Company Use: trade marks, patents, company logos, important documents o Financial industry: currency, stocks, checks, bills, bonds, checks o Retail: event tickets, VIP tickets, clothing labels o Medicines: capsule and pill surface printing o Inner package: foil blister packs o Outer package: boxes, bottles o Arts: paintings, artifacts, collectibles and memorabilia o Others: lottery tickets, stamps, custom seals, passports, visas, etc. Virtually any item that can be duplicated now can be protected with any of these DNA ink applications. These applications are cost-effective and can be adapted to any company's current branding, product tracking, or other anti-counterfeiting program. DNA Labels DNA anti-counterfeit ink can be applied to garment labels. It can also be printed onto logos or on any other surface. Labels are printed with the proprietary ink containing the specific authentication DNA code for a manufacturer. The labels can then be easily tested for authenticity. Knowledge that the labels are DNA-imprinted and can be quickly and easily verified serves as a deterrent to counterfeiters. We believe this in itself will create a demand for the proprietary DNA ink-impregnated label technology. DNA Chip Computer and electronic signals constitute most of the corporate security systems. These systems are of similar function and design, and are susceptible to duplication and counterfeit. The polymorphism of DNA is significantly more complex than electronic signals, and better suited for security systems. The DNA chip card is intended for both authentication of the card and identification of the individual. For that purpose, a set of DNA chip cards are assigned with specific DNA (group ID), along with the individual's identification information and recorded in the chip's memory. A reader module is configured to recognize (and therefore verify) only the chip carrying the correct group ID. Any DNA chip card with different group ID, or indeed any other chip card, will be rejected. The DNA chip uses artificially constructed DNA, with each user group having the same DNA code. Individuals are differentiated in the system by identification codes stored in the chip's memory. In addition, the DNA chip can be configured for the customer to have a particular person have their own DNA as the source DNA for that user group. The DNA chip generates unique signals and will not function properly once removed from the casing. The empty chip is not available anywhere else on the market, thus making it impossible to counterfeit. Once the imbedded DNA chip is sabotaged or removed the chip will cease functioning, thus preventing data on the chip from being duplicated. 23 The signal of a DNA chip is generated through an interaction between DNA and a specially devised mechanism known as a DNA chip reader. A real DNA chip will generate an analogical signal and be received by the reader after the chip is stimulated. An LCD display screen provides immediate authentication by reading the unique DNA signals embedded in the chip. The DNA chip function is versatile, which allows it to be integrated into the form of slot reader, slide through reader, or contact point reader for instant authentication. Biowell has also developed a portable, lightweight, hand-held scanner that can be used to authenticate the DNA chips. The cost of the DNA chip, card, and reader system is comparable to existing smart card systems. Above all, the reader can be linked externally with existing card readers to save replacement costs. We believe that the DNA chip system is more secure than all other systems; since it cannot be copied or hacked, and works with specially configured readers. The DNA biochip can be applied to many products. For example: o Security ID cards o Passports o Licenses o Credit and ATM cards o Debit cards o Consumer merchandise (CDs, VCDs, DVDs, notebook computers, PDAs, handbags, etc.) o Other applications where authentication is required (antiques, paintings, etc.,) Demands for Security and Positive Identification As nations are threatened by terrorism and corporations try to prevent corporate fraud and espionage, the need for secure anti-counterfeiting and identification systems increases. Our technology can provide important and cost-effective support for local, state, and federal governments as well as corporations doing business with highly sensitive information. Our anti-counterfeiting technology can be used for the following types of identification and important government documents: o Passports o Green cards o Visas o Driver's licenses o Social Security cards o Student visas o Military ID's o Other important Identity cards and official documents We will explore contracting with consultants in Washington D.C. that will assist with identifying and securing potential Government contracts that will utilize the DNA technology for identity and authentication. In 2004, we won the "Best of New technology" prize at the Security Industry Association conference in Washington D.C. in competition against some of the world's largest corporations. Shortly thereafter, we were inducted into the InteGuard Alliance, a consortium of 29 major companies providing security services and security technology to the US Government. We intend to work in collaboration with Biowell and other security organizations in order to continue to research and develop new product lines derived from, but not limited to, DNA technology. Research and development of new product lines is an ongoing commitment of our and is currently underway in the Biowell labs. Business Strategy and Approach 24 Our goal is to establish three integrated business operations addressing and servicing the needs of the marketplace for anti-counterfeit, fraud prevention, and homeland security solutions. Intellectual Property Development, Product Operations & Partnerships We are a developer of security solutions that protects corporate and intellectual property from counterfeiting, fraud, piracy and product diversion using a proprietary line of DNA embedded biotechnology products accompanied by monitoring and enforcement support, we produce solutions customized to their customer's need. We intend to market and sell DNA anti-counterfeit and fraud prevention products and oversee laboratory facilities where consumer and corporate products can be tested for authenticity. We will oversee the development of new product lines that will address specific and individual customer needs. Additionally, this division will identify strategic licensees and partnerships in multiple sectors that will license and sell our products and biotechnologies. This will include sub-licensing the technology to key partners in each sector with an established base of customers. These new partners will be able to enhance their client services by adding our technology to the existing product line or current security methods to deter fraud and counterfeiting. Consultant & Enforcement Operations As a service to our clients, we will consult with them on how to best protect their intellectual property and products. We will offer worldwide investigative and DNA analysis services for the enforcement and prosecution of counterfeiters and fraud itself and through our subcontractors or sub-licensees. International Sub-License Operations This division will oversee the activities of all international sub-license alliances and partnerships. This division will also develop a corporate policy for all marketing and promotional activities. We intend to seek alliances with existing anti-counterfeit networks in each market. We will train these networks to use our technology to detect and monitor counterfeit and fraud, and we will use our own anti-counterfeit and security experts to help detect counterfeiting attempts against corporations and government agencies. By combining our three operations, we will provide multiple security solutions. Each division will produce separate revenue streams and integrated organizational structures that we believe will make us a leader in the field of anti-counterfeit and fraud prevention services. Our management team and advisory board have a unique combination of skills for providing integrated DNA anti-counterfeit and fraud prevention systems for the protection and tracking of documents, products, and intellectual property: -- Strong Security Knowledge Base -- Our team has the experience to analyze and provide solutions that address the security needs of companies in such diverse market segments as pharmaceuticals, designer clothing, luxury goods and cosmetics, aerospace, defense, diamonds, automotive, holography and chip manufacturing. Several team members are published authors in the area of security and are recognized globally as experts in their fields. -- Leading Technology -- We have exclusive rights to all patent pending, leading DNA anti-counterfeit, and fraud prevention technologies created by Biowell. We also have an agreement in place with HoloMex, Inc., a leading security hologram manufacturer, to create DNA-holograms, a new generation security product. Our management also hasan in-depth understanding of microchip design and applications. -- Strategic Corporate Relationships -- Our management has personal and corporate relationships with leaders in key industries such as: high-end fashion retail, computers, entertainment, automobiles, aerospace, defense and pharmaceuticals. We will utilize these existing relationships to introduce our anti-counterfeiting products and generate contracts, although no discussions have yet been held. Each industry has multiple facets for the anti-counterfeit DNA technology. For example, fashion retail can use our anti-counterfeit chip in its high-end fashion handbags, while a company producing fine wines can take advantage of our DNA-embedded label. Our proprietary technologies offer immediate and affordable detection and security for all of their trademarks and products. 25 -- Strong Technology Alliances -- Our products can also work with and supplement products in key anti-fraud and security industries, such as: o Electronics security o Hologram manufacturing o Radio Frequency Identification (RFID) systems o Isotopic Markers o Security papers and printing o Other security-related products, systems, and services -- Law Enforcement Expertise -- Our management includes former federal law enforcement, security, and intelligence officers who provide us with extensive hands-on experience in: o Intellectual property investigation o Counter-intelligence o Personal security services o Anti-counterfeit technologies o Secure communications and data management Patents Pending
- ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- Patent Name Application No. Filed by Date Filed Jurisdiction - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- A Method of Utilizing 089108443 Biowell March 17, 2000 Taiwan Nucleic Acids as Markers for Product 00107580.2 May 18, 2000 China Anti-Counterfeit Labeling and Verification 09/832,048; April 9, 2001 United States published 20020187263-A1 - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- EppenLocker (A 089204158 Biowell March 10, 2000 Taiwan Leakage-Prevention Apparatus of Microcentrifuge) - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- Multiple Tube Structure for 089210575 Biowell June 20, 2000 Taiwan Multiple in a Closed Container - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- Method for Processing 89111477 Biowell June 12, 2000 Taiwan Multi-PCR in Closed Vessel - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- Method for Mixing Nucleic 2002-294229 Biowell August 31, 2002 Japan Acid in Water Insoluble Media and 03007023.9 March 27, 2003 European Application Thereof Patent Office 92121973 August 11, 2003 Taiwan - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- 26 - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- Method for Hiding Secret 92121490 Biowell August 6, 2003 Taiwan Message Carrying a DNA Molecule and a Method for pending August 6, 2003 China Decoding the Secret Message Hiding by thereof - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- Method for Transferring 92119302 Biowell July 15, 2003 Taiwan Giveback Funds by Recognizing Plurality of 03150071.4 July 31, 2003 China Objects - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- Anti-Counterfeit Chip None Biowell To be filed Taiwan Recognizing Device China - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- A System and Method for 60/463215 Biowell April 16, 2003 United States Marking Textiles Using DNA Applied DNA Sciences - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- A System and Method for 2004/012031 Applied DNA Sciences April 15, 2004 United States Marking Textiles Using Nucleic Acids - ------------------------------ --------------------------- --------------------------- --------------------------- ----------------- System and Method for 10/82596 Applied DNA Sciences January 21, 2004 United States Authenticating Clients on a Local Area Network Using Nucleic Acids
Sales and Marketing We employ a multi-tier sales and marketing strategy. We develop strategic alliances and marketing partners, by setting up alliances with Biowell's technology partners, granting licenses to existing anti-counterfeit suppliers and partner with industry leaders for intellectual property development. We provide anti-counterfeiting and security solutions through our sales force covering a multitude of potential clients either directly or via resellers. Customers We do not currently have any revenue-generating customers at this point. Our targeted client base includes major corporations, government entities and educational institutions. We will provide DNA chip technology, DNA ink technology as well as DNA profiling/tagging technology through various types of resale agreements. We will apply these technologies to labels and security ink, to a chip and reader as well as textile markers and agriculture profiling. Competition The anti-counterfeit and fraud prevention market is highly competitive and diverse. Since we believe that other forms of anti-counterfeiting and security measures can be easily defeated, we expect that utilizing DNA which cannot be replicated will garner great demand from the market. Some examples of biotechnology and other security technologies include: FINGERPRINT- a systems scans fingerprints before granting access to computer files. VOICE- Off-the-shelf software authenticates users based on individual vocal patterns. CORNEA- Scanners that scan the iris of a user's eye to match compared to a computer database. FACIAL SCAN- Computers can use complex algorithms to distinguish one face from another. 27 IC CHIP & MAGNETIC STRIP- Integrated circuit chip that runs an electric current through a circuit and is verified by a IC card. Is used in many parts of Europe and Asia. HOLOGRAPH- Optical security elements ('holograms') constitute a family of optically variable microstructures, which are difficult to copy. Most of them are difficult to reproduce using advanced color photocopiers and printing techniques. This is why they are so widely used as anti-counterfeit devices. Holograms are only one member of a family of optically variable devices which all have several features in common. These are: o Highly visible to the naked eye under good or reasonable conditions of illumination. o Colorful and change their colors with viewing angle. o They derive their colorful effects from microstructures within the devices, which cause interference or diffraction of the light falling upon them. FLUORESCENCE- X-ray Fluorescence (XRF) and elemental taggant technologies were developed as a unique method for assaying uranium ore. Later on was used as a handheld alloy grade identification and spectral analysis instrument. Its use is limited to label/printing applications. RADIOACTIVITY& RARE MOLECULES- a method of Radiation detection is very effective but limited to use on crude oil. Some of the bigger competitors in the field of anti-counterfeiting and fraud protection include: o DNA Technologies. Inc. o Art Guard International o Theft Protection Systems o Cypher Science (United Kingdom) Mt. Sinai Hospital o ChemTAG (Norway) o NTT DATA Labs (Japan) o November AG Management Strategy In anticipation of internal growth, we will organize resources to manage our development effectively, minimizing organic growth, while optimizing our use of excess capacity, where core competency in the biotech arena is made available. Our Chief Executive Officer is responsible for the strategic direction, coordinating with our overseas technology partner Biowell and others as well as operations. Our President is responsible for government entity relations, corporate governance and building shareholder value. Our Chief Financial Officer covers overall financial management, financial reporting, corporate administration, investors relations. Our Vice President covers specific industries, such as the pharmaceutical, cosmetic and comestible sectors and acts as our media spokesperson, clarifying for the pharmaceutical and nutraceutical industries, allied health professionals and consumers the advantages of our anti-counterfeit, diversion and piracy applications and products. Giuliani Partners In August 2004, we engaged Giuliani Partners LLC as our strategic marketing partner and advisor. Giuliani Partners has extensive experience in advising corporations and organizations in various business sectors. The engagement agreement had an effective date of September 1, 2004. Giuliani Partners has been engaged, on a non-exclusive basis, to provide advice and assistance to us regarding issues associated with our proprietary DNA embedded security solutions. Giuliani Partners will assist us with strategic positioning and enhancement of our business, and will assist us in the development of domestic and international marketing strategies for our DNA products and services. The term of the engagement is one year from the effective date, with automatic one year renewals unless either party expresses, in writing, an intention not to renew within 60 days prior to the expiration of the term. 28 As compensation for Giuliani Partners' performance, we will pay Giuliani Partners an aggregate advisory fee of $2,000,000 payable in increments over the term and renewal term. The initial payment of $500,000 was made by us on or about September 7, 2004. Additionally, we will issue a net-exercisable warrant to purchase shares of our common stock at a later date. Fees were placed in escrow during Giuliani Partners' completion of its due diligence review. All our promotional materials will be submitted to Giuliani Partners for its review, including all advertising, written sales promotion, press releases, news clippings and other publicity matters relating to Giuliani Partners' engagement and the strategic relationship created. We have agreed to maintain confidentiality with regard to our relationship with Giuliani Partners, wherever appropriate, and have indemnified Giuliani Partners, its controlling persons, respective partners, shareholders, directors, officers, employees, agents, affiliates and representatives and will hold them harmless against any actions, judgments, claims, etc. EMPLOYEES As of February 10, 2005, we employed 12 full-time employees, of which six are in management, four in sales & marketing and two in administration. We believe that our relations with our employees are good. DESCRIPTION OF PROPERTIES Presently, we maintain our principal office at 9229 W. Sunset Boulevard, Suite 830, Los Angeles, California 90069. We signed a lease for our office space in November 2003. The office space, which is provided to us for $11,312.70 per month for the first twelve months of the lease, for $11,635.92 for the second 12 months and $12,031.01 for the last 12 months of the lease, has approximately 5,387 square feet. 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. 29 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. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results. 30 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Names: Ages Titles: Board of Directors ----- ---- ------- ------------------ Rob Hutchison 49 Chairman & CEO Director Peter Brocklesby 52 President Director Lawrence Lee 44 Chief Technology Director Strategist Michael Hill 44 Director Ron Erickson 61 Director Karin Klemm 38 Secretary 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, our Directors are not compensated for their services. Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors. Biographical resumes of each officer and director are set forth below. Chairman of the Board and Chief Executive Officer - Robin Hutchison In November 2003, Robin "Rob" Hutchison joined our Board of Directors. On December 12, 2003, he was appointed Chairman of the Board and on March 1, 2004, he was appointed Chief Executive Officer. Previously, Mr. Hutchison served on Board of Directors of PowerHouse Technologies Group, Inc., the developer of mobile computing solutions that enhance personal productivity. He is the founder of several companies, including eCharge Corporation of Seattle, Washington, specialists in alternative payment methods for the Internet. Mr. Hutchison served as eCharge's president and chief technical officer and played an integral role in raising in excess of $90 million in private funding. Mr. Hutchison pioneered, and holds the patent pending on, unique digital certificate technology using Bio-metrics that enabled eCharge to provide secure Internet commerce transactions. Prior to co-founding eCharge, Mr. Hutchison was president of Canada-based SNI Corporation, specialists in the integration of SUN Microsystems UNIX-based systems and Internet and computer firewall security. Mr. Hutchison also served as the western regional director of sales and operations for Everex Canada Inc. and as vice president and co-founder of Vivox International Inc. Mr. Hutchison remains on the Board of Directors of eCharge. He retired from that company in 2002 to assist in the development of several start-ups and mature technology companies, including Bit Learning, Via Vis Technologies Inc., One Person Health Inc. and Applied DNA Canada. Mr. Hutchison is a member of the Board of Directors of Golden Goliath Resources and Serebra Learning Corporations. President - Peter Brockelsby Mr. Brocklesby graduated from Leeds University, UK with a BA Honors degree in History in 1970. He attended the Royal Air Force College, UK and was commissioned in the RAF. In 1977, after 7 years service in the UK Armed Forces, Mr. Brocklesby left to become Director of Logistics for Air Asia (Air America), a US defense contractor providing support for the US military and for other governments in Asia. Following acquisition of Air Asia by E-Systems, Inc., a multi-billion dollar defense contractor, and now part of Raytheon, Mr. Brocklesby was appointed VP Marketing. E-Systems specialized in the development and integration of advanced airborne and land-based military and government communications systems, electronic warfare equipment, electronic surveillance and airborne intelligence gathering systems. 31 As an independent businessman, Mr. Brocklesby developed sophisticated electronics systems for commercial aircraft in a joint-venture with Plessey, a multi-billion dollar defense contractor and avionics manufacturer. The products included satellite communication systems, on-board electronic management systems and fully interactive video, audio and voice/data communications systems. Mr. Brocklesby has extensive experience in the development, commercialization and marketing of new technologies and has many contacts in the aerospace, defense, electronics and telecommunications industries worldwide. Chief Technology Strategist and Director - Larry Lee Larry Lee served as President, CEO and Director from September of 2002 to March 1st, 2004, when he assumed the role of Chief Technology Strategist. Lee has over 20 years of leadership experience in technology and telecommunications with both Fortune 500 companies and start-up organizations. His roles have ranged from Senior scientist to CEO, managing all aspects of business development including technical, financial, resource management and marketing. Prior to becoming president and CEO of the Company, Lee has held management positions at Hughes Aircraft, Boeing and General Motors where he worked on innovative and cutting-edge new technology. While working in the environment of Fortune 500 companies, he led the new initiatives divisions where he mastered entrepreneurial skills by developing a variety of new business ventures. His success was so notable that he was awarded the coveted Six Sigma Black Belt training award for his accomplishments. This is an award that is given after an intensive program to groom high corporate achievers to learn how to make companies successful. He recently successfully initiated the start-up of three satellite telecommunications product lines for wireless, broadband and multi-media applications with sales exceeding $200 million. He was also instrumental in directing the development of integrated data and software systems for the automotive industry, military and government security programs. Lee currently serves on the board of advisors and/or partners for several U.S. and international companies including: Dery Resources Inc.; IMC, and VO Management, LLC. Lee has a Master of Science in Computer/Electronic Engineering from California State University and a Bachelor of Science in Mechanical/Biomedical Engineering from Virginia Tech. He has also received advanced training in Business Executive Management and Finance from University of California, Los Angeles and the Hughes Education Center. Consultant and Director - Michael E. Hill Mr. Hill has 18 years of experience in venture capital finance, investment banking and business development in North America and Europe. Hill has been involved in the initial funding and start-up of numerous companies including: multi-media, technology, biotech and the resource sectors. He has successfully completed transactions ranging as high as $200 million and has been an intricate participant in many acquisition and merger strategies. Hill is currently a major shareholder in a west coast commercial real estate company and retail chain. He is also serving as the trustee and governor for the Shawnigan Lake School, a top ranked, international private school in Canada. Previous to joining the Applied DNA Sciences team, Hill was an Investment Banker at Research Capital from 1997-2002 where he managed a portfolio exceeding $300 million. At Research Capital Hill worked closely with senior executives and Management in developing new product, marketing, recruiting, due diligence and structuring investment banking deals. Prior to working with Research Capital, Hill performed similar tasks with Scotia Capital Markets and Burns Fry Ltd. He was employed with these companies from 1987 until 1997. 32 Director - Ronald P. Erickson Ronald Erickson has over thirty years of experience as a manager, attorney and senior level executive. In January 2004, Mr. Erickson was appointed to the Company's Board of Directors. From 1997 through the present, Mr. Erickson served as Chairman and Chief Executive Officer of eCharge Corporation in Seattle, Washington where he played a major role in raising approximately $90 Million in equity capital from major international investors including Deutsche Telkom's venture arm, Korea Telecom, National Data Corp. and others. Previously, from 1995 through 1997, he served as Chairman and Chief Executive Officer of Globaltel Resources, Inc. where he co-founded and lead the worldwide financing efforts and managed all aspects of growth of this privately held international telecommunications and networking company. From 1992 through 1994, he was Chairman, Interim President and Chief Executive Officer of Egghead Software, Inc. in Issaquah, Washington. Secretary - Karin Klemm On August 2, 2004, Applied DNA Sciences, Inc. (the "Company") appointed Karin Lise Klemm to the position of Chief Operating Officer and Secretary. In that capacity, Ms. Klemm oversees the day-to-day operations of the Company. Ms. Klemm continues to serve as President of Poly Pacific Entertainment, Inc., an entertainment company based in Beverly Hills, where she began her employ in that role in August of 1999. Since August of 2003, Ms. Klemm has served as Chief Executive Officer to Uncensored Music Network, Inc., also an entertainment company. Previously, from 1997 through 2000, Ms. Klemm was a branch manager of RH11, an executive search firm in Los Angeles, California. EXECUTIVE COMPENSATION The following tables set forth certain information regarding our CEO and each of our most highly-compensated executive officers whose total annual salary and bonus for the fiscal years ending September 30, 2004, 2003 and 2002 exceeded $100,000:
Other Annual Restricted Options LTIP Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other Position Year ($) ($) sation ($) Awards ($) (#)(1) ($) Compensation - --------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ -------------- Rob Hutchison, 2004 159,450 0 0 39,000 0 0 0 CEO 2003 0 0 0 0 0 0 0 2002 0 0 0 0 0 0 0 - --------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ -------------- Lawrence C. Lee, 2004 150,000 0 0 2,017,500 0 0 0 CEO 2003 300,000 0 0 0 0 0 0 2002 0 0 0 182,000 0 0 0 - --------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ -------------- Gerhard Wehr, 2004 58,328 0 22,489 54,000 0 0 0 CFO 2003 180,000 0 0 0 0 0 0 2002 0 0 0 40,000 0 0 0 - --------------------- --------- ------------ ----------- ------------ -------------- ----------- ------------ --------------
Employment Agreements None. 33 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In September of 2004, Larry Lee entered into a private transaction with Mr. Chaim Stern, selling a total of 2,500,000 shares to him, after which he loaned all proceeds of $600,000 to us. We have no policy regarding entering into transactions with affiliated parties. 34 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of our common stock as of February 1, 2005: o by each person who is known by us to beneficially own more than 5% of our common stock; o by each of our officers and directors; and o by all of our officers and directors as a group.
PERCENTAGE OF PERCENTAGE OF CLASS CLASS NAME AND ADDRESS NUMBER OF PRIOR TO AFTER OF OWNER TITLE OF CLASS SHARES OWNED(1) OFFERING(2) OFFERING(3) - ----------------------------------------------------------------------------------------------------- Rob Hutchison Common Stock 1,120,000 (4) 2.32% 1.34% 9229 Sunset Blvd., Suite 830 Los Angeles, CA 90069 Peter Brockelsby Common Stock 1,000,000 (5) 2.07% 1.20% 9229 Sunset Blvd., Suite 830 Los Angeles, CA 90069 Lawrence Lee Common Stock 3,820,000 (6) 7.98% 4.61% 9229 Sunset Blvd., Suite 830 Los Angeles, CA 90069 Michael Hill Common Stock 552,000 (7) 1.16% * 9229 Sunset Blvd., Suite 830 Los Angeles, CA 90069 Ron Erickson Common Stock 550,000 (8) 1.15% * 9229 Sunset Blvd., Suite 830 Los Angeles, CA 90069 Karin Klemm Common Stock 0 0% 0% 9229 Sunset Blvd., Suite 830 Los Angeles, CA 90069 All Officers and Directors Common Stock 7,042,000 (9) 13.90% 8.22% As a Group (6 persons) RHL Management, Inc. Common Stock 4,955,475 10.48% 6.02% Roxbury Road Los Angeles, CA 90069 Chaim Stern Common Stock 4,500,000 9.52% 5.46% 1880 East 26th Street Brooklyn, NY 11229
(1) Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of February 8, 2005 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. (2) Based upon 47,280,993 shares issued and outstanding on February 8, 2005. (3) Percentage based on 82,349,993 shares of common stock outstanding, assuming all shares being registered in the offering are sold. (4) Includes 1,000,000 shares underlying currently exercisable options. (5) Includes 1,000,000 shares underlying currently exercisable options. 35 (6) Includes 600,000 shares underlying currently exercisable options. (7) Includes 315,000 shares underlying currently exercisable options. (8) Includes 400,000 shares underlying currently exercisable options and 50,000 shares underlying currently exercisable options owned by Alpha Spectrum Investments, LLC, of which Mr. Erickson is deemed a beneficial owner. (9) Includes 3,365,000 shares underlying currently exercisable options. 36 DESCRIPTION OF SECURITIES COMMON STOCK We are authorized to issue up to 100,000,000 shares of common stock, par value $.50. As of February 8, 2005, there were 47,280,993 shares of common stock outstanding. Holders of the common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. Upon the liquidation, dissolution, or winding up of our company, the holders of common stock are entitled to share ratably in all of our assets which are legally available for distribution after payment of all debts and other liabilities and liquidation preference of any outstanding common stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are validly issued, fully paid and nonassessable. We have engaged American Stock Transfer & Trust Company, located in Brooklyn, New York, as independent transfer agent or registrar. PREFERRED STOCK We are authorized to issue up to 10,000,000 shares of Preferred Stock, par value $.001. The 10,000,000 shares of Preferred Stock authorized are undesignated as to preferences, privileges and restrictions. As the shares are issued, the Board of Directors must establish a "series" of the shares to be issued and designate the preferences, privileges and restrictions applicable to that series. To date, the Board has designated a Founders' Series of Convertible Preferred Stock, which, in six months from the date of issuance, shall be convertible at the option of the holder and upon our reaching certain financial objectives, into shares of our restricted Common Stock. Each share, when eligible, is convertible into 25 fully paid and non-assessable shares of our Common Stock, subject to a leak out agreement that extends the Rule 144 period to two years. Holders will be permitted to sell, after a one year holding period through a three year holding period, 1% of the issued and outstanding shares of our common stock every 90 days. This series has been authorized by the Board of Directors. On or about February 1, 2005, the Founders' Series of Preferred Stock was converted into 1,500,000 shares of our common stock. As of February 8, 2005, there were no shares of preferred stock issued and outstanding. OPTIONS There are currently options outstanding that have been issued to our officers and directors to purchase 3,365,000 shares of our common stock pursuant to our Professional/Employee/Consultant Compensation Plan and employment agreements. WARRANTS In connection with the sale of convertible promissory notes in December 2004, we issued 2,930,000 warrants to purchase shares of common stock. The warrants are exercisable until three years from the date of issuance at a purchase price of $0.75 per share. In addition, in connection with a private placement offering in January and February of 2005, we have issued 14,722,000 warrants. The warrants are exercisable until five years from the date of issuance at a purchase price of $0.75 per share. We also have outstanding 285,000 warrants exercisable at $0.10 per share, 5,000 warrants exercisable at $0.20 per share, 1,500,000 warrants exercisable at $0.60 per share, 750,000 warrants exercisable at $0.70 per share and 155,000 warrants exercisable at $0.75 per share. CONVERTIBLE SECURITIES To obtain funding for our ongoing operations, we sold $1,465,000 in convertible promissory notes to 13 investors in December 2004. Each promissory note was automatically convertible into shares of our common stock, at a price of $0.50 per share, upon the closing of a private placement for $1 million or more. On January 28, 2005, we closed upon a private placement transaction in excess of $1 million, and on February 2, 2005, the promissory notes were converted into an aggregate of 2,930,000 shares of common stock. This prospectus includes the resale of the common stock issued upon conversion of the promissory notes. 37 To obtain funding for our ongoing operations, we conducted a private placement offering in January and February 2005, in which we sold $7,361,000 of 10% Secured Convertible Promissory Notes to 61 investors. The 10% Secured Convertible Promissory Notes automatically convert into shares of our common stock, at a price of $0.50 per share, upon the filing of this registration statement. This prospectus includes the resale of the common stock to be issued upon conversion of the 10% Secured Convertible Promissory Notes. INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Our Articles of Incorporation, as amended, provide to the fullest extent permitted by Nevada law, our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended, is to eliminate our rights and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers. In addition, we have entered into indemnification agreements with our officers and directors. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. 38 PLAN OF DISTRIBUTION The selling stockholders and any of their respective pledgees, donees, assignees and other successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares: o ordinary brokerage transactions and transactions in which the broker-dealer solicits the purchaser; o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by the broker-dealer for its account; o an exchange distribution in accordance with the rules of the applicable exchange; o privately-negotiated transactions; o short sales that are not violations of the laws and regulations of any state or the United States; o broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; o through the writing of options on the shares; o a combination of any such methods of sale; and o any other method permitted pursuant to applicable law. The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling stockholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time. The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades. The selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The selling stockholders cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholders. Vertical Capital Partners, Inc., a registered broker-dealer; Michael Morris, Susan Diamond; Ronald Heineman and Michael Gochman; all of whom are employees of Vertical Capital Partners., are an "underwriter" as that term is defined under the Securities Exchange Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the rules and regulations of such acts. Further, the other selling stockholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed to be "underwriters." In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholders, but excluding brokerage commissions or underwriter discounts. The selling stockholders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. No selling stockholder has entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into. 39 The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The selling stockholders and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholders or any other such person. In the event that the selling stockholders are deemed affiliated purchasers or distribution participants within the meaning of Regulation M, then the selling stockholders will not be permitted to engage in short sales of common stock. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In regards to short sells, the selling stockholder can only cover its short position with the securities they receive from us upon conversion. In addition, if such short sale is deemed to be a stabilizing activity, then the selling stockholder will not be permitted to engage in a short sale of our common stock. All of these limitations may affect the marketability of the shares. We have agreed to indemnify the selling stockholders, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities. If the selling stockholders notify us that they have a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholders and the broker-dealer. PENNY STOCK The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: o that a broker or dealer approve a person's account for transactions in penny stocks; and o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must o obtain financial information and investment experience objectives of the person; and o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: o sets forth the basis on which the broker or dealer made the suitability determination; and o that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. 40 SELLING STOCKHOLDERS The table below sets forth information concerning the resale of the shares of common stock by the selling stockholder. We will not receive any proceeds from the resale of the common stock by the selling stockholder. We will receive proceeds from the exercise of the warrants. Assuming all the shares registered below are sold by the selling stockholder, none of the selling stockholder will continue to own any shares of our common stock. The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered. For the table set forth below, the following persons have investment and voting control over the shares owned by the respective entities: -------------------------------------------- -------------------------------- Entity Control Person -------------------------------------------- -------------------------------- -------------------------------------------- -------------------------------- Allied International Fund Rosemarie DePalo -------------------------------------------- -------------------------------- AS Capital Partners Michael Coughlan -------------------------------------------- -------------------------------- Avonwoods Ltd. C. Rand -------------------------------------------- -------------------------------- Basso Private Opportunity Holding Fund Ltd. Howard I. Fischer -------------------------------------------- -------------------------------- Basso Multi-Strategy Holding Fund Ltd. Howard I. Fischer -------------------------------------------- -------------------------------- F Berdon Comp. Frederick Berdon -------------------------------------------- -------------------------------- Beston Worldwide Ltd Michael Ben-Jacob -------------------------------------------- -------------------------------- Blumfield Investments M. Kraus -------------------------------------------- -------------------------------- Brighton Capital Jeffery Wolin -------------------------------------------- -------------------------------- Clear Mountain Holdings Raul Garrido Garibaldo -------------------------------------------- -------------------------------- The Condor Group, LLC Robert Lowinger -------------------------------------------- -------------------------------- Consultants and Advisors NJB, Inc. Gary Schonwald -------------------------------------------- -------------------------------- Cordilliera Funds Stephen J. Carter -------------------------------------------- -------------------------------- DC Capital Craig Kirsch -------------------------------------------- -------------------------------- Double U Master Fund David Sims -------------------------------------------- -------------------------------- Equilibrium Solutions Johnny Vage -------------------------------------------- -------------------------------- First London Finance, Ltd. Moshe Grauman -------------------------------------------- -------------------------------- Galileo Asset Management, SA Marie-Christine Wright, John Sauickie and John Wright -------------------------------------------- -------------------------------- Gemini Master Funds Steve Winters -------------------------------------------- -------------------------------- Global Asset Management Robert Fallah -------------------------------------------- -------------------------------- Goldenberg & Hirsch Properties Leo Hirsch -------------------------------------------- -------------------------------- GSSF Master Fund E.B. Lyon IV -------------------------------------------- -------------------------------- Guerilla IRA L.P. Leigh Curry -------------------------------------------- -------------------------------- Hirsch Family Foundation Leo Hirsch -------------------------------------------- -------------------------------- ID Federman Holdings LTD Iris Federman -------------------------------------------- -------------------------------- 41 -------------------------------------------- -------------------------------- Ivelocity Fund Scott Parent -------------------------------------------- -------------------------------- KA Steel Chemical Kenneth Steel Jr. -------------------------------------------- -------------------------------- Livingston Ventures, LLC Ronald Heineman -------------------------------------------- -------------------------------- Lone Star Equity Mark A. Bogina -------------------------------------------- -------------------------------- Marina Ventures Michael Hartstein -------------------------------------------- -------------------------------- Melton Management Yehuda Breitkops -------------------------------------------- -------------------------------- Odin Partners LP John A. Gibbons -------------------------------------------- -------------------------------- Omega Capital Small Cap Abraham Sylverin -------------------------------------------- -------------------------------- P.R. Diamonds Pinkus Reisz -------------------------------------------- -------------------------------- Provident Master Fund Steven Winters -------------------------------------------- -------------------------------- Rock Capital Partners, LLC Howard Chalfin -------------------------------------------- -------------------------------- Salzwedel Financial Communications, Inc. Jeff Salzwedel -------------------------------------------- -------------------------------- San Rafael Consulting Group, LLC Isabelle H. Wright and John Wright -------------------------------------------- -------------------------------- Rabbi Scheinerman KBY LLC Rabbi Schenerman -------------------------------------------- -------------------------------- Sichenzia Ross Friedman Ference LLP Greg Sichenzia, Marc Ross, Richard Friedman and Michael Ference -------------------------------------------- -------------------------------- Spencer Edwards, Inc. Thomas Kaufman -------------------------------------------- -------------------------------- Starboard Capital Markets, LLC James Dotzman -------------------------------------------- -------------------------------- Steel Harbor Holdings Mark Step -------------------------------------------- -------------------------------- Stonestreet, LP Michael Finkelstein -------------------------------------------- -------------------------------- Vertical Capital Partners, Inc. Robert DePalo -------------------------------------------- -------------------------------- Vestal Venture Capital Allan Lyons -------------------------------------------- -------------------------------- Whalehaven Evan Schemenauer -------------------------------------------- -------------------------------- Wolfson Trust Franchesca Wolfson -------------------------------------------- -------------------------------- 42
Beneficial Ownership Beneficial Ownership Prior to Offering (1) After Offering (1) Name of Selling Security Holder Shares Percentage (2) Shares Offered Shares Percentage (2) - ----------------------------------------------------------------------------------------------------------------------------------- Allied International Fund 1,237,500 2.62% 1,237,500 0 * AS Capital Partners 100,000 * 100,000 (3) 0 * Avonwoods Ltd. 800,000 1.68% 800,000 (3) 0 * Evan B. Azriliant 100,000 * 100,000 (3) 0 * Mordechai Bank 200,000 * 200,000 (3) 0 * Judith Barclay 400,000 * 400,000 (3) 0 * Jack Basch 600,000 1.26% 600,000 (3) 0 * Basso Private Opportunity Holding Fund Ltd. 630,000 1.32% 630,000 (3) 0 * Basso Multi-Strategy Holding Fund Ltd. 2,370,000 4.89% 2,370,000 (3) 0 * Lon E Bell 60,000 * 60,000 (4) 0 * F Berdon Comp. 200,000 * 200,000 (3) 0 * Beston Worldwide Ltd 67,500 * 67,500 (4) 0 * Robert R. Blakely 33,334 * 33,334 0 * Blumfield Investments 400,000 * 400,000 (3) 0 * Doug Bowen 138,750 * 138,750 (5) 0 * Brighton Capital 46,750 * 46,750 0 * Salvatore Cantatore 112,500 * 112,500 (6) 0 * Jaime Cardona 100,000 * 100,000 0 * Andrea Cataneo 250,000 * 250,000 0 * Notzer Chesed 400,000 * 400,000 (3) 0 * Clear Mountain Holdings 300,000 * 300,000 (3) 0 * David Cohen 200,000 * 200,000 (3) 0 * The Condor Group, LLC 8,250 * 8,250 0 * Consultant and Advisors NJB, Inc. 145,000 * 145,000 0 * Cordilliera Funds 1,000,000 2.09% 1,000,000 (3) 0 * Adrian Davidescu 400,000 * 400,000 (3) 0 * Jacob and Linda Davidowitz JTWROS 800,000 1.68% 800,000 (3) 0 * DC Capital 60,000 * 60,000 (4) 0 * David and Jeanette Defoto JTWROS 200,000 * 200,000 (3) 0 * Robert DePalo Jr. 20,000 * 20,000 0 * Susan Diamond 5,000 * 5,000 0 * Joseph Digiacamo 50,000 * 50,000 (3) 0 * Double U Master Fund 800,000 1.68% 800,000 (3) 0 * Richard Durkee 27,000 * 27,000 0 * Asher Avishay Ephrathi 1,040,230 2.19% 1,040,230 (7) 0 * Equilibrium Solutions 100,000 * 100,000 (3) 0 * Douglas Falkner 120,000 * 120,000 0 * Jeanine Fehn 240,000 * 240,000 (3) 0 * First London Finance, Ltd. 1,250,000 2.64% 1,250,000 0 * Frederick Frank 110,000 * 110,000 (8) 0 * Galileo Asset Management, SA 157,000 * 157,000 0 * Charles Gargano 62,500 * 62,500 (7) 0 * Gemini Master Funds 200,000 * 200,000 (3) 0 * Nicholas Giustino 133,750 * 133,750 (8) 0 * 43 Michael Glazer 16,875 * 16,875 (10) 0 * Global Asset Management 1,257,500 2.66% 1,257,500 0 * Michael Gochman 36,750 * 36,750 0 * Rochelle Gold 600,000 1.26% 600,000 (3) 0 * Harold Goldenberg 400,000 * 400,000 (3) 0 * Goldenberg & Hirsch Properties 400,000 * 400,000 (3) 0 * Mary Anne Gray 60,000 * 60,000 (11) 0 * Scott R. Griffith 33,333 * 33,333 0 * Eugene Gross 400,000 * 400,000 (3) 0 * Wayne Grubb 67,500 * 67,500 (4) 0 * GSSF Master Fund 1,000,000 2.09% 1,000,000 (3) 0 * Guerilla IRA L.P. 115,000 * 115,000 (4) 0 * Paul Reyes-Guerra 31,250 * 31,250 (12) 0 * Michael Hamblett 84,060 * 84,060 0 * Ronald Heineman 22,000 * 22,000 0 * Joseph Henn 15,000 * 15,000 (10) 0 * Hirsch Family Foundation 160,000 * 160,000 (3) 0 * Leo Hirsch 240,000 * 240,000 (3) 0 * ID Federman Holdings LTD 600,000 1.26% 600,000 (3) 0 * Joseph Iorio 100,000 * 100,000 (3) 0 * Thomas Iovino 200,000 * 200,000 (3) 0 * Ivelocity Fund 135,000 * 135,000 (13) 0 * William L. Jiler 16,875 * 16,875 (9) 0 * KA Steel Chemical 33,750 * 33,750 (13) 0 * Ahmed Kareem 10,500 * 10,500 0 * Jeffery Kessler 33,750 * 33,750 (14) 0 * Tibor Klein 720,000 1.51% 720,000 (3) 0 * Yisreal Klein 200,000 * 200,000 (3) 0 * Yossi Kraus 100,000 * 100,000 (3) 0 * Alexander J. Lapatka 67,500 * 67,500 (4) 0 * Livingston Ventures, LLC 170,000 * 170,000 0 * Lone Star Equity 400,000 * 400,000 (3) 0 * Jason Lyons 57,000 * 57,000 0 * Michael Mangan 100,000 * 100,000 (3) 0 * Tony Manual 200,000 * 200,000 (3) 0 * Marina Ventures 195,000 * 195,000 0 * Paul Masters IRA 200,000 * 200,000 (3) 0 * Melton Management 400,000 * 400,000 (3) 0 * Linda Michaels 250,000 * 250,000 0 * Raymond Mikulich 335,000 * 335,000 (15) 0 * Kyle Morgan 200,000 * 200,000 (3) 0 * Michael Morris 75,000 * 75,000 0 * Houston Muthart 267,500 * 267,500 (16) 0 * Richard Neslund 1,000,000 2.09% 1,000,000 (3) 0 * Michael Nizza 50,000 * 50,000 (3) 0 * Marvin Numeroff 267,500 * 267,500 (16) 0 * Odin Partners LP 67,500 * 67,500 (4) 0 * Eric Okamoto 493,880 * 493,880 (17) 0 * Omega Capital Small Cap 1,200,000 2.51% 1,200,000 (3) 0 * Eileen Patterson 38,750 * 38,750 (18) 0 * Platinum Partners 400,000 * 400,000 (3) 0 * P.R. Diamonds 240,000 * 240,000 (3) 0 * Joseph Prezioso 400,000 * 400,000 (3) 0 * Arthur Priver 228,750 * 228,750 (18) 0 * Provident Master Fund 1,200,000 2.51% 1,200,000 (3) 0 * Robert & Claudia Quinn JTWROS 28,750 * 28,750 (9) 0 * Avindam Rapaport 100,000 * 100,000 (3) 0 * Kenneth Reichelle 116,875 * 116,875 (19) 0 * Rock Capital Partners, LLC 600,000 1.26% 600,000 (3) 0 * 44 Joseph Rozehzadeh 400,000 * 400,000 (3) 0 * Edward M Rotter 3,320,000 6.78% 3,320,000 (20) 0 * Angela Chen Sabella 120,000 * 120,000 (21) 0 * Salzwedel Financial Communications, Inc. 365,000 * 365,000 0 * San Rafael Consulting Group, LLC 67,236 * 67,236 0 * Frederick Sandvick 200,000 * 200,000 (3) 0 * Rabbi Scheinerman KBY LLC 100,000 * 100,000 (3) 0 * Joel Schindler 100,000 * 100,000 (3) 0 * Shatashvili Sharona 200,000 * 200,000 (3) 0 * Jesse B. Shelmire IV 33,333 * 33,333 0 * Sichenzia Ross Friedman Ference LLP 112,000 * 112,000 0 * Jerry Silva 1,000,000 2.09% 1,000,000 (3) 0 * Jerry and Esther Soloman JTWROS 800,000 1.68% 800,000 (3) 0 * Anthony Spatacco 42,030 * 42,030 0 * Spencer Edwards, Inc. 8,000 * 8,00 0 * Starboard Capital Markets, LLC 42,030 * 42,030 0 * Steel Harbor Holdings 170,000 * 170,000 0 * Kenneth Steel Jr. 33,750 * 33,750 (13) 0 * Chaim Stern 3,000,000 6.15% 3,000,000 (3) 0 * Alexander Stolin 200,000 * 200,000 (3) 0 * Stonestreet, LP 600,000 1.25% 600,000 (22) 0 * Richard Swier Jr. 60,000 * 60,000 (3) 0 * Stewart Taylor 33,750 * 33,750 (13) 0 * Marcovich Tibo 100,000 * 100,000 (3) 0 * Doron Rafael Toledano 56,735 * 56,735 0 * Ester Tuman 67,500 * 67,500 (4) 0 * Alex Verjovski 200,000 * 200,000 (3) 0 * Vertical Capital Partners, Inc. 165,750 * 165,750 0 * Vestal Venture Capital 67,500 * 67,500 (4) 0 * Sem Victori 240,000 * 240,000 (3) 0 * Whalehaven 1,150,000 2.40% 1,150,000 (23) 0 * Phil Westridge 33,750 * 33,750 (15) 0 * Peter Wieser 200,000 * 200,000 (3) 0 * Wolfson Trust 16,875 * 16,875 (11) 0 * Franchesca Wolfson 16,875 * 16,875 (11) 0 * Eric Yaoz 320,000 * 320,000 (3) 0 * Harry/Temy/Ark Zelcer 200,000 * 200,000 (3) 0 *
* Less than 1% (1) Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of February 8, 2005 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. (2) Percentage prior to offering is based on 47,280,993 shares of common stock outstanding; percentage after offering is based on 82,349,993 shares of common stock outstanding, which assumes that all shares registered in the offering will be sold. (3) Of which 50% of such number of shares are issuable upon exercise of currently exercisable warrants. (4) Includes 60,000 shares of common stock underlying warrants. (5) Includes 85,000 shares of common stock underlying warrants. (6) Includes 90,000 shares of common stock underlying warrants. (7) Includes 115,000 shares of common stock underlying warrants. (8) Includes 55,000 shares of common stock underlying warrants. 45 (9) Includes 80,000 shares of common stock underlying warrants. (10) Includes 15,000 shares of common stock underlying warrants. (11) Includes 52,500 shares of common stock underlying warrants. (12) Includes 27,500 shares of common stock underlying warrants. (13) Includes 120,000 shares of common stock underlying warrants. (14) Includes 30,000 shares of common stock underlying warrants. (15) Includes 220,000 shares of common stock underlying warrants. (16) Includes 160,000 shares of common stock underlying warrants. (17) Includes 232,000 shares of common stock underlying warrants. (18) Includes 35,000 shares of common stock underlying warrants. (19) Includes 65,000 shares of common stock underlying warrants. (20) Includes 1,720,000 shares of common stock underlying warrants. (21) Includes 120,000 shares of common stock underlying warrants. (22) Includes 600,000 shares of common stock underlying warrants. (23) Includes 650,000 shares of common stock underlying warrants. LEGAL MATTERS Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion with respect to the validity of the shares of common stock being offered hereby. Sichenzia Ross Friedman Ference LLP is also the owner of 112,000 shares of our common stock, which are included in this registration statement. Andrea Cataneo, a partner of Sichenzia Ross Friedman Ference LLP is the owner of 250,000 shares of our common stock, which are included in this registration statement. EXPERTS Russell Bedford Stefanou Mirchandani LLP, independent registered public accounting firm, have audited, as set forth in their report thereon appearing elsewhere herein, our financial statements at September 30, 2004 and 2003 and for the years then ended that appear in the prospectus. The financial statements referred to above are included in this prospectus with reliance upon the independent registered public accounting firm's opinion based on their expertise in accounting and auditing. AVAILABLE INFORMATION We have filed a registration statement on Form SB-2 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of Applied DNA Sciences, Inc., filed as part of the registration statement, and it does not contain all information in the registration statement, as certain portions have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission. We are subject to the informational requirements of the Securities Exchange Act of 1934 which requires us to file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC's Internet website at http://www.sec.gov. 46 INDEX TO FINANCIAL STATEMENTS APPLIED DNA SCIENCES, INC. INDEX TO FINANCIAL STATEMENTS
For the Years Ended September 30, 2004 and September 30, 2003 Report of Independent Registered Public Accounting Firm......................... F-1 Consolidated Balance Sheet...................................................... F-2 Consolidated Statement of Losses for the year ended September 30, 2004 and 2003 and the period September 16, 2002 (date of inception) to September 30, 2004.............................. F-3 Consolidated Statement of Deficiency in Stockholders' Equity for the period September 16, 2002 (date of inception) to September 30, 2004..................................................... F-4 to F-11 Consolidated Statements of Cash Flows for the year ended September 30, 2004 and 2003, and the period September 16, 2002 (date of inception) to September 30, 2004........... F-12 Notes to Consolidated Financial Statements...................................... F-13 to F-34 For the Three Months Ended December 31, 2004 and December 31, 2003 Condensed Balance Sheets December 31, 2004 (Unaudited) and December 31, 2003.................................................. F-35 Condensed Statements of Operations for the three months ended December 31, 2004 and 2003 (Unaudited)................................. F-36 Condensed Statements of Deficiency in Stockholders' Equity for the date of inception through December 31, 2004 (Unaudited)........ F-37 to F-46 Condensed Statements of Cash Flows For the three months ended December 31, 2004 and 2003 (Unaudited)........................... F-47 Notes to the Condensed Financial Statements (Unaudited)......................... F-48 to F-65
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP CERTIFIED PUBLIC ACCOUNTANTS REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Applied DNA Sciences, Inc. Los Angeles, California We have audited the accompanying consolidated balance sheets of Applied DNA Sciences, Inc. (a development stage company) as of September 30, 2004 and the related consolidated statements of losses, deficiency in stockholders' equity, and cash flows for the years ended September 30, 2004 and 2003 and the period September 16, 2002 (date of inception) through September 30, 2004. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on the financial statements based upon our audits. We have conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (PCAOB) (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Applied DNA Sciences , Inc. (a development stage company) at September 30, 2004 and the results of its operations and its cash flows for the years ended September 30, 2004 and 2003, and the period September 16, 2002 (date of inception) through September 30, 2004 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in the Note K to the accompanying financial statements, the Company is in the development stage and has not established a source of revenues. This raises substantial doubt about the company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ RUSSELL BEDFORD Stefanou MIRCHANDANI LLP -------------------------------------------- Russell Bedford Stefanou Mirchandani LLP Certified Public Accountants McLean, Virginia January 11, 2005 F-1 APPLIED DNA SCIENCES , INC (A development stage company) CONSOLIDATED BALANCE SHEET
September 30, 2004 ASSETS Current Assets: Cash $ 1,832 ------------ Total Current Assets 1,832 Property, Plant and Equipment (Note A) 29,507 Less: accumulated depreciation (1,405) ------------ Total Property, Plant and Equipment 28,102 Other Assets: Deposits 23,559 Intangible assets (net of accumulated amortization of $1,756) (Note A) 28,154 ------------ Total Other Assets 51,713 $ 81,647 ============ LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued liabilities $ 1,770,379 Accrued expenses - related parties (Note D) 117,333 Convertible notes payables (Note F) 1,625,000 Due to related parties (Note D) 111,943 Note payable -related parties (Note C) 1,163,500 ============ Total Current Liabilities 4,788,155 ============ Commitments and contingencies (Note J) DEFICIENCY IN STOCKHOLDERS' EQUITY: (Note E) Convertible Preferred Stock, par value $0.001 per share; 10,000,000 shares authorized; 60,000 shares issued and outstanding at September 30, 2004 6 Common Stock, par value $0.50 per share; 100,000,000 authorized; 23,981,054 shares issued and outstanding at September 30, 2004 11,990,527 Additional paid in capital 6,118,993 ============ Common stock subscribed (1,000) Deficit accumulated during development stage (22,815,034) ============ Total deficiency in stockholders' equity (4,706,508) $ 81,647 ------------ See accompanying notes to consolidated financial statements
F-2 APPLIED DNA SCIENCES , INC. ( A development stage company) CONSOLIDATED STATEMENT OF LOSSES
For the Period September 16, 2002 For the Year Ended For the YearEnded (Date Of Inception) September 30, September 30, through September 30, 2004 2003 2004 --------------- -------------- ---------------------- Operating expenses: General and administrative $ 17,580,098 $ 3,468,363 $ 21,060,073 --------------- -------------- ---------------------- Depreciation and Amortization 3,161 - 3,161 --------------- -------------- ---------------------- Total expenses 17,583,259 3,468,363 21,063,234 --------------- -------------- ---------------------- Loss from operations (17,583,259) (3,468,363) (21,063,234) --------------- -------------- ---------------------- Other income(expense) 1,385 25,000 26,385 Interest (expense) (1,776,385) (1,801) (1,778,186) Income (taxes) benefit - - - --------------- -------------- ---------------------- Net loss $ (19,358,259) $ (3,445,164) $ (22,815,035) =============== ============== ====================== Basic and diluted loss per common share (Note H) $ (0.93) $ (0.27) n/a =============== ============== ====================== Weighted average common shares outstanding 20,819,700 12,955,358 n/a --------------- -------------- ----------------------
See accompanying notes to consolidated financial statements F-3 APPLIED DNA SCIENCES, INC (A development stage company) CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH SEPTEMBER 30, 2004
Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total -------- -------- -------- --------- -------- ------------ ---------- ---------- ----------- Issuance of common stock to Founders in exchange for services on September 16, 2002 at $.01 per share - $ - 100,000 $ 10 $ 990 - $ - $ - $ 1,000 Net Loss - - - - - - - (11,612) (11,612) -------- -------- -------- --------- -------- ------------ ---------- ---------- ----------- Balance at September 30, 2002 - - 100,000 10 990 - - (11,612) (10,612) Issuance of common stock in connection with merger with Prohealth Medical Technologies , Inc on October 1, 2002 - - 10,178,352 1,018 - - - - 1,000 Cancellation of Common stock in connection with merger with Prohealth Medical Technologies , Inc on October 21, 2002 - - (100,000) 10 (1,000) - - - (1,000) Issuance of common stock in exchange for services in October 2002 at $ 0.65 per share - - 602,000 60 39,070 - - - 39,130 Issuance of common stock in exchange for subscription in November and December 2002 at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - - Cancellation of common stock in January 2003 previously issued in exchange for consulting services - - (836,000) (84) (54,264) - 54,340 - - Issuance of common stock in exchange for licensing services valued at $ 0.065 per share in January 2003 - - 1,500,000 150 97,350 - - - 97,500 Issuance of common stock in exchange for consulting services valued at $ 0.13 per share in January 2003 - - 586,250 58 76,155 - - - 76,213 Issuance of common stock in exchange for consulting services at $ 0.065 per share in February 2003 - - 9,000 1 584 - - - 585 Issuance of common stock to Founders 1in exchange for services valued at $0.0001 per share in March 2003 - - 10,140,000 1,014 - - - - 1,014 Issuance of common stock in exchange for consulting services valued at $2.50 per share in March 2003 - - 91,060 9 230,625 - - - 230,634 See accompanying notes to consolidated financial statements
F-4 APPLIED DNA SCIENCES, INC (A development stage company) CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH SEPTEMBER 30, 2004 (Continued)
Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- -------- ---------- ---------- ------- -------- Issuance of common stock in exchange for consulting services valued at $ 0.065 per share in March 2003 - - 6,000 1 389 - - - 390 Common stock subscribed in exchange for cash at $1 per share in March 2003 - - - - 18,000 - - - 18,000 Common stock issued in exchange for consulting services at $ 0.065 per share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900 Common stock issued in exchange for cash at $ 1.00 per share on April 9, 2003 - - 18,000 2 - - - - 2 Common stock issued in exchange for consulting services at $ 0.065 per share on April 9, 2003 - - 9,000 1 584 - - - 585 Common stock issued in exchange for consulting services at $ 2.50 per share on April 23, 2003 - - 5,000 1 12,499 - - - 12,500 Common stock issued in exchange for consulting services at $ 2.50 per share, on June 12, 2003 - - 10,000 1 24,999 - - - 25,000 Common stock issued in exchange for cash at $ 1.00 per share on June 17, 2003 - - 50,000 5 49,995 - - - 50,000 Common stock subscribed in exchange for cash at $ 2.50 per share pursuant to private placement on June 27, 2003 - - - - - - 24,000 - 24,000 Common stock retired in exchange for note payable at $0.0118 per share, on June 30, 2003 - - (7,500,000) (750) 750 - - - - Common stock issued in exchange for consulting services at $0.065 per share, on June 30, 2003 - - 270,000 27 17,523 - - - 17,550 Common stock subscribed in exchange for cash at $ 1.00 per share pursuant to private placement on June 30, 2003 - - - - - 10,000 - - 10,000 Common stock subscribed in exchange for cash at $ 2.50 per share pursuant to private placement on June 30, 2003 - - - - - 24,000 - - 24,000 Common stock issued in exchange for consulting services at approximately $2.01 per share, July 2003 - - 213,060 21 428,797 - - - 428,818 See accompanying notes to consolidated financial statements
F-5 APPLIED DNA SCIENCES, INC (A development stage company) CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH SEPTEMBER 30, 2004 (Continued)
Deficit Additional Accumulated Preferred Common Paid in Common Stock During Preferred Shares Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- -------- ---------- ---------- ------- -------- Common stock canceled in July 2003, previously issued for services rendered at $2.50 per share - - (24,000) (2) (59,998) - - - (60,000) Common stock issued in exchange for options exercised at $1.00 in July 2003 - - 20,000 2 19,998 - - - 20,000 Common stock issued in exchange for exercised of options previously subscribed at $1.00 in July 2003 - - 10,000 1 9,999 (10,000) - - - Common stock issued in exchange for consulting services at approximately $2.38 per share, August 2003 - - 172,500 17 410,913 - - - 410,931 Common stock issued in exchange for options exercised at $1.00 in August 2003 - - 29,000 3 28,997 - - - 29,000 Common stock issued in exchange for consulting services at approximately $2.42 per share, September 2003 - - 395,260 40 952,957 - - - 952,997 Common stock issued in exchange for cash at $2.50 per share-subscription payable-September 2003 - - 19,200 2 47,998 (48,000) - - - Common stock issued in exchange for cash at $2.50 per share pursuant to private placement September 2003 - - 6,400 1 15,999 - - - 16,000 Common stock issued in exchange for options exercised at $1.00 in September 2003 - - 95,000 10 94,991 - - - 95,000 Common stock subscription receivable reclassification adjustment Common Stock subscribed to at $2.50 per share in September 2003 - - - - 2,600 - 2,600 Net Loss for the year ended September 30, 200 - - - 300,000 - - 300,000 Balance at September 30, 2003 - - - - - - - (3,445,164) (3,445,164) -------- -------- ----------- -------- ----------- --------- --------- ------------- ----------- - $ - 17,811,082 $ 1,781 $2,577,568 $300,000 $ - $(3,456,776) $(577,427) ======== ======== =========== ======== =========== ========= ========= ============= ============
See accompanying notes to consolidated financial statements F-6 APPLIED DNA SCIENCES, INC (A development stage company) CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH SEPTEMBER 30, 2004 (Continued)
Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Preferred shares issues in exchange for services at $25.00 per share, October 2003 1500 15 15 Common stock issued in exchange for consulting services at approximately $2.85 per share, October 2003 287,439 29 820,389 - - - 820,418 Common stock issued in exchange for cash at $2.50 per share-subscription payable-October 2003 120,000 12 299,988 (300,000) - - - Common stock canceled in October 2003, previously issued for services rendered at $2.50 per share (100,000) (10) (249,990) - - - (250,000) Common stock issued in exchange for consulting services at approximately $3 per share, November 2003 100,000 10 299,990 - - - 300,000 Common stock subscribed in exchange for cash at $2.50 per share pursuant to private placement, November, 2003 100,000 10 249,990 - - - 250,000 Common stock subscribed in exchange for cash at $2.50 per share pursuant to private placement, December, 2003 6,400 1 15,999 - - - 16,000 Common stock issued in exchange for consulting services at approximately $2.59 per share, December 2003 2,125,500 213 5,504,737 - - - 5,504,950 Common Stock subscribed to at $2.50 per share in December 2003 - - - 104,000 - - 104,000 Beneficial conversion feature relating to notes payable - - 1,168,474 - - - 1,168,474 Beneficial conversion feature relating to warrants - - 206,526 - - - 206,526 Adjust common stock par value from $0.0001 to $0.50 per share, per amendment of articles dated Dec 2003 - 10,223,166 (10,223,166) - - - - Common Stock issued pursuant to subscription at $2.50 share in Jan 2004 41,600 20,800 83,200 (104,000) - - - Common stock issued in exchange for consulting services at $2.95 per share, Jan 2004 13,040 6,520 31,948 - - - 38,468 Common stock issued in exchange for consulting services at $2.60 per share, Jan 2004 123,000 61,500 258,300 - - - 319,800 Common stock issued in exchange for consulting services at $3.05 per share, Jan 2004 1,000 500 2,550 - - - 3,050 See accompanying notes to consolidated financial statements
F-7 APPLIED DNA SCIENCES, INC (A development stage company) CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH SEPTEMBER 30, 2004 (Continued) Deficit
Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Common stock issued in exchange for employee services at $3.07 per share, Feb 2004 6,283 3,142 16,147 - - - 19,288 Common stock issued in exchange for consulting services at $3.04 per share, Mar 2004 44,740 22,370 113,640 - - - 136,010 Common Stock issued for options exercised at $1.00 per share in Mar 2004 55,000 27,500 27,500 - - - 55,000 Common stock issued in exchange for employee services at $3.00 per share, Mar 2004 5,443 2,722 13,623 - - - 16,344 See accompanying notes to consolidated financial statements F-8 APPLIED DNA SCIENCES, INC (A development stage company) CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH SEPTEMBER 30, 2004 (Continued) Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Common stock issued in exchange for employee services at $3.15 per share, Mar 2004 5,769 2,885 15,293 - - - 18,177 Preferred shared converted to common shares for consulting services at $3.00per share, Mar 2004 5000 5 125,000 62,500 312,500 - - - 374,995 Common stock issued in exchange for employee services at $3.03 per share, Mar 2004 8,806 4,403 22,236 - - - 26,639 Common Stock issued pursuant to subscription at $2.50 per share in Mar. 2004 22,500 11,250 (9,000) - - - 2,250 Beneficial Conversion Feature relating to Notes Payable - - 122,362 - - - 122,362 Beneficial Conversion Feature relating to Warrants - - 177,638 - - - 177,638 Common stock issued in exchange for consulting services at $2.58 per share, Apr 2004 9,860 4,930 20,511 - - - 25,441 Common stock issued in exchange for consulting services at $2.35 per share, Apr 2004 11,712 5,856 21,667 - - - 27,523 Common stock issued in exchange for consulting services at $1.50 per share, Apr 2004 367,500 183,750 367,500 - - - 551,250 Common stock returned to treasury at $0.065 per share, Apr 2004 (50,000) (25,000) 21,750 - - - (3,250) Preferred stock converted to common stock for consulting services at $1.01 per share in May 2004 4000 4 100,000 50,000 51,250 - - - 101,246 Common stock issued per subscription May 2004 10,000 5,000 (4,000) - (1,000) - - Common stock issued in exchange for consulting services at $0.86 per share in May 2004 137,000 68,500 50,913 - - - 119,413 Common stock issued in exchange for consulting services at $1.15 per share in May 2004 26,380 13,190 17,147 - - - 30,337 Common stock returned to treasury at $0.065 per share, Jun 2004 (5,000) (2,500) 2,175 - - - (325) See accompanying notes to consolidated financial statements F-9 APPLIED DNA SCIENCES, INC (A development stage company) CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH SEPTEMBER 30, 2004 (Continued) Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Common stock issued in exchange for consulting services at $0.67 per share in June 2004 270,500 135,250 45,310 - - - 180,560 Common stock issued in exchange for consulting services at $0.89 per share in June 2004 8,000 4,000 3,120 - - - 7,120 Common stock issued in exchange for consulting services at $0.65 per share in June 2004 50,000 25,000 7,250 - - - 32,250 Common stock issued pursuant to private placement at $1.00 per share in June 2004 250,000 125,000 125,000 - - - 250,000 Common stock issued in exchange for consulting services at $0.54 per share in July 2004 100,000 50,000 4,000 - - - 54,000 Common stock issued in exchange for consulting services at $0.72 per share in July 2004 5,000 2,500 1,100 - - - 3,600 Common stock issued in exchange for consulting services at $0.47 per share in July 2004 100,000 50,000 (2,749) - - - 47,251 Common stock issued in exchange for consulting services at $0.39 per share in August 2004 100,000 50,000 (11,000) - - - 39,500 Preferred stock converted to common stock for consulting services at $0.39 per share in August 2004 (2000) (2) 50,000 25,000 (5,500) - - - 19,498 See accompanying notes to consolidated financial statements F-10 APPLIED DNA SCIENCES, INC (A development stage company) CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH SEPTEMBER 30, 2004 (Continued) Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Common stock issued in exchange for consulting services at $0.50 per share in August 2004 100,000 50,000 250 50,250 Common stock issued in exchange for consulting services at $0.56 per share in August 2004 200,000 100,000 12,500 - - - 112,500 Common stock issued in exchange for consulting services at $0.41 per share in August 2004 92,500 46,250 (8,787) - - - 37,463 Common stock issued in exchange for consulting services at $0.52 per share in September 2004 1,000,000 500,000 17,500 - - - 517,500 Common stock issued in exchange for consulting services at $0.46 per share in September 2004 5,000 2,500 (212) - - - 2,288 Common stock issued pursuant to subscription at $0.50 per share in September 2004 40,000 20,000 - - - - 20,000 Preferred shares converted to common stock for consulting services at $0.41 per share in September 2004 (4000) (4) 100,000 50,000 4,000 - - - 53,996 Preferred shares issued in exchange for service at $25 per share in September 2004 60,000 6 1,499,994 1,500,000 Warrants issued to consultants in the fourth quarter 2004 2,019,862 2,019,862 Net Loss - - - - - (19,358,259) (19,358,259) Balance at September 30, 2004 60,000 $6 23,981,054 11,990,527 6,118,993 - (1,000) (22,815,034) (4,706,508) ====== == ========== ========== ========= ======== ======= ============ ===========
F-11 APPLIED DNA SCIENCES, INC. (A Development Stage Company) CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period September 16, 2002 For the Year Ended For the Year Ended (Date of Inception) September 30, September 30, through September 2004 2003 30, 2004 ------------- ------------- ------------- Cash Flows from operating activities: Net loss from operating activities $ (19,358,259) $(3,445,164) $(22,815,034) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation and amortization 3,161 - 3,161 Organizational expenses - 88,500 88,500 Preferred shares issued in exchange for service at $25 per share in September 2004 1,500,000 - 1,500,000 Warrants issued to consultants in the fourth quarter 2004 2,019,862 - 2,019,862 Amortization of beneficial conversion feature 1,625,000 - 1,625,000 Common stock issued in exchange for consultant services rendered 10,105,382 2,292,350 12,397,732 Common stock canceled-previously issued for services rendered (285,575) - (285,575) Changes in assets and liabilities: Prepaid Expenses and Deposits - - - Increase in-Other Assets - (13,890) (13,890) Increase (decrease) in: - Increase in due related parties 20,000 132,696 152,696 Accounts payable and accrued liabilities 1,301,560 454,000 1,755,560 Net cash (used in) operating activities (3,068,719) (491,509) (3,571,838) Cash flows from investing activities: Payments for Patent Filing (21,351) - (21,351) Payments for security deposits (23,559) - (23,559) Capital expenditures (29,507) - (29,507) Net cash (used in) investing activities (74,417) - (74,417) Cash flows from financing activities: Proceeds from sale of common stock, net of cost - 432,000 432,000 Proceeds from subscription of common stock 124,000 - 125,000 Proceeds from sale of options 87,000 154,000 241,000 Net advances from shareholders (9,504) 98,980 100,088 Proceeds from loans 2,750,000 - 2,750,000 ------------- ------------- ------------- Net cash provided by financing activities 2,951,496 684,980 3,648,088 Increase (decrease) in cash and cash equivalents (191,640) 193,471 1,832 Cash and cash equivalents, beginning of year 193,471 - - Cash and cash equivalents, end of year $ 1,832 $ 193,471 $ 1,832 ============== ============ ============= Supplemental Information: Cash paid during the period for interest $ - $ - $ - Cash paid during the year for taxes - - - Non cash disclosures: Common stock issued for services $ 10,105,382 $ 2,292,350 $ 12,398,732 Amortization of beneficial conversion feature $ 1,625,000 $ - $ 1,625,000 Common stock canceled-previously issued for services rendered $ (285,575) $ - $ (285,575) Preferred shares issued in exchange for service at $25 per share in September 2004 1,500,000 - 1,500,000 -------------- ------------- ------------- Warrants issued to consultants in the fourth quarter 2004 2,019,862 - 2,019,862 -------------- ------------- ------------- Acquisition: Common stock retained $ - $ 1,015 $ 1,015 Assets acquired $ - $ (135) $ (135) -------------- ------------- ------------- Total consideration paid $ - $ 880 $ 880 -------------- ------------- ------------- Organization expenses- note issued in exchange of shares retired $ - $ 88,500 $ 88,500
See accompanying notes to consolidated financial statements F-12 APPLIED DNA SCIENCES, Inc. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE A - SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows. Business and Basis of Presentation On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was incorporated under the laws of the State of Nevada. The Company is in the development stage , as defined by Statement of Financial Accounting Standards No. 7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA embedded biotechnology security solutions in the United States. To date, the Company has generated nominal sales revenues, has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from inception through September 30, 2004, the Company has accumulated losses of $22,815,034. Estimates The preparation of the financial statement in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Revenue Recognition The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized :(1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. On December 17, 2003, the SEC staff released Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. The staff updated and revised the existing revenue recognition in Topic 13, Revenue Recognition, to make its interpretive guidance consistent with current accounting guidance, principally EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." Also, SAB 104 incorporates portions of the Revenue Recognition in Financial Statements - Frequently Asked Questions and Answers document that the SEC staff considered relevant and rescinds the remainder. The company's revenue recognition policies are consistent with this guidance; therefore, this guidance will not have an immediate impact on the company's consolidated financial statements. Cash Equivalents For the purpose of the accompanying financial statements, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents. Income Taxes The Company has adopted Financial Accounting Standard No. 109 (SFAS 109) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. F-13 APPLIED DNA SCIENCES , Inc. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) Property and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives of 3 to 5 years using the straight line method. At September 30, 2004 property and equipment consist of: September 30, 2004 ------------------ Furniture $ 29,507 Accumulated depreciation 1,405 ================== Net $ 28,102 Impairment of Long-Lived Assets The Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS 144). The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undercounted cash flows. Should an impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. SFAS No. 144 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell. Comprehensive Income The Company does not have any items of comprehensive income in any of the periods presented. Segment Information The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. The information disclosed herein, materially represents all of the financial information related to the Company's principal operating segment. Net Loss Per Share The Company has adopted Statement of Financial Accounting Standard No. 128, "Earnings Per Share," specifying the computation, presentation and disclosure requirements of earnings per share information. Basic earnings per share has been calculated based upon the weighted average number of common shares outstanding. Stock options and warrants have been excluded as common stock equivalents in the diluted earnings per share because they are either antidilutive, or their effect is not material. F-14 APPLIED DNA SCIENCES , Inc. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) Stock Based Compensation In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the exercise price of the related option. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended September 30, 2004 and for the subsequent periods. Had compensation costs for the Company's stock options been determined based on the fair value at the grant dates for the awards, the Company's net loss and losses per share would have been as follows (transactions involving stock options issued to employees and Black-Scholes model assumptions are presented in Note E):
For the Year Ended For the Year Ended September 30,2004 September 30, 2003 ------------------ ------------------- Net loss - as reported $ (19,358,259) $ (3,445,164) Add: Total stock based employee compensation - - expense as reported under intrinsic value method (APB. No. 25) Deduct: Total stock based employee compensation expense as reported under fair value based method (SFAS No. 123) - - ------------------ ------------------- Net loss - Pro Forma $ (19,358,259) $ (3,445,164) Net loss attributable to common stockholders - Pro forma $ (19,358,259) $ (3,445,164) Basic (and assuming dilution) loss per share - as reported $ (0.93) $ (0.27) Basic (and assuming dilution) loss per share - Pro forma $ (0.93) $ (0.27) F-15
APPLIED DNA SCIENCES , Inc. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) Liquidity As shown in the accompanying financial statements, the Company incurred a net loss of $22,815,034. during the period September 16, 2002 (date of inception) through September 30, 2004. The Company's current liabilities assets exceeded its current assets by $4,786,323 as of September 30, 2004. Concentrations of Credit Risk Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. Research and Development The Company accounts for research and development costs in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs. Under SFAS 2, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company did not incur any research and development expenses from September 16, 2002 (date of inception) through September 30, 2004. Advertising The Company will follow a policy of charging the costs of advertising to expenses incurred. The Company incurred advertising costs of $125,758 and $0, respectively during the years ended September 30, 2004 and 2003, respectively. Reclassifications Certain reclassifications have been made in prior year's financial statements to conform to classifications used in the current year. F-16 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) Intangible Assets Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from one to ten years. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that an impairment exists. All of our intangible assets are subject to amortization. At September 30, 2004, intangible assets consist of: September 30, 2004 Intangible assets $ 29,910 Accumulated amortization (1,756) ----------- Net Intangible Assets $ 28,154 =========== F-17 APPLIED DNA SCIENCES , Inc. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) New Accounting Pronouncements In April 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends SFAS No. 133 to provide clarification on the financial accounting and reporting of derivative instruments and hedging activities and requires that contracts with similar characteristics be accounted for on a comparable basis. The provisions of SFAS 149 are effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a material impact on the Company's results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 establishes standards on the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003 and to all other instruments that exist as of the beginning of the first interim financial reporting period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the Company's results of operations or financial position. In December 2003, the FASB issued a revision of SFAS No. 132, "Employers' Disclosures About Pensions And Other Postretirement Benefits." This pronouncement, SFAS No. 132-R, expands employers' disclosures about pension plans and other post-retirement benefits, but does not change the measurement or recognition of such plans required by SFAS No. 87, No. 88, and No. 106. SFAS No. 132-R retains the existing disclosure requirements of SFAS No. 132, and requires certain additional disclosures about defined benefit post-retirement plans. Except as described in the following sentence, SFAS No. 132-R is effective for foreign plans for fiscal years ending after June 15, 2004; after the effective date, restatement for some of the new disclosures is required for earlier annual periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such as the components of net periodic benefit cost, and certain key assumptions) are effective for foreign plans for quarters beginning after December 15, 2003; other interim-period disclosures will not be required for the Company until the first quarter of 2005. Since the Company does not have any defined benefit post-retirement plans, the adoption of this pronouncement did not have any impact on the Company's results of operations or financial condition. In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS 151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . ." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this Statement will have any immediate material impact on the Company. In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS 152) The amendments made by Statement 152 This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. with earlier application encouraged. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows. F-18 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued) On December 16, 2004, the Financial Accounting Standards Board ("FASB") published Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R are effective as of the first interim period that begins after June 15, 2005. Accordingly, the Company will implement the revised standard in the third quarter of fiscal year 2005. Currently, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. Management is assessing the implications of this revised standard, which may materially impact the Company's results of operations in the third quarter of fiscal year 2005 and thereafter. On December 16, 2004, FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (" SFAS 153"). This statement amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 is effective for nonmonetary transactions in fiscal periods that begin after June 15, 2005. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows. NOTE B - MERGER Acquisition On October 21, 2002, the Company completed a Plan and Agreement of Reorganization ("Merger") with ProHealth Medical Technologies, Inc. ("ProHealth") an inactive publicly registered shell corporation with no significant assets or operations. For accounting purposes, the Company shall be the surviving entity. The transaction is accounted for using the purchase method of accounting. The total purchase price and carrying value of net assets acquired of was $ 880. From November 1988 until the date of the merger, ProHealth was an inactive entity with no significant assets and liabilities Effective with the Merger , all previously outstanding common stock, preferred stock, options and warrants owned by the Company's shareholders were exchanged for an aggregate of 10,178,352 shares of ProHealth common stock. The value of the stock that was issued was the historical cost of the ProHealth's net tangible assets, which did not differ materially from their fair value. In accordance with SFAS No. 141, the Company is the acquiring entity. Effective with the Merger, ProHealth changed its name to Applied DNA Sciences, Inc. F-19 APPLIED DNA SCIENCES , Inc. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE B - MERGER (continued) The total purchase price and carrying value of net assets acquired of ProHealth was $1. The net assets acquired were as follows: Common stock retained by ProHealth shareholders $ 1,015 Assets acquired (135) ---------- Total consideration paid $ 880 ========== In accordance with SOP 98-5, the Company expensed $880 as organization costs. In connection with the Company's acquisition of ProHealth, the controlling owner of ProHealth granted the Company an option to acquire up to 8,500,000 shares of the Company's common stock in exchange for $100,000 (see Note E). The option expires on December 10, 2004. On June 30, 2003, the Company exercised its option and acquired 7,500,000 common shares under this agreement in exchange for an $88,500 convertible promissory note payable to the former controlling owner. The Company accounted for the acquisition of the shares as an organization cost and charged $88,500 to operations and retired the 7,500,000 shares acquired common stock. NOTE C - RELATED PARTY TRANSACTIONS
At September 30, 2004, notes payable are as follows: September 30, 2004 ---------- Note payable , related party, together with interest at 8% per annum, unsecured. Should the Company default under the terms of the Note, Noteholder has the option to convert the unpaid principal at maturity to 7,500,000 shares of the Company's common stock and receive additional common shares in exchange for accrued and unpaid interest at a conversion rate equal to the then fair market value of the Company's common stock. (refer to note J) $88,500 ---------- Note payable, unsecured, related party, payable from August 1, 2005, right to convert to restricted stock in lieu of cash, rate of interest 4%, 160,000 shares prior to October 31, 2005 or 180,000 shares after that date. 425,000 ---------- Due to ex-president, in September 2004, note holder entered into a private transaction, selling a total of 2,500,000 shares to him, after which he loaned all proceeds of $600,000 to us. 600,000 ---------- Note payable, ex-officer of the Company, due $70,000 upon first funding, 20% rate of interest, or 100,000 shares at par value of $0.001 50,000 ---------- 1,163,500 ---------- Less: current portion 1,163,500 ---------- Note payable - long-term $ - ---------- F-20
APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE C - RELATED PARTY TRANSACTIONS (continued) Included in current liabilities is $111,943 at September 30, 2004 which represents advances from the stockholders of the Company. No formal agreements or repayment terms exist. Also, the Company owed $117,333 at September 30, 2004 to the stockholders and other related parties towards accrued expenses. The Company leases office space under a sub lease agreement with an entity controlled by a former significant former shareholder of the Company (see Note H). The Company has entered into long term employment and consulting agreements with Company's ex- President and Chief Executive Officer and an entity controlled by a significant Company shareholder, respectively (see Note H). NOTE D - CAPITAL STOCK The Company is authorized to issue 10,000,000 shares of convertible preferred stock, with $0.001 par value per share. The Company is authorized to issue 100,000,000 shares of common stock, with $0.50 par value per share. In January 2004, the Company passed a resolution authorizing change in the par value per common shares from $0.0001 per share to $0.50 per share. As of September 30, 2004, the Company has issued and outstanding 23,981,054 common share with par value of $0.50 per share and 60,000 convertible preferred shares with par value of $0.0001. During the period September 16, 2002 through September 30, 2003, the Company issued 100,000 shares of common stock in exchange for reimbursement of services provided by the founders of the Company. The Company valued the shares issued at approximately $1,000, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In October, 2002, the Company issued 10,178,352 shares of common stock in exchange for the previously issued 100,000 shares to the Company's founders in connection with the merger with Prohealth Medical Technologies, Inc (see Note B). In October, 2002 the Company canceled 100,000 shares of common stock issued to the Company's founders. In October 2002 the Company issued 602,000 shares of common stock in exchange for services valued at $ 0.065 per share. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. F-21 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE D- CAPITAL STOCK (continued) In November and December 2002, the Company issued 876,000 shares of common stock in exchange for subscription at $ 0.065 per share. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. In January 2003, the Company canceled 836,000 shares of common stock previously issued in exchange for consulting services. In January 2003, the Company issued 1,500,000 shares of common stock in exchange for a licensing agreement (see Note H). The Company valued the shares issued at approximately $ .065 per share, which represents the fair value of the license received which did not differ materially from the value of the stock issued. The Company charged the cost of the license to operations. In January 2003, the Company issued 586,250 shares of common stock in exchange for consulting services. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.13 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. In February 2003, the Company issued 9,000 shares of common stock in exchange for consulting services. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. In March 2003, the Company issued 10,140,000 shares of common stock to Company's founders in exchange for services. In accordance with EITF 96-18 the measurement date to determine fair value was in September 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.0001 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. In March 2003, the Company issued 91,060 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $2.53 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. F-22 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE D- CAPITAL STOCK (continued) In March 2003, the Company issued 6,000 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $ 0.065 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In March 2003, the Company received subscription for 18,000 shares of common stock in exchange for cash at $1 per share. On April 1, 2003, the Company issued 860,000 shares of common stock in exchange for consulting services provided to the Company. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. On April 9, 2003, the Company issued 18,000 shares of common stock in exchange for previously issued options to purchase the Company's common stock at $1.00 per share. On April 9, 2003, the Company issued 9,000 shares of common stock in exchange for consulting services provided to the Company. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. On April 23, 2003, the Company issued 5,000 shares of common stock in exchange for consulting services provided to the Company. The Company valued the shares issued at approximately $2.50 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. On June 12, 2003, the Company issued 10,000 shares common stock in exchange for consulting services provided to the Company. The Company valued the shares issued at approximately $ 2.50 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. On June 17 2003, the Company issued 50,000 shares of common stock in exchange for cash at $1.00 per share On June 30, 2003, the Company issued 270,000 shares of common stock in exchange for consulting services provided to the Company. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. F-23 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE D- CAPITAL STOCK (continued) On June 30, 2003, the Company received $10,000 as subscription for options to purchase the Company's common stock at $1.00 per share. In June, 2003, the Company received $48,000 in connection with a subscription to purchase the Company's common stock pursuant to a private placement. In connection with the Company's acquisition of ProHealth, the controlling owner of ProHealth granted the Company an option to acquire up to 8,500,000 shares of the Company's common stock in exchange for $100,000 (see Note B). The option expires on December 10, 2004. On June 30, 2003, the Company exercised its option and acquired 7,500,000 common shares under this agreement in exchange for an $88,500 convertible promissory note payable to the former controlling owner. The Company has an option through December 10, 2004 to acquire the remaining 1,000,000 shares from the former controlling owner in exchange for $11,500. On June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant to the option agreement. In July 2003 the Company issued 213,060 shares of common stock for consulting services provided to the Company. The Company valued the shares issued at approximately $ 2.01 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In July 2003, the Company canceled 24,000 shares of common stock, previously issued for services valued at $2.50 per share. In July 2003, the Company received $20,000 in exchange for previously issued options to purchase the Company's common stock at $1.00 per share. In July 2003, the Company issued 10,000 shares of common stock for cash previously subscribed at $1.00 per share. In August 2003, the Company issued 172,500 shares of common stock in exchange for consulting services provided to the Company. The Company valued the shares issued at approximately $ 2.38 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued In August 2003, the Company received $29,000 in exchange for previously issued options to purchase the Company's common stock at $1.00 per share. In September 2003, the Company issued 395,260 shares of common stock in exchange for consulting services provided to the Company. The Company valued the shares issued at approximately $ 2.42 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. F-24 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE D- CAPITAL STOCK (continued) In September 2003, the Company issued 19,200 shares of common stock for cash previously subscribed at $2.50 per share. In September 2003, the Company issued 6,400 shares of common stock issued in exchange for cash at $2.50 per share pursuant to private placement. In September 2003, the Company received $95,000 in exchange for previously issued options to purchase the Company's common stock at $1.00 per share. In September 2003, the Company received $300,000 in connection with a subscription to purchase the Company's common stock pursuant to a private placement. The Company valued the shares issued for consulting services at the rate which represents the fair value of the services received which did not differ materially from the value of the stock issued. In October 2003, the Company issued 15,000 shares of convertible preferred stock in exchange for services. The Company valued the shares issued at the $15 par value and recorded the value for services when the shares were converted into common shares as identified below. In October 2003, the Company issued 287,439 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $2.85 per share for a total of $820,418, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In October 2003, the Company issued 120,000 shares of common stock for shares previously subscribed at $2.50 per share in September 2003. In October 2003, the Company canceled 100,000 shares of common stock previously issued in exchange for services at $2.50 per share. In November 2003, the Company issued 100,000 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $3.00 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In November 2003, the Company sold 100,000 shares of common stock subscribed for cash at $2.50 per share pursuant to private placement. In December 2003, the Company sold 6,400 shares of common stock subscribed for cash at $2.50 per share pursuant to private placement. In December 2003, the Company issued 2,125,500 shares of common stock in exchange for consulting services. . The Company valued the shares issued at approximately $2.59 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In December 2003, the Company received $104,000 in exchange for a common stock subscription at $2.50 per share pursuant to private placement. In January 2004, the Company issued 41,600 shares of common stock at $2.50 share pursuant to a subscription made on December 2003. In January 2004, the Company issued 13,040 shares of common stock at $2.95 per share in exchange for consulting services valued at $38,468. In January 2004, the Company issued 123,000 shares of common stock at $2.60 per share in exchange for consulting services valued at $319,800. In January 2004, the Company issued 1,000 shares of common stock at $3.05 per share in exchange for consulting services valued at $3,050. In February 2004, the Company issued 6,283 shares of common stock at $3.07 per share in exchange for employee services valued at $19,288. In March 2004, the Company issued 44,740 shares of common stock at $3.04 per share in exchange for consulting services valued at $136,010. In March 2004, the Company issued 55,000 of common stock for options exercised at $1.00 per share. F-25 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE D- CAPITAL STOCK (continued) In March 2004, the Company issued 5,443 shares of common stock at $3.00 per share in exchange for employee services valued at $16,344. In March 2004, the Company issued 5,769 shares of common stock at $3.15 per share in exchange for employee services valued at $18,177. In March 2004, the Company converted 5,000 preferred shares into 125,000 shares of common stock at $3.00 per share in exchange for employee services valued at $375,000. In March 2004, the Company issued 8,806 shares of common stock at $3.03 per share in exchange for employee services valued at $26,639. In April 2004, the Company issued 22,500 shares of common stock at $0.10 for subscription of warrants to be exercised. In April 2004, the Company issued 9,860 shares of common stock at $2.58 per share in exchange for employee services valued at $25,441. In April 2004, the Company issued 11,712 shares of common stock at $2.35 per share in exchange for consulting services valued at $27,523. In April 2004, the Company issued 367,500 shares of common stock at $1.50 per share in exchange for consulting services valued at $551,250. In April 2004, the Company retired 50,000 shares of common stock previously issued for consulting services at $0.065 per share or $3,250. In May 2004, the Company converted 4,000 preferred shares into 100,000 shares of common stock at $1.01 per share in exchange for consulting services valued at $101,250. In May 2004, the Company issued 10,000 shares of common stock at $0.10 per share in a stock subscription for $1,000. In May 2004, the Company issued 137,000 shares of common stock at $0.86 per share in exchange for consulting services valued at $119,233. In May 2004, the Company issued 26,380 shares of common stock at $1.15 per share in exchange for consulting services valued at $30,337. In June 2004, the Company retired 5,000 shares of common stock previously issued for consulting services at $0.065 per share or $325. In June 2004, the Company issued 270,500 shares of common stock at $0.67 per share in exchange for consulting services valued at $180,560. In June 2004, the Company issued 8,000 shares of common stock at $0.89 per share in exchange for consulting services valued at $7,120. In June 2004, the Company issued 50,000 shares of common stock at $0.645 per share in exchange for consulting services valued at $32,250. In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share for total proceeds of $250,000 pursuant to private placement. In July 2004, the Company issued 100,000 shares of common stock at $0.54 per share in exchange for consulting services valued at $54,000. In July 2004, the Company issued 5,000 shares of common stock at $0.72 per share in exchange for consulting services valued at $3,600. In July 2004, the Company issued 100,000 shares of common stock at $0.47 per share in exchange for consulting services valued at $47,250. In August 2004, the Company converted 2,000 preferred shares into 50,000 shares of common stock at $0.39 in exchange for consulting services valued at $19,500. In August 2004, the Company issued 100,000 shares of common stock at $0.39 in exchange for consulting services valued at $39,000. In August 2004, the Company issued 100,000 shares of common stock at $0.50 in exchange for consulting services valued at $50,250. F-26 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE D- CAPITAL STOCK (continued) In August 2004, the Company issued 200,000 shares of common stock at $0.56 in exchange for consulting services valued at $112,500. In September 2004, the Company issued 1,000,000 shares of common stock at $0.52 in exchange for consulting services valued at $517,500. In September 2004, the Company issued 45,000 shares of common stock at $0.50 in exchange for consulting services valued at $22,288. In September 2004, the Company converted 4,000 preferred shares into 100,000 shares of common stock at $0.41 in exchange for consulting services valued at $54,000. In September 2004, the Company issued 60,000 convertible preferred shares at $25.00, in exchange for consulting services valued at $1,500,000. In accordance with EITF 96-18 the measurement date to determine fair value was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued for consulting services at the rate which represents the fair value of the services received which did not differ materially from the value of the stock issued. NOTE E - STOCK OPTIONS AND WARRANTS Warrants The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company's common stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses in connection with the sale of the Company's common stock.
Warrants Outstanding Warrants Exercisable Weighted Average Weighed Weighted Number Remaining Contractual Average Number Average Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price --------------- ----------- --------------------- -------------- ----------- -------------- $0.10 335,000 4.79 $ 0.10 335,000 $ 0.10 $0.60 3,472,750 4.01 $ 0.60 3,472,750 $ 0.60 $0.70 750,000 2.84 $ 0.70 750,000 $ 0.70 $1.00 250,000 1.61 $ 1.00 250,000 $ 1.00 $3.00 62,503 1.25 $ 3.00 62,503 $ 3.00 4,870,253 4,870,253
F-27 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE E- STOCK OPTIONS AND WARRANTS (continued) Transactions involving warrants are summarized as follows:
Number of Shares Weighted Average Price Per Share ---------------- ----------------- Outstanding at September 30, 2003 383,500 $ 1.38 Granted 4,574,753 0.58 Exercised (88,000) 1.00 Canceled or expired - - Outstanding at September 30, 2004 4,870,253 $ 0.63
The estimated value of the compensatory warrants granted to non-employees in exchange for services and financing expenses was determined using the Black-Scholes pricing model and the following assumptions: contractual term of 2 to 5 years, a risk free interest rate of 3.00%, a dividend yield of 0% and volatility of 30%. The amount of the expense charged to operations for compensatory warrants granted in exchange for services was $0 for the years ended September 30, 2004 and 2003. The estimated value of the compensatory warrants granted to non-employees in exchange for services and financing expenses was determined using the Black-Scholes pricing model and the following assumptions: contractual term of 2 to 5 years, a risk free interest rate of 1.00%, a dividend yield of 0% and volatility of 22.9%. The amount of the expense charged to operations for compensatory warrants granted in exchange for services was $2,019,862 and $0, respectively, for the years ended September 30, 2004 and 2003. NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE A summary of convertible promissory notes payable at September 30, 2004 is as follows: Convertible notes payable ("Bridge Unit Offering"), in quarterly installments of interest only at 10% per annum, secured by all assets of the Company and due on the earlier of the 9- month anniversary date of the initial closing of the Offering, or the completion of any equity financing of $3M or more; The Company, in its sole discretion, may prepay principal at any time without penalty. The notes are convertible into shares of common stock of the Company at a price of $2.50 per share. September 30, 2004 ------------------ Convertible notes payable $ 1,675,000 ------------------ Debt discount - beneficial conversion feature, net of accumulated amortization of $1,270,444 (20,393) ------------------ Debt discount, net of accumulated amortization of $354,556 (29,607) ------------------ Net balance $ 1,625,000 ------------------ During the three months ended December 31, 2003, the Company sold 27.5 units (the "Units") to accredited investors at a price of $50,000 per Unit (the "Bridge Offering") for a total of $1,375,000. Each Unit consists of (i) a $50,000 Principal Amount 10% Secured Convertible Promissory Note ("Note" or "Notes"), (ii) detachable warrants to purchase 50,000 shares of our common stock, exercisable for a period of five years at a price of $3.20 per share ("$3.20 Warrant") and (iii) detachable warrants to purchase 10,000 shares of our common stock, exercisable for a period of five years at a price of $0.10 per share ("$0.10 Warrant" and together with the $3.20 Warrant, the "Warrants"). The Notes are convertible into shares of our common stock at a price of $2.50 per share. F-28 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued) The Company accounted for the warrants and notes payable in accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants" ("APB 14"). APB 14 requires a portion of the proceeds from the issuance of debt securities with detachable stock warrants be allocated to the warrants and treated as paid-in capital. Any resulting discount or premium on the notes payable should be recorded and amortized over the life of the notes. The Company used the Black-Scholes model to determine the value of the warrants issued to the noteholders. Under the Black-Scholes model, the value of the warrants are determined by taking the difference between acquiring the stock outright and the present value of paying the exercise price on the expiration day. As a result, the Company valued the warrants at $206,526. This amount was recorded as paid-in capital and the resulting discount on the notes payable was recorded and is being amortized using the interest method over the life of the notes. The debt discount attributed is amortized over the Bridge Offering's earliest maturity period of 9 months from the date of issue as interest expense. In accordance with EMERGING ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR CONVERTIBLE SECURITIES WITH A BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS ("EITF 98-5"), the Company recognized an imbedded beneficial conversion feature present in the Bridge Offering note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital. The Company recognized and measured an aggregate of $1,168,474 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the Bridge Offering. The debt discount attributed to the beneficial conversion feature is amortized over the Bridge Offering's earliest maturity period of 9 months from the date of issue as interest expense. The Company valued the beneficial conversion of the notes and warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and the following assumptions: o contractual terms of 5 years o an average risk free interest rate of 1.00% o a dividend yield of 0.00% o volatility of 22.9%. During the three months ended March 31, 2004, the Company sold 6 units (the "Units") to accredited investors at a price of $50,000 per Unit (the "Bridge Offering") for a total of $300,000. Each Unit consists of (i) a $50,000 Principal Amount 10% Secured Convertible Promissory Note ("Note" or "Notes"), (ii) warrants to purchase 50,000 shares of our common stock, exercisable for a period of five years at a price of $3.20 per share ("$3.20 Warrant") and (iii) warrants to purchase 10,000 shares of our common stock, exercisable for a period of five years at a price of $0.10 per share ("$0.10 Warrant" and together with the $3.20 Warrant, the "Warrants"). The Notes are convertible into shares of our common stock at a price of $2.50 per share. The Company accounted for the warrants and notes payable in accordance with APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants" ("APB 14"). APB 14 requires a portion of the proceeds from the issuance of debt securities with detachable stock warrants be allocated to the warrants and treated as paid-in capital. Any resulting discount or premium on the notes payable should be recorded and amortized over the life of the notes. The Company used the Black-Scholes model to determine the value of the warrants issued to the noteholders. Under the Black-Scholes model, the value of the warrants are determined by taking the difference between acquiring the stock outright and the present value of paying the exercise price on the expiration day. As a result, the Company valued the warrants at $177,638. This amount was recorded as paid-in capital and the resulting discount on the notes payable was recorded and is being amortized using the interest method over the life of the notes. The debt discount attributed is amortized over the Bridge Offering's earliest maturity period of 9 months from the date of issue as interest expense. In accordance with EMERGING ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR CONVERTIBLE SECURITIES WITH A BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS ("EITF 98-5"), the Company recognized an imbedded beneficial conversion feature present in the Bridge Offering note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital. The Company recognized and measured an aggregate of $122,362 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the Bridge Offering. The debt discount attributed to the F-29 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued) beneficial conversion feature is amortized over the Bridge Offering's earliest maturity period of 9 months from the date of issue as interest expense. The Company valued the beneficial conversion of the notes and warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and the following assumptions: o contractual terms of 5 years o an average risk free interest rate of 4.25% o a dividend yield of 0.00% o volatility of 42.0%. In September 2004, the Company re-priced the $3.20 warrants to $0.60 as an inducement to convertible note holders as the Company sought additional financing. The Company recorded a charge of $371,850 to earning for the year ended September 30, 2004. NOTE G- INCOME TAXES The Company has adopted Financial Accounting Standard No. 109 which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. At September 30, 2004, the Company has available for federal income tax purposes a net operating loss carryforward of approximately $22,815,034, expiring in the year 2023, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company, it is more likely than not that the benefits will not be realized. Due to significant changes in the Company's ownership, the future use of its existing net operating losses may be limited. F-30 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE G- INCOME TAXES (continued) Components of deferred tax assets as of September 30, 2003 are as follows: Non current: Net operating loss carryforward $7,985,000 Valuation allowance (7,985,000) ----------- Net deferred tax asset $ - =========== NOTE H-LOSSES PER SHARE The following table presents the computation of basic and diluted losses per share:
For the Year Ended For the Year Ended September 30, 2004 September 30, 2003 ------------------ ------------------ Loss available for common shareholders $ (19,358,259) $ (3,445,164) ================== ================== Basic and fully diluted loss per share $ (0.93) $ (0.27) ================== ================== Weighted average common shares outstanding 20,819,700 12,955,358
Net loss per share is based upon the weighted average of shares of common stock outstanding NOTE I- COMMITMENTS AND CONTINGENCIES Licensing Agreement In October 2002, the Company entered into an exclusive Licensing Agreement ("License") with Biowell Technology, Inc., a company formed under the laws of Taiwan, Republic of Taiwan. The initial term of the License expires in 2007 with renewal options under certain terms and conditions. The License grants the Company the exclusive use of certain patented DNA technology, along with the rights to future technology, in exchange for an initial payment of 1,500,000 shares of the Company's restricted common stock (see Note D). The Company is obligated to order minimum purchase orders or make future certain minimum annual royalty payments as follows: Year ending Minimum purchase orders Alternative Minimum October 8, Royalty Payable 2004 $300,000 $100,000 2005 360,000 - 2006 432,000 - 2007 518,400 - Consulting Agreement GP has been engaged, on a non-exclusive basis, to provide advice and assistance to the Company regarding issues associated with Applied DNA's proprietary DNA embedded security solutions. GP will assist the Company with strategic positioning and enhancement of the Company's business, and will assist the Company in the development of domestic and international marketing strategies for the Company's DNA products and services. The term of the engagement is one year from the effective date, with automatic one year renewals unless either party expresses, in writing, an intention not to renew within 60 days prior to the expiration of the term. F-31 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE I- COMMITMENTS AND CONTINGENCIES (continued) As compensation for GP's performance, the Company will pay GP an aggregate advisory fee of Two Million Dollars ($2,000,000) payable in increments over the term and renewal term. Two payments of $500,000 each were made by the Company in September 2004 and January 2005. Thereafter, eight payments of $125,000 are due monthly over the period February through September 2005. Additionally, the Company will issue a net-exercisable warrant to purchase shares of Common Stock of the Company at a later date. Fees were placed in escrow during GP's completion of its due diligence review. All promotional materials of the Company, on a going forward basis, will be submitted to GP for its review, including all advertising, written sales promotion, press releases, news clippings and other publicity matters relating to GP's engagement and the strategic relationship created. The Company has agreed to maintain confidentiality with regard to its relationship with GP, wherever appropriate, and has indemnified GP, its controlling persons, respective partners, shareholders, directors, officers, employees, agents, affiliates and representatives and will hold them harmless against any actions, judgments, claims, etc. The Agreement, in its entirety, will be filed with the Company's 10-KSB in accordance with SEC regulatory requirements. Franchising and Distribution Agreements The Company has entered into a Distribution and Franchising Agreement ("Franchise Agreement") in July 2003. Under the terms of the Franchise Agreement, the franchisee is obligated to pay the Company $3,000,000 payable $25,000 upon execution of the Franchise Agreement and the balance of $2,975,000 payable over five (5) years with interest accruing at 8% per annum. Payments under the Franchise Agreement are subject to franchisee's net profits, as defined, under the Franchise Agreement. During the year ended September 30, 2004 and 2003 the Company has received the initial $25,000 and $0, as installment and has recognized the receipt as other income in the accompanying financial statements. F-32 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE I- COMMITMENTS AND CONTINGENCIES (continued) Operating Lease Commitments The Company leases office space under operating lease in Los Angeles, California for its corporate use from an entity controlled by significant former shareholder, expiring in November 2006. Total lease rental expenses for the years ended on September 30, 2004 and 2003, was $120,804 and $38,725, respectively. Commitments for minimum rentals under non-cancelable lease at September 30, 2004 are as follows: Year ended September 30, 2005 $ 139,308 2006 143,977 2007 12,031 ----------- $ 295,316 Employment and Consulting Agreements The Company has employment agreements with the Company's officers and certain employees. These employment agreements provide for salaries and benefits, including stock options and extend up to seven years. In addition to salary and benefit provisions, the agreements include defined commitments should the employer terminate the employee with or without cause. The Company has a consulting agreement with an entity controlled by a former significant shareholder of the Company. The consulting agreement provides for compensation and certain benefits, including stock options and extends up to seven years. In addition to compensation and benefit provisions, the agreements include defined commitments should the employer terminate the consultant with or without cause. The Company has consulting agreements with outside contractors to provide marketing and financial advisory services. The Agreements are generally for a term of 12 months from inception and renewable automatically from year to year unless either the Company or consultant terminates such engagement by written notice. F-33 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 AND 2003 NOTE J- SUBSEQUENT EVENTS On October 31, 2004, the Company defaulted on a note held by a former company officer and director in the amount of $88,500 (See Note C), and in accordance with the default, the noteholder has the right, at any time without further notice, to demand that his outstanding note be converted back into 7,500,000 shares. On December 28, 2004, the noteholder made his demand for the issuance of 7,500,000 shares of common stock. The Company is currently negotiating a settlement of this matter with the noteholder. In October 2004, the Company granted 3,036,000 common stock warrants to the Company's Directors and certain advisors as additional compensation for services. The warrants have excise prices between $.50 and $1.00 per share and expire in periods raging from 3 to 5 years. In January 2005, the Company arranged a $6 million private placement of 12 million shares at $0.50 per share along with 12 million attached warrants with an exercise price of $0.75 that expires in 5 years. As of January 10, 2005, $4 million of the $6 million has been subscribed. In January 2005, holders of 1,625,000 of convertible notes payable elected to convert their notes to common stock at $.33 per share (See Note F). NOTE K - GOING CONCERN The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements during the period September 16, 2002 through September 30, 2004, the Company incurred a loss of $22,815,034. In addition, the Company has a deficiency in stockholder's equity of $4,706,508. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's existence is dependent upon management's ability to develop profitable operations. Management is devoting substantially all of its efforts to developing DNA embedded biotechnology security solutions in the United States and there can be no assurance that the Company's efforts will be successful. However, the planned principal operations have not commenced and no assurance can be given that management's actions will result in profitable operations or the resolution of its liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern. In order to improve the Company's liquidity, the Company's management is actively pursing additional equity financing through discussions with investment bankers and private investors. There can be no assurance the Company will be successful in its effort to secure additional equity financing. F-34 (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS (Unaudited) December 31, September 30, 2004 2004 ----------- ----------- Current assets: Cash and Equivalents ............................. $ 62,665 $ 1,832 ----------- ----------- Total Current Assets ............................. 62,665 1,832 Property, Plant and Equipment: Furniture and Equipment .......................... 29,507 29,507 Less: Accumulated Depreciation ................... (1,756) (1,405) ----------- ----------- 27,751 28,102 Other Assets: Deposits and Prepaid Expenses .................... 47,585 23,559 Patent Filing .................................... 34,257 29,910 Less: Accumulated Amortization ................... (6,126) (1,756) ----------- ----------- Net Patents ...................................... 28,131 28,154 Restricted Cash .................................. 1,065,318 -- ----------- ----------- Total Other Assets ............................... 1,141,034 51,713 ----------- ---------- Total Assets ..................................... $ 1,231,450 $ 81,647 =========== =========== LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable and Accrued Liabilities ......... $ 2,973,686 $ 1,770,379 Accrued Liabilities Due Related Parties .......... 168,857 117,333 Convertible Notes Payable ........................ 1,675,000 1,625,000 Due to Related Parties ........................... 61,943 111,943 Note Payable ..................................... 1,125,000 1,163,500 ----------- ----------- Total Current Liabilities ........................ 6,004,486 4,788,156 Long Term Liabilities: Note Payable ..................................... -- -- ----------- ----------- Deficiency in Stockholders' Equity: Preferred Stock, par value $.0001 per share; 10,000,000 shares authorized; 60,000 issued at December 31, 2004 and September 30, 2004 ............................... 6 6 Common Stock, par value $.50 per share; 100,000,000 shares authorized; 40,848,239 shares and 23,981,054 shares issued and outstanding at December 31, 2004 and September 30, 2004, respectively ................. 20,424,120 11,990,527 Common Stock Subscription ....................... (880,000) (1,000) Additional Paid-In-Capital ...................... 10,863,008 6,118,993 Accumulated Deficit ............................. (35,180,170) (22,815,034) ----------- ----------- (4,773,036) (4,706,508) ----------- ----------- Total Liabilities and Deficiency in Stockholders' Equity $ 1,231,450 $ 81,647 =========== =========== See accompanying notes to unaudited condensed consolidated financial statements F-35 APPLIED DNA SCIENCES, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENTS OF LOSSES (Unaudited)
For the Period, For The Three For The Three September 16, 2002, Months Ended Months Ended (Date of Inception) December 31, December 31, through 2004 2003 December 31, 2004 ---- ---- ---------- Revenues: Sales ............................. $ -- $ -- $ -- COGS .............................. $ -- $ -- $ -- Operating expenses: Selling, general and administrative 10,792,921 7,407,750 31,852,994 Depreciation and amortization ..... 4,721 351 7,882 ------------ ------------ ------------ Total operating expenses .......... 10,797,642 7,408,101 31,860,876 Operating loss .................... (10,797,642) (7,408,101) (31,860,876) Other Income (expense) ............ 315 685 26,700 Interest (expense) ................ (1,567,809) (135,074) (3,345,995) Income (taxes) benefit ............ -- -- -- ------------ ------------ ------------ Net loss .......................... $(12,365,136) $ (7,542,490) $(35,180,171) ============ ============ ============ Loss per common share (basic and assuming dilution) ..... $ (0.45) $ (0.41) $ (1.28) ============ ============ ============ Weighted average shares outstanding 27,402,160 18,503,162 27,402,160
See accompanying notes to unaudited condensed consolidated financial statements F-36 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004
Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total -------- -------- -------- --------- -------- ------------ ---------- ---------- ----------- Issuance of common stock to Founders in exchange for services on September 16, 2002 at $.01 per share - $ - 100,000 $ 10 $ 990 - $ - $ - $ 1,000 Net Loss - - - - - - - (11,612) (11,612) -------- -------- -------- --------- -------- ------------ ---------- ---------- ----------- Balance at September 30, 2002 - - 100,000 10 990 - - (11,612) (10,612) Issuance of common stock in connection with merger with Prohealth Medical Technologies , Inc on October 1, 2002 - - 10,178,352 1,018 - - - - 1,000 Cancellation of Common stock in connection with merger with Prohealth Medical Technologies , Inc on October 21, 2002 - - (100,000) 10 (1,000) - - - (1,000) Issuance of common stock in exchange for services in October 2002 at $ 0.65 per share - - 602,000 60 39,070 - - - 39,130 Issuance of common stock in exchange for subscription in November and December 2002 at $ 0.065 per share - - 876,000 88 56,852 - (56,940) - - Cancellation of common stock in January 2003 previously issued in exchange for consulting services - - (836,000) (84) (54,264) - 54,340 - - Issuance of common stock in exchange for licensing services valued at $ 0.065 per share in January 2003 - - 1,500,000 150 97,350 - - - 97,500 Issuance of common stock in exchange for consulting services valued at $ 0.13 per share in January 2003 - - 586,250 58 76,155 - - - 76,213 Issuance of common stock in exchange for consulting services at $ 0.065 per share in February 2003 - - 9,000 1 584 - - - 585 Issuance of common stock to Founders 1in exchange for services valued at $0.0001 per share in March 2003 - - 10,140,000 1,014 - - - - 1,014 Issuance of common stock in exchange for consulting services valued at $2.50 per share in March 2003 - - 91,060 9 230,625 - - - 230,634 See accompanying notes to unaudited condensed consolidated financial statements F-37 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004 (Continued) Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- -------- ---------- ---------- ------- -------- Issuance of common stock in exchange for consulting services valued at $ 0.065 per share in March 2003 - - 6,000 1 389 - - - 390 Common stock subscribed in exchange for cash at $1 per share in March 2003 - - - - 18,000 - - - 18,000 Common stock issued in exchange for consulting services at $ 0.065 per share on April 1, 2003 - - 860,000 86 55,814 - - - 55,900 Common stock issued in exchange for cash at $ 1.00 per share on April 9, 2003 - - 18,000 2 - - - - 2 Common stock issued in exchange for consulting services at $ 0.065 per share on April 9, 2003 - - 9,000 1 584 - - - 585 Common stock issued in exchange for consulting services at $ 2.50 per share on April 23, 2003 - - 5,000 1 12,499 - - - 12,500 Common stock issued in exchange for consulting services at $ 2.50 per share, on June 12, 2003 - - 10,000 1 24,999 - - - 25,000 Common stock issued in exchange for cash at $ 1.00 per share on June 17, 2003 - - 50,000 5 49,995 - - - 50,000 Common stock subscribed in exchange for cash at $ 2.50 per share pursuant to private placement on June 27, 2003 - - - - - - 24,000 - 24,000 Common stock retired in exchange for note payable at $0.0118 per share, on June 30, 2003 - - (7,500,000) (750) 750 - - - - Common stock issued in exchange for consulting services at $0.065 per share, on June 30, 2003 - - 270,000 27 17,523 - - - 17,550 Common stock subscribed in exchange for cash at $ 1.00 per share pursuant to private placement on June 30, 2003 - - - - - 10,000 - - 10,000 Common stock subscribed in exchange for cash at $ 2.50 per share pursuant to private placement on June 30, 2003 - - - - - 24,000 - - 24,000 Common stock issued in exchange for consulting services at approximately $2.01 per share, July 2003 - - 213,060 21 428,797 - - - 428,818 See accompanying notes to unaudited condensed consolidated financial statements F-38 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004 (Continued) Deficit Additional Accumulated Preferred Common Paid in Common Stock During Preferred Shares Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- -------- ---------- ---------- ------- -------- Common stock canceled in July 2003, previously issued for services rendered at $2.50 per share - - (24,000) (2) (59,998) - - - (60,000) Common stock issued in exchange for options exercised at $1.00 in July 2003 - - 20,000 2 19,998 - - - 20,000 Common stock issued in exchange for exercised of options previously subscribed at $1.00 in July 2003 - - 10,000 1 9,999 (10,000) - - - Common stock issued in exchange for consulting services at approximately $2.38 per share, August 2003 - - 172,500 17 410,913 - - - 410,931 Common stock issued in exchange for options exercised at $1.00 in August 2003 - - 29,000 3 28,997 - - - 29,000 Common stock issued in exchange for consulting services at approximately $2.42 per share, September 2003 - - 395,260 40 952,957 - - - 952,997 Common stock issued in exchange for cash at $2.50 per share-subscription payable-September 2003 - - 19,200 2 47,998 (48,000) - - - Common stock issued in exchange for cash at $2.50 per share pursuant to private placement September 2003 - - 6,400 1 15,999 - - - 16,000 Common stock issued in exchange for options exercised at $1.00 in September 2003 - - 95,000 10 94,991 - - - 95,000 Common stock subscription receivable reclassification adjustment Common Stock subscribed to at $2.50 per share in September 2003 - - - - 2,600 - 2,600 Net Loss for the year ended September 30, 200 - - - 300,000 - - 300,000 Balance at September 30, 2003 - - - - - - - (3,445,164) (3,445,164) -------- -------- ----------- -------- ----------- --------- --------- ------------- ----------- - $ - 17,811,082 $ 1,781 $2,577,568 $300,000 $ - $(3,456,776) $(577,427) ======== ======== =========== ======== =========== ========= ========= ============= ============ See accompanying notes to unaudited condensed consolidated financial statements F-39 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004 (Continued) Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Preferred shares issues in exchange for services at $25.00 per share, October 2003 1500 15 15 Common stock issued in exchange for consulting services at approximately $2.85 per share, October 2003 287,439 29 820,389 - - - 820,418 Common stock issued in exchange for cash at $2.50 per share-subscription payable-October 2003 120,000 12 299,988 (300,000) - - - Common stock canceled in October 2003, previously issued for services rendered at $2.50 per share (100,000) (10) (249,990) - - - (250,000) Common stock issued in exchange for consulting services at approximately $3 per share, November 2003 100,000 10 299,990 - - - 300,000 Common stock subscribed in exchange for cash at $2.50 per share pursuant to private placement, November, 2003 100,000 10 249,990 - - - 250,000 Common stock subscribed in exchange for cash at $2.50 per share pursuant to private placement, December, 2003 6,400 1 15,999 - - - 16,000 Common stock issued in exchange for consulting services at approximately $2.59 per share, December 2003 2,125,500 213 5,504,737 - - - 5,504,950 Common Stock subscribed to at $2.50 per share in December 2003 - - - 104,000 - - 104,000 Beneficial conversion feature relating to notes payable - - 1,168,474 - - - 1,168,474 Beneficial conversion feature relating to warrants - - 206,526 - - - 206,526 Adjust common stock par value from $0.0001 to $0.50 per share, per amendment of articles dated Dec 2003 - 10,223,166 (10,223,166) - - - - Common Stock issued pursuant to subscription at $2.50 share in Jan 2004 41,600 20,800 83,200 (104,000) - - - Common stock issued in exchange for consulting services at $2.95 per share, Jan 2004 13,040 6,520 31,948 - - - 38,468 Common stock issued in exchange for consulting services at $2.60 per share, Jan 2004 123,000 61,500 258,300 - - - 319,800 Common stock issued in exchange for consulting services at $3.05 per share, Jan 2004 1,000 500 2,550 - - - 3,050 See accompanying notes to unaudited condensed consolidated financial statements F-40 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004 (Continued) Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Common stock issued in exchange for employee services at $3.07 per share, Feb 2004 6,283 3,142 16,147 - - - 19,288 Common stock issued in exchange for consulting services at $3.04 per share, Mar 2004 44,740 22,370 113,640 - - - 136,010 Common Stock issued for options exercised at $1.00 per share in Mar 2004 55,000 27,500 27,500 - - - 55,000 Common stock issued in exchange for employee services at $3.00 per share, Mar 2004 5,443 2,722 13,623 - - - 16,344 See accompanying notes to unaudited condensed consolidated financial statements F-41 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004 (Continued) Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Common stock issued in exchange for employee services at $3.15 per share, Mar 2004 5,769 2,885 15,293 - - - 18,177 Preferred shared converted to common shares for consulting services at $3.00per share, Mar 2004 5000 5 125,000 62,500 312,500 - - - 374,995 Common stock issued in exchange for employee services at $3.03 per share, Mar 2004 8,806 4,403 22,236 - - - 26,639 Common Stock issued pursuant to subscription at $2.50 per share in Mar. 2004 22,500 11,250 (9,000) - - - 2,250 Beneficial Conversion Feature relating to Notes Payable - - 122,362 - - - 122,362 Beneficial Conversion Feature relating to Warrants - - 177,638 - - - 177,638 Common stock issued in exchange for consulting services at $2.58 per share, Apr 2004 9,860 4,930 20,511 - - - 25,441 Common stock issued in exchange for consulting services at $2.35 per share, Apr 2004 11,712 5,856 21,667 - - - 27,523 Common stock issued in exchange for consulting services at $1.50 per share, Apr 2004 367,500 183,750 367,500 - - - 551,250 Common stock returned to treasury at $0.065 per share, Apr 2004 (50,000) (25,000) 21,750 - - - (3,250) Preferred stock converted to common stock for consulting services at $1.01 per share in May 2004 4000 4 100,000 50,000 51,250 - - - 101,246 Common stock issued per subscription May 2004 10,000 5,000 (4,000) - (1,000) - - Common stock issued in exchange for consulting services at $0.86 per share in May 2004 137,000 68,500 50,913 - - - 119,413 Common stock issued in exchange for consulting services at $1.15 per share in May 2004 26,380 13,190 17,147 - - - 30,337 Common stock returned to treasury at $0.065 per share, Jun 2004 (5,000) (2,500) 2,175 - - - (325) See accompanying notes to unaudited condensed consolidated financial statements F-42 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004 (Continued) Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Common stock issued in exchange for consulting services at $0.67 per share in June 2004 270,500 135,250 45,310 - - - 180,560 Common stock issued in exchange for consulting services at $0.89 per share in June 2004 8,000 4,000 3,120 - - - 7,120 Common stock issued in exchange for consulting services at $0.65 per share in June 2004 50,000 25,000 7,250 - - - 32,250 Common stock issued pursuant to private placement at $1.00 per share in June 2004 250,000 125,000 125,000 - - - 250,000 Common stock issued in exchange for consulting services at $0.54 per share in July 2004 100,000 50,000 4,000 - - - 54,000 Common stock issued in exchange for consulting services at $0.72 per share in July 2004 5,000 2,500 1,100 - - - 3,600 Common stock issued in exchange for consulting services at $0.47 per share in July 2004 100,000 50,000 (2,749) - - - 47,251 Common stock issued in exchange for consulting services at $0.39 per share in August 2004 100,000 50,000 (11,000) - - - 39,000 Preferred stock converted to common stock for consulting services at $0.39 per share in August 2004 (2000) (2) 50,000 25,000 (5,500) - - - 19,498 See accompanying notes to unaudited condensed consolidated financial statements F-43 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004 (Continued) Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Common stock issued in exchange for consulting services at $0.50 per share in August 2004 100,000 50,000 250 50,250 Common stock issued in exchange for consulting services at $0.56 per share in August 2004 200,000 100,000 12,500 - - - 112,500 Common stock issued in exchange for consulting services at $0.41 per share in August 2004 92,500 46,250 (8,787) - - - 37,463 Common stock issued in exchange for consulting services at $0.52 per share in September 2004 1,000,000 500,000 17,500 - - - 517,500 Common stock issued in exchange for consulting services at $0.46 per share in September 2004 5,000 2,500 (212) - - - 2,288 Common stock issued pursuant to subscription at $0.50 per share in September 2004 40,000 20,000 - - - - 20,000 Preferred shares converted to common stock for consulting services at $0.41 per share in September 2004 (4000) (4) 100,000 50,000 4,000 - - - 53,996 Preferred shares issued in exchange for service at $25 per share in September 2004 60,000 6 1,499,994 1,500,000 Warrants issued to consultants in the fourth quarter 2004 2,019,862 2,019,862 Net Loss - - - - - (19,358,259) (19,358,259) Balance at September 30, 2004 60,000 $6 23,981,054 11,990,527 6,118,993 - (1,000) (22,815,034) (4,706,508) ====== == ========== ========== ========= ======== ======= ============ =========== See accompanying notes to unaudited condensed consolidated financial statements F-44 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004 Deficit Additional Accumulated Preferred Paid in Common Stock During Preferred Shares Common Common Stock Capital Stock Subscription Development Shares Amount Shares Amount Amount Subscribed Receivable Stage Total --------- ------- ---------- ------- ------ ---------- ---------- ------- -------- Common stock issued in exchange for consulting services at $0.68 per share in October 2004 - - 200,000 100,000 36,000 - - - 136,000 Common stock returned to treasury at $0.60 per share, Oct 2004 - - (1,069,600) (534,800) (107,298) - - - (642,098) Common stock issued in exchange for consulting services at $0.60 per share in October 2004 - - 82,500 41,250 8,250 - - - 49,500 Common Stock issued pursuant to subscription at $0.60 share in October 2004 - - 500,000 250,000 50,000 (300,000) - - - Common stock issued in exchange for consulting services by noteholders at $0.50 per share in October 2004 - - 532,500 266,250 - - - - 266,250 Common Stock issued pursuant to subscription at $0.50 share in October 2004 - - 500,000 250,000 - - - - 250,000 Common Stock issued pursuant to subscription at $0.45 share in October 2004 - - 1,000,000 500,000 (50,000) (450,000) - - - Common stock issued in exchange for consulting services by noteholders at $0.45 per share in October 2004 - - 315,000 157,500 (15,750) - - - 141,750 Common Stock issued in exchange for consulting services at $0.47 share in November 2004 - - 100,000 50,000 (3,000) - - - 47,000 Common Stock issued in exchange for consulting services at $0.80 share in November 2004 - - 300,000 150,000 90,000 - - - 240,000 Common Stock issued in exchange for consulting services at $1.44 share in November 2004 - - 115,000 57,500 108,100 - - - 165,600 Common Stock issued in exchange for employee services at $1.44 share in November 2004 - - 5,000 2,500 4,700 - - - 7,200 See accompanying notes to unaudited condensed consolidated financial statements F-45 APPLIED DNA SCIENCES, INC (A development stage company) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE PERIOD SEPTEMBER 16, 2002 (Date of Inception) THROUGH DECEMBER 31, 2004 Common Stock issued in exchange for employee services at $0.60 share in November 2004 - - 60,000 30,000 6,000 (4,000) - - 32,000 Beneficial Conversion discount relating to Notes Payable - - - - 936,541 - - - 936,541 Beneficial Conversion Feature relating to Warrants - - - - 528,459 - - - 528,459 Common stock issued at $0.016 in exchange for note payable in December 2004 5,500,000 2,750,000 (2,661,500) 88,500 Common Stock issued in exchange for consulting services at $1.44 share in December 2004 - - 5,796,785 2,898,393 5,418,815 - - - 8,317,207 Common stock issued pursuant to subscription at $0.50 per share in December 2004 - - 2,930,000 1,465,000 - (125,000) - - 1,340,000 Warrants issued to consultants in Dec. 2004 - - 394,698 394,698 Net Loss - - - - - - - (12,365,136)(12,365,136) --------- ------- ---------- ---------- ---------- ----------- --------- ------------ ----------- 60,000 6 40,848,239 20,424,120 10,863,008 (879,000) (1,000)(35,180,171) (4,773,035) ========= ======= =========== ========== ========== =========== ========= ============ ===========
See accompanying notes to unaudited condensed consolidated financial statements F-46 APPLIED DNA SCIENCES, INC. (A DEVELOPMENT STAGE COMPANY) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
For the period September 16, 2002 (date of For The Three Months Ended inception) through December 31, December 31, 2004 2003 2004 ---- ---- ---- Cash flows from operating activities: Net loss from operating activities ........................................ $(12,365,136) $(7,542,490) $(35,180,170) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation .............................................................. 4,721 351 7,882 Organizational Expenses ................................................... 88,500 Preferred Shares issued in exchange for service ........................... -- -- 1,500,000 Warrants issued to consultants .......................... ................. 394,698 -- 2,414,560 Amortization of beneficial conversion feature-convertible notes............ 1,515,000 133,273 3,140,000 Common stock issued in exchange for consultant services rendered .......... 9,366,507 6,625,368 21,764,239 Common stock canceled-previously issued for services rendered ............. (642,605) (282,000) (928,180) Changes in Assets and Liabilities: Increase in-other assets .................................................. (1,065,318) -- (1,079,208) Increase in due related parties ................................ 1,523 -- 154,219 Increase (decrease) in accounts payable and accrued liabilities ........... 1,203,816 (61,589) 2,959,525 ------------ ------------ ------------ Net cash used in operating activities ..................................... (1,586,794) (1,127,087) (5,158,633) ------------ Cash flows from investing activities: Payments for patent filing ................................................ (4,347) -- (25,698) Payments for security deposits ............................................ (24,026) (23,559) (47,585) Capital expenditures ...................................................... (0) (29,507) (29,507) ------------ ------------ ------------ Net cash used in investing activities ..................................... (28,373) (53,066) (102,790) ------------ Cash flows from financing activities: Proceeds from sale of common stock, net of cost ........................... -- 266,000 432,000 Proceeds from subscription of common stock ................................ 250,000 104,000 375,000 Proceeds from sale of options ............................................. 36,000 32,000 277,000 Advances from shareholders ................................................ -- 34,004 100,088 Proceeds from notes payablele.............................................. 1,390,000 1,175,030 4,140,000 ------------ ------------ ------------ Net cash provided by financing activities ................................. 1,676,000 1,611,034 5,324,088 ------------ Net increase in cash and cash equivalents ................................. 60,833 430,881 62,665 Cash and cash equivalents at beginning of period .......................... 1,832 193,471 -- Cash and cash equivalents at end of period ................................ $ 62,665 $ 624,352 $ 62,665 ============ ============ ============ Supplemental Disclosures of Cash Flow Information: Cash paid during period for interest ...................................... -- -- -- Cash paid during period for taxes ......................................... -- -- -- Non-cash transaction Common stock issued for services .......................................... 9,366,507 6,625,368 21,765,239 Common stock canceled-previously issued for services rendered ............. (642,605) (282,000) (928,180) Common stock retired ...................................................... -- -- -- Deferred financing costs ................................................. 200,000.00 -- Beneficial conversion feature related to notes payable .................... 936,541 1,168,474.00 2,321,812 Beneficial conversion feature related to warrants ......................... 528,459 206,526.00 818,188 Preferred Shares in exchange for services.................................. 1,500,000 Warrants issued to consultants ............................................ 394,698 -- 2,414,560 Acquisition: Common stock retained ..................................................... 1,015 Assets acquired ........................................................... (135) ------------ Total consideration paid .................................................. 880 ------------ Organization expenses - note issued in excahnge of shares retired ......... 88,500 Common stock issued in exchange for note payable .......................... 88,500 -- 88,500
See accompanying notes to unaudited condensed consolidated financial statements F-47 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE A - SUMMARY OF ACCOUNTING POLICIES General The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-QSB, and therefore, do not include all the information necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended December 31, 2004 is not necessarily indicative of the results that may be expected for the year ended September 30, 2005. The unaudited condensed consolidated financial statements should be read in conjunction with September 30, 2004 financial statements. Business and Basis of Presentation On September 16, 2002, Applied DNA Sciences, Inc. (the "Company") was incorporated under the laws of the State of Nevada. The Company is in the development stage , as defined by Statement of Financial Accounting Standards No. 7 ("SFAS No. 7") and its efforts have been principally devoted to developing DNA embedded biotechnology security solutions in the United States. To date, the Company has generated nominal sales revenues, has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from inception through December 31, 2004, the Company has accumulated losses of $35,180,171 The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary ProHealth Medical Technologies, Inc. Significant inter-company transactions have been eliminated in Consolidation. Reclassification Certain prior period amounts have been reclassified for comparative purposes. Property and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives of 3 to 5 years using the straight line method. At December 31, 2004 property and equipment consist of: December 31, 2004 ----------------- Furniture $ 29,507 Accumulated depreciation 1,756 ================= Net $ 27,751 Advertising The Company will follow a policy of charging the costs of advertising to expenses incurred. The Company incurred advertising costs of $4,490 and $0, respectively during the three months ended December 31, 2004. Intangible Assets Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from one to ten years. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that an impairment exists. All of our intangible assets are subject to amortization. F-48 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued) Intangible Assets (continued) At December 31, 2004, intangible assets consist of: December 31, 2004 Intangible assets $ 34,257 Accumulated amortization (6,126) ----------- Net Intangible Assets $ 28,131 =========== Restricted Cash Per terms of the December Promissory Note Payable agreement dated December 20, 2004, all proceeds received from note holders remain in escrow subject to (1) the filing of a Definitive Information Statement that increases the authorized Common Stock and reduces par value, and (2) the closing of a Private Placement for $1 million or more and in the event of such occurrence the Note will automatically without notice to the note holder, in to Common Stock of the Company, at any time at $0.50 per share plus 100% warrant coverage with said warrant being exerciseable at $0.75 per share for a period of three years and callable at $1.25 after the underlying stock is registered if said stock trades at above $1.25 per share for 10 days - See Note F. Stock Based Compensation In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the exercise price of the related option. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended September 30, 2003 and for the subsequent periods. Had compensation costs for the Company's stock options been determined based on the fair value at the grant dates for the awards, the Company's net loss and losses per share would have been as follows (transactions involving stock options issued to employees and Black-Scholes model assumptions are presented in Note E): F-49 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued) Stock Based Compensation (Continued)
For the Period September 16, 2002 (Date of For The Three For The Three Inception) Months ended Months ended through December 31, December 31, December 31, 2004 2003 2004 Net loss - as reported $ (12,365,136) $(7,542,490) $(35,180,171) Add: Total stock based employee compensation expense as reported under intrinsic value method (APB. No. 25) - - - Deduct: Total stock based employee compensation expense as reported under fair value based method (SFAS No. 123) - - - - - - Net loss - Pro Forma $ (12,365,136) $(7,542,490) $ (35,180,171) Net loss attributable to common stockholders - Pro forma $ (12,365,136) $(7,542,490) $ (35,180,171) ============== ============ ============== Basic (and assuming dilution) loss per share - as reported $ (0.45) $ (0.40) $ (1.28) ============== ============ ============== Basic (and assuming dilution) loss per share - Pro forma $ (0.45) $ (0.40) $ (1.28) ============== ============ ==============
NOTE B - MERGER Acquisition On October 21, 2002, the Company completed a Plan and Agreement of Reorganization ("Merger") with ProHealth Medical Technologies, Inc. ("ProHealth") an inactive publicly registered shell corporation with no significant assets or operations. For accounting purposes, the Company shall be the surviving entity. The transaction is accounted for using the purchase method of accounting. The total purchase price and carrying value of net assets acquired of was $ 880. From November 1988 until the date of the merger, ProHealth was an inactive entity with no significant assets and liabilities F-50 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE B - MERGER (Continued) Effective with the Merger, all previously outstanding common stock, preferred stock, options and warrants owned by the Company's shareholders were exchanged for an aggregate of 10,178,352 shares of ProHealth common stock. The value of the stock that was issued was the historical cost of the ProHealth's net tangible assets, which did not differ materially from their fair value. In accordance with SFAS No. 141, the Company is the acquiring entity. Effective with the Merger, ProHealth changed its name to Applied DNA Sciences, Inc. The total purchase price and carrying value of net assets acquired of ProHealth was $1. The net assets acquired were as follows: Common stock retained by ProHealth shareholders $1,015 Assets acquired (135) Total consideration paid $880 In accordance with SOP 98-5, the Company expensed $880 as organization costs. NOTE C - RELATED PARTY TRANSACTIONS At December 31, 2004, notes payable are as follows:
December 31, 2004 ---------- Note payable , related party, together with interest at 8% per annum, unsecured. Upon default, the Company issued noteholder 7.5 million shares of the Company's common stock. The noteholder retained 2 million shares and set aside 3.5 million in escrow as third party deferred compensation for a future transaction $ - Note payable, unsecured, related party, payable from August 1, 2005, right to convert to restricted stock in lieu of cash, rate of interest 4%, 160,000 shares prior to October 31, 2005 or 180,000 shares after that date. 425,000 Due to ex-president, in September 2004, note holder entered into a private transaction, selling a total of 2,500,000 shares to him, after which he loaned all proceeds of $600,000 to us. 600,000 Note payable, ex-officer of the Company, due $100,000 upon first funding, 20% rate of interest, or 100,000 shares at par value of $0.001 100,000 ---------- 1,125,000 Less: current portion 1,125,000 ---------- Note payable - long-term $ - ----------
Included in current liabilities is $61,943 at December 31, 2004, which represents advances from the stockholders of the Company. No formal agreements or repayment terms exist. Also, the Company owed $168,857 at December 31, 2004 to the stockholders and other related parties towards accrued expenses. The Company leases office space under a sub lease agreement with an entity controlled by a significant former shareholder of the Company. F-51 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE C - RELATED PARTY TRANSACTIONS (Continued) The Company has entered into long term employment and consulting agreements with Company's President and Chief Executive Officer and an entity controlled by a former significant Company shareholder, respectively. NOTE D - CAPITAL STOCK The Company is authorized to issue 10,000,000 shares of preferred stock with a $.001 par value per share. The Company is authorized to issue 100,000,000 shares of common stock, with a $0.50 par value per share. In January 2004, the Company passed a resolution authorizing change in the par value per common shares from $0.0001 per share to $0.50 per share. As of December 31, 2004, the Company has issued and outstanding 40,848,239 common share with par value of $0.50 per share and 60,000 convertible preferred shares with par value of $0.0001. During the period September 16, 2002 through September 30, 2003, the Company issued 100,000 shares of common stock in exchange for reimbursement of services provided by the founders of the Company. The Company valued the shares issued at approximately $1,000, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In October, 2002, the Company issued 10,178,352 shares of common stock in exchange for the previously issued 100,000 shares to the Company's founders in connection with the merger with Prohealth Medical Technologies, Inc (see Note B). In October, 2002 the Company canceled 100,000 shares of common stock issued to the Company's founders. In October 2002 the Company issued 602,000 shares of common stock in exchange for services valued at $ 0.065 per share. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. In November and December 2002, the Company issued 876,000 shares of common stock in exchange for subscription at $ 0.065 per share. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. In January 2003, the Company canceled 836,000 shares of common stock previously issued in exchange for consulting services. In January 2003, the Company issued 1,500,000 shares of common stock in exchange for a licensing agreement (see Note H). The Company valued the shares issued at approximately $ .065 per share, which represents the fair value of the license received which did not differ materially from the value of the stock issued. The Company charged the cost of the license to operations. In January 2003, the Company issued 586,250 shares of common stock in exchange for consulting services. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.13 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. In February 2003, the Company issued 9,000 shares of common stock in exchange for consulting services. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. F-52 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE D - CAPITAL STOCK (continued) In March 2003, the Company issued 10,140,000 shares of common stock to Company's founders in exchange for services. In accordance with EITF 96-18 the measurement date to determine fair value was in September 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.0001 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. In March 2003, the Company issued 91,060 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $2.53 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In March 2003, the Company issued 6,000 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $ 0.065 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In March 2003, the Company received subscription for 18,000 shares of common stock in exchange for cash at $1 per share. On April 1, 2003, the Company issued 860,000 shares of common stock in exchange for consulting services provided to the Company. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. On April 9, 2003, the Company issued 18,000 shares of common stock in exchange for previously issued options to purchase the Company's common stock at $1.00 per share. On April 9, 2003, the Company issued 9,000 shares of common stock in exchange for consulting services provided to the Company. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. On April 23, 2003, the Company issued 5,000 shares of common stock in exchange for consulting services provided to the Company. The Company valued the shares issued at approximately $2.50 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. On June 12, 2003, the Company issued 10,000 shares common stock in exchange for consulting services provided to the Company. The Company valued the shares issued at approximately $ 2.50 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. On June 17 2003, the Company issued 50,000 shares of common stock in exchange for cash at $1.00 per share On June 30, 2003, the Company issued 270,000 shares of common stock in exchange for consulting services provided to the Company. In accordance with EITF 96-18 the measurement date to determine fair value was in October 2002. This was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued at approximately $0.065 per share, which presents the fair value of the services received which did not differ materially from the value of the stock issued. F-53 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE D - CAPITAL STOCK (continued) On June 30, 2003, the Company received $10,000 as subscription for options to purchase the Company's common stock at $1.00 per share. In June, 2003, the Company received $48,000 in connection with a subscription to purchase the Company's common stock pursuant to a private placement. In connection with the Company's acquisition of ProHealth, the controlling owner of ProHealth granted the Company an option to acquire up to 8,500,000 shares of the Company's common stock in exchange for $100,000 (see Note B). The option expires on December 10, 2004. On June 30, 2003, the Company exercised its option and acquired 7,500,000 common shares under this agreement in exchange for an $88,500 convertible promissory note payable to the former controlling owner. The Company has an option through December 10, 2004 to acquire the remaining 1,000,000 shares from the former controlling owner in exchange for $11,500. On June 30, 2003, the Company retired the 7,500,000 shares common acquired pursuant to the option agreement. In July 2003 the Company issued 213,060 shares of common stock for consulting services provided to the Company. The Company valued the shares issued at approximately $ 2.01 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In July 2003, the Company canceled 24,000 shares of common stock, previously issued for services valued at $2.50 per share. In July 2003, the Company received $20,000 in exchange for previously issued options to purchase the Company's common stock at $1.00 per share. In July 2003, the Company issued 10,000 shares of common stock for cash previously subscribed at $1.00 per share. In August 2003, the Company issued 172,500 shares of common stock in exchange for consulting services provided to the Company. The Company valued the shares issued at approximately $ 2.38 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued In August 2003, the Company received $29,000 in exchange for previously issued options to purchase the Company's common stock at $1.00 per share. In September 2003, the Company issued 395,260 shares of common stock in exchange for consulting services provided to the Company. The Company valued the shares issued at approximately $ 2.42 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In September 2003, the Company issued 19,200 shares of common stock for cash previously subscribed at $2.50 per share. In September 2003, the Company issued 6,400 shares of common stock issued in exchange for cash at $2.50 per share pursuant to private placement. In September 2003, the Company received $95,000 in exchange for previously issued options to purchase the Company's common stock at $1.00 per share. In September 2003, the Company received $300,000 in connection with a 7subscription to purchase the Company's common stock pursuant to a private placement. F-54 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE D - CAPITAL STOCK (continued) The Company valued the shares issued for consulting services at the rate which represents the fair value of the services received which did not differ materially from the value of the stock issued. In October 2003, the Company issued 15,000 shares of convertible preferred stock in exchange for services. The Company valued the shares issued at the $15 par value and recorded the value for services when the shares were converted into common shares as identified below. In October 2003, the Company issued 287,439 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $2.85 per share for a total of $820,418, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In October 2003, the Company issued 120,000 shares of common stock for shares previously subscribed at $2.50 per share in September 2003. In October 2003, the Company canceled 100,000 shares of common stock previously issued in exchange for services at $2.50 per share. In November 2003, the Company issued 100,000 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $3.00 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In November 2003, the Company sold 100,000 shares of common stock subscribed for cash at $2.50 per share pursuant to private placement. In December 2003, the Company sold 6,400 shares of common stock subscribed for cash at $2.50 per share pursuant to private placement. In December 2003, the Company issued 2,125,500 shares of common stock in exchange for consulting services. . The Company valued the shares issued at approximately $2.59 per share, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In December 2003, the Company received $104,000 in exchange for a common stock subscription at $2.50 per share pursuant to private placement. In January 2004, the Company issued 41,600 shares of common stock at $2.50 share pursuant to a subscription made on December 2003. In January 2004, the Company issued 13,040 shares of common stock at $2.95 per share in exchange for consulting services valued at $38,468. In January 2004, the Company issued 123,000 shares of common stock at $2.60 per share in exchange for consulting services valued at $319,800. In January 2004, the Company issued 1,000 shares of common stock at $3.05 per share in exchange for consulting services valued at $3,050. In February 2004, the Company issued 6,283 shares of common stock at $3.07 per share in exchange for employee services valued at $19,288. In March 2004, the Company issued 44,740 shares of common stock at $3.04 per share in exchange for consulting services valued at $136,010. F-55 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE D - CAPITAL STOCK (continued) In March 2004, the Company issued 55,000 of common stock for options exercised at $1.00 per share. In March 2004, the Company issued 5,443 shares of common stock at $3.00 per share in exchange for employee services valued at $16,344. In March 2004, the Company issued 5,769 shares of common stock at $3.15 per share in exchange for employee services valued at $18,177. In March 2004, the Company converted 5,000 preferred shares into 125,000 shares of common stock at $3.00 per share in exchange for employee services valued at $375,000. In March 2004, the Company issued 8,806 shares of common stock at $3.03 per share in exchange for employee services valued at $26,639. In April 2004, the Company issued 22,500 shares of common stock at $0.10 for subscription of warrants to be exercised. In April 2004, the Company issued 9,860 shares of common stock at $2.58 per share in exchange for employee services valued at $25,441. In April 2004, the Company issued 11,712 shares of common stock at $2.35 per share in exchange for consulting services valued at $27,523. In April 2004, the Company issued 367,500 shares of common stock at $1.50 per share in exchange for consulting services valued at $551,250. In April 2004, the Company retired 50,000 shares of common stock previously issued for consulting services at $0.065 per share or $3,250. In May 2004, the Company converted 4,000 preferred shares into 100,000 shares of common stock at $1.01 per share in exchange for consulting services valued at $101,250. In May 2004, the Company issued 10,000 shares of common stock at $0.10 per share in a stock subscription for $1,000. In May 2004, the Company issued 137,000 shares of common stock at $0.86 per share in exchange for consulting services valued at $119,233. In May 2004, the Company issued 26,380 shares of common stock at $1.15 per share in exchange for consulting services valued at $30,337. In June 2004, the Company retired 5,000 shares of common stock previously issued for consulting services at $0.065 per share or $325. In June 2004, the Company issued 270,500 shares of common stock at $0.67 per share in exchange for consulting services valued at $180,560. In June 2004, the Company issued 8,000 shares of common stock at $0.89 per share in exchange for consulting services valued at $7,120. In June 2004, the Company issued 50,000 shares of common stock at $0.645 per share in exchange for consulting services valued at $32,250. In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share for total proceeds of $250,000 pursuant to private placement. F-56 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE D - CAPITAL STOCK (continued) In July 2004, the Company issued 100,000 shares of common stock at $0.54 per share in exchange for consulting services valued at $54,000. In July 2004, the Company issued 5,000 shares of common stock at $0.72 per share in exchange for consulting services valued at $3,600. In July 2004, the Company issued 100,000 shares of common stock at $0.47 per share in exchange for consulting services valued at $47,250. In August 2004, the Company converted 2,000 preferred shares into 50,000 shares of common stock at $0.39 in exchange for consulting services valued at $19,500. In August 2004, the Company issued 100,000 shares of common stock at $0.39 in exchange for consulting services valued at $39,000. In August 2004, the Company issued 100,000 shares of common stock at $0.50 in exchange for consulting services valued at $50,250. In August 2004, the Company issued 200,000 shares of common stock at $0.56 in exchange for consulting services valued at $112,500. In September 2004, the Company issued 1,000,000 shares of common stock at $0.52 in exchange for consulting services valued at $517,500. In September 2004, the Company issued 45,000 shares of common stock at $0.50 in exchange for consulting services valued at $22,288. In September 2004, the Company converted 4,000 preferred shares into 100,000 shares of common stock at $0.41 in exchange for consulting services valued at $54,000. In September 2004, the Company issued 60,000 convertible preferred shares at $25.00, in exchange for consulting services valued at $1,500,000. In October 2004, the Company issued 200,000 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $0.68 per share for a total of $136,000, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In October 2004, shareholders returned 1,069,600 shares to treasury issued earlier in exchange for services valued at $642,098. In October 2004, the Company issued 82,500 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $0.60 per share for a total of $49,500, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In October 2004, the Company sold 500,000 shares of common stock subscribed for cash at $0.60 per share pursuant to private placement. In October 2004, the Company issued 532,500 shares of common stock to existing noteholders. The Company valued the shares issued at approximately $0.50 per share for a total of $266,250. F-57 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE D - CAPITAL STOCK (continued) In October 2004, the Company sold 500,000 shares of common stock subscribed for cash at $0.50 per share pursuant to private placement. In October 2004, the Company sold 1,000,000 shares of common stock subscribed for cash at $0.45 per share pursuant to private placement. In October 2004, the Company issued 315,000 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $0.45 per share for a total of $141,750, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In November 2004, the Company issued 100,000 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $0.47 per share for a total of $47,000, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In November 2004, the Company issued 300,000 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $0.80 per share for a total of $240,000, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In November 2004, the Company issued 115,000 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $1.44 per share for a total of $165,600, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In November 2004, the Company issued 5,000 shares of common stock in exchange for employee services. The Company valued the shares issued at approximately $1.44 per share for a total of $7,200, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In November 2004, the Company issued 60,000 shares of common stock in exchange for employee services. The Company valued the shares issued at approximately $0.60 per share for a total of $36,000, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In December 2004, the Company issued net 5,500,000 shares of common stock for default as per terms of notes payable for $88,500. Out of total, 3,500,000 shares were retained in escrow on behalf of another party for future deferred compensation. In December 2004, the Company issued 5,796,785 shares of common stock in exchange for consulting services. The Company valued the shares issued at approximately $1.44 per share for a total of $8,317,207, which represents the fair value of the services received which did not differ materially from the value of the stock issued. In December 2004, the Company issued 2,930,000 shares of common stock subscribed for cash at $0.50 per share pursuant to the exercise terms of a promissory note payable. F-58 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE D - CAPITAL STOCK (Continued) In accordance with EITF 96-18 the measurement date to determine fair value was the date at which a commitment for performance by the counter party to earn the equity instrument was reached. The Company valued the shares issued for consulting services at the rate which represents the fair value of the services received which did not differ materially from the value of the stock issued. NOTE E - STOCK OPTIONS AND WARRANTS Warrants The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company's common stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed or financing expenses in connection with the sale of the Company's common stock.
Warrants Outstanding Exercisable Remaining Weighted Weighted Weighted Number Contractual Average Average Average Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price --------------- ----------- -------------- ----------- -------------- $0.10 335,000 4.54 $0.10 335,000 $0.10 $0.50 50,000 4.77 $0.50 50,000 $0.50 $0.60 6,322,750 4.30 $0.60 6,322,750 $0.60 $0.70 750,000 2.58 $0.70 750,000 $0.70 $0.75 2,830,000 2.98 $0.75 2,830,000 $0.75 $1.00 386,000 0.79 $1.00 386,000 $1.00 $3.00 62,503 1.00 $3.00 62,503 $3.00 ---------- ---------- 10,736,253 10,736,253 ========== ========== Transactions involving warrants are summarized as follows: Number of Shares Weighted Average Price Per Share Outstanding at September 30, 2004 4,870,253 $ 0.63 Granted 5,866,000 0.68 Exercised - - Canceled or expired - - -------------------- - Outstanding at December 31, 2004 10,736,253 $ 0.66 ==================== ========
The estimated value of the compensatory warrants granted to non-employees in exchange for services and financing expenses was determined using the Black-Scholes pricing model and the following assumptions: contractual term of 2 to 5 years, a risk free interest rate of 4.25%, a dividend yield of 0% and volatility of 22.9%. The amount of the expense charged to operations for compensatory warrants granted in exchange for services was $ 394,698 for the three months ended December 31, 2004. F-59 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE A summary of convertible promissory notes payable at December 31, 2004 (Unaudited) is as follows:
December 31, 2004 (Unaudited) A) Convertible notes payable ("Bridge Unit Offering"), in quarterly installments of interest only at 10% per annum, secured by all assets of the Company and due on the earlier of the 9-month anniversary date of the initial closing of the Offering, or the completion of any equity financing of $3M or more; The Company, in its sole discretion, may prepay principal at any time without penalty. The Notes are convertible into shares of common stock of the Company at a price of $2.50 per share. 1,675,000 Debt Discount - beneficial conversion feature, net of accumulated amortization of $1,290,837 as of December 31, 2004 - Debt Discount - value attributable to warrants attached to notes, net of accumulated amortization of $384,163 as of December 31, 2004 - B) Convertible notes payable totaling $1,465,000 ("December Promissory Notes"), at the earlier of Definitive Information Statement that increases the authorized Common Stock and reduces par value or the completion of any equity financing of $1M or more bearing interest at 6% per annum. The Notes are convertible into shares of common stock of the Company at a price of $0.50 per share.At December 31, 2004, convertible notes are converted into common shares of the Company as per the terms - Debt Discount - beneficial conversion feature, net of accumulated amortization of $936,541 as of December 31, 2004. - Debt Discount - value attributable to warrants attached to notes, net of accumulated amortization of $528,459 as of December 31, - 2004. ----------- $ 1,675,000 ===========
Convertible Debentures During 2004, the Company sold 33.5 units (the "Units") to accredited investors at a price of $50,000 per Unit (the "Bridge Offering") for a total of $1,675,000. Each Unit consists of (i) a $50,000 Principal Amount 10% Secured Convertible Promissory Note ("Note" or "Notes"), (ii) warrants to purchase 50,000 shares of our common stock, exercisable for a period of five years at a price of $0.60 per share ("$0.60 Warrant") and (iii) warrants to purchase 10,000 shares of our common stock, exercisable for a period of five years at a price of $0.10 per share ("$0.10 Warrant" and together with the $0.60 Warrant, the "Warrants"). The Notes are convertible into shares of our common stock at a price of $0.33 per share. F-60 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE F - CONVERTIBLE PROMISSORY NOTES PAYABLE (continued) In accordance with EMERGING ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR CONVERTIBLE SECURITIES WITH A BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS ("EITF 98-5"), the Company recognized an imbedded beneficial conversion feature present in the Bridge Offering note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital. The Company recognized and measured an aggregate of $1,290,837 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the Bridge Offering. The debt discount attributed to the beneficial conversion feature is amortized over the Bridge Offering's earliest maturity period of 9 months from the date of issue as interest expense. In connection with the placement of the Bridge Offering notes, the Company offered 100% warrant coverage for each dollar of promissory note, exercisable for a period of three years at a price of $0.75 per share ("$0.75 Warrant"). In accordance with EMERGING ISSUES TASK FORCE ISSUE 00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS ("EITF - 0027"), the Company recognized the value attributable to the warrants in the amount of $384,163 to additional paid in capital and a discount against the Bridge Offering. The Company valued the warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 4.25%, a dividend yield of 0.00%, and volatility of 42%. The debt discount attributed to the value of the warrants issued is amortized over the Bridge Offering's earliest maturity period of 9 months from the date of issue as interest expense. In December 2004, the Company sold convertible promissory notes to accredited investors in the aggregate of $1,465,000. Each $1.00 is convertible into common stock at $0.50 and includes 100% warrant coverage to purchase our common stock, exercisable for a period of three years at a price of $0.75 per share ("$0.75 Warrant") and callable at $1.25 after the underlying stock is registered if said stock trades at above $1.25 per share for 10 days - See Note A, Restricted Cash. In accordance with EMERGING ISSUES TASK FORCE ISSUE 98-5, ACCOUNTING FOR CONVERTIBLE SECURITIES WITH A BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS ("EITF 98-5"), the Company recognized an imbedded beneficial conversion feature present in the Bridge Offering note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital. The Company recognized and measured an aggregate of $936,541 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid in capital and a discount against the Bridge Offering. The debt discount attributed to the beneficial conversion feature was fully amortized over the fiscal first quarter period as interest expense. In connection with the placement of the Bridge Offering notes, the Company offered 100% warrant coverage for each dollar of promissory note, exercisable for a period of three years at a price of $0.75 per share ("$0.75 Warrant"). In accordance with EMERGING ISSUES TASK FORCE ISSUE 00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS ("EITF - 0027"), the Company recognized the value attributable to the warrants in the amount of $528,459 to additional paid in capital and a discount against the Bridge Offering. The Company valued the warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and the following assumptions: contractual terms of 3 years, an average risk free interest rate of 4.25%, a dividend yield of 0.00%, and volatility of 26.72%. The debt discount attributed to the value of the warrants issued was fully amortized over the fiscal first quarter period as interest expense. F-61 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE G- INCOME TAXES The Company has adopted Financial Accounting Standard No. 109 which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant. At December 31, 2004, the Company has available for federal income tax purposes a net operating loss carryforward of approximately $35,000,000, expiring in the year 2023, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company, it is more likely than not that the benefits will not be realized. Due to significant changes in the Company's ownership, the future use of its existing net operating losses may be limited. Components of deferred tax assets as of December 31, 2004 are as follows: Non current: Net operating loss carryforward $12,000,000 Valuation allowance (12,000,000) ----------- Net deferred tax asse $ - =========== F-62 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE H-LOSSES PER SHARE The following table presents the computation of basic and diluted losses per share:
For the Three Months Ended For the Three Months Ended December 31, 2004 December 31, 2003 ----------------- ----------------- Loss available for common shareholders $ (12,365,136) $ (7,542,590) ================= ================= Basic and fully diluted loss per share $ (0.45) $ (0.41) ================= ================= Weighted average common shares outstanding 27,402,160 18,503,162
Net loss per share is based upon the weighted average of shares of common stock outstanding NOTE I- COMMITMENTS AND CONTINGENCIES Licensing Agreement In October 2002, the Company entered into an exclusive Licensing Agreement ("License") with Biowell Technology, Inc., a company formed under the laws of Taiwan, Republic of Taiwan. The initial term of the License expires in 2007 with renewal options under certain terms and conditions. The License grants the Company the exclusive use of certain patented DNA technology, along with the rights to future technology, in exchange for an initial payment of 1,500,000 shares of the Company's restricted common stock (see Note D). The Company is obligated to order minimum purchase orders or make future certain minimum annual royalty payments as follows: Year ending Minimum purchase orders Alternative Minimum October 8, Royalty Payable 2005 360,000 - 2006 432,000 - 2007 518,400 - Consulting Agreement GP has been engaged, on a non-exclusive basis, to provide advice and assistance to the Company regarding issues associated with Applied DNA's proprietary DNA embedded security solutions. GP will assist the Company with strategic positioning and enhancement of the Company's business, and will assist the Company in the development of domestic and international marketing strategies for the Company's DNA products and services. The term of the engagement is one year from the effective date, with automatic one year renewals unless either party expresses, in writing, an intention not to renew within 60 days prior to the expiration of the term. F-63 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE I- COMMITMENTS AND CONTINGENCIES (Continued) Consulting Agreements (continued) As compensation for GP's performance, the Company will pay GP an aggregate advisory fee of Two Million Dollars ($2,000,000) payable in increments over the term and renewal term. Two payments of $500,000 each were made by the Company in September 2004 and January 2005. Thereafter, eight payments of $125,000 are due monthly over the period February through September 2005. Additionally, the Company will issue a net-exercisable warrant to purchase shares of Common Stock of the Company at a later date. Fees were placed in escrow during GP's completion of its due diligence review. All promotional materials of the Company, on a going forward basis, will be submitted to GP for its review, including all advertising, written sales promotion, press releases, news clippings and other publicity matters relating to GP's engagement and the strategic relationship created. Franchising and Distribution Agreements The Company has entered into a Distribution and Franchising Agreement ("Franchise Agreement") in July 2003. Under the terms of the Franchise Agreement, the franchisee is obligated to pay the Company $3,000,000 payable $25,000 upon execution of the Franchise Agreement and the balance of $2,975,000 payable over five (5) years with interest accruing at 8% per annum. Payments under the Franchise Agreement are subject to franchisee's net profits, as defined, under the Franchise Agreement. Note Payable Settlement In October 2004, the Company defaulted on a note held by a former company officer and director in the amount of $88,500 (See Note C), and in accordance with the default, the noteholder had the right to demand that his outstanding note be converted back into 7,500,000 shares. The Company subsequently settled the matter for 5,500,000 shares with the noteholder. Included within the 5,500,000 shares are 3,500,000 shares retained in escrow for negotiated on behalf of another party for future deferred compensation. Litigation Ex-officer was named as a defendant in a lawsuit brought by an outside party in the United States District Court for the Central District of California, and in that action, Applied DNA was named as a "nominal defendant." The plaintiff is alleging that the ex-officer violated the short swing rule. The Company believes it has meritorious defenses and will prevail in this matter. F-64 APPLIED DNA SCIENCES, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION DECEMBER 31, 2004 (UNAUDITED) NOTE I- COMMITMENTS AND CONTINGENCIES (Continued) Operating Lease Commitments The Company leases office space under operating lease in Los Angeles, California for its corporate use from an entity controlled by significant former shareholder, expiring in November 2006. Total lease rental expenses for the three months ended on December 31, 2004 was $47,194. Commitments for minimum rentals under non-cancelable lease at September 30, 2004 were as follows: Year ended September 30, 2005 $ 139,308 2006 143,977 2007 12,031 ----------- $ 295,316 Employment and Consulting Agreements The Company has employment agreements with the Company's officers and certain employees. These employment agreements provide for salaries and benefits, including stock options and extend up to seven years. In addition to salary and benefit provisions, the agreements include defined commitments should the employer terminate the employee with or without cause. The Company has a consulting agreement with an entity controlled by a former significant shareholder of the Company. The consulting agreement provides for compensation and certain benefits, including stock options and extends up to seven years. In addition to compensation and benefit provisions, the agreements include defined commitments should the employer terminate the consultant with or without cause. The Company has consulting agreements with outside contractors to provide marketing and financial advisory services. The Agreements are generally for a term of 12 months from inception and renewable automatically from year to year unless either the Company or consultant terminates such engagement by written notice. NOTE J- SUBSEQUENT EVENTS In January 2005, the Company arranged a $5.970 million private placement of 11.940 million shares at $0.50 per share along with 11.940 million attached warrants with an exercise price of $0.75 that expires in 5 years. In January 2005, holders of 1,675,000 of convertible notes payable elected to convert their notes to common stock at $0.33 per share (See Note F). On January 2005, the Company entered into a stock purchase agreement with Biowell Technology Inc.,a Taiwan corporation ("Biowell"), whereby a to-be-formed wholly- owned subsidiary of the Company would acquire a company to be formed which would own all of the intellectual property of Biowell in exchange for 36,000,000 shares of the Company's common stock to be issued to the shareholders of Biowell. The Acquisition Shares represent 50% of the total shares issued and outstanding on a fully diluted basis on the date of execution of the Agreement. In February 2005, the Company in a private placement, sold an aggregate of $1,391,000 in secured convertible promissory notes and 2,782,000 warrants. The notes bear interest at 10% per annum, mature one year from the date of issuance, and are convertible: into shares of common stock of the Company at a price of $0.50 per share (i) at the holder's option; or (ii) automatically upon the Company's filing of a registration statement registering the shares underlying the notes and Warrants. F-65 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our Articles of Incorporation, as amended, provide to the fullest extent permitted by Nevada law, our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended, is to eliminate our right and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in its Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers. In addition, we have entered into indemnification agreements with our officers and directors. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth an itemization of all estimated expenses, all of which we will pay, in connection with the issuance and distribution of the securities being registered: NATURE OF EXPENSE AMOUNT SEC Registration fee $ 6,571.87 Accounting fees and expenses 10,000.00* Legal fees and expenses 40,000.00* Miscellaneous 3,428.13 ----------- TOTAL $60,000.00* =========== * Estimated. II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. On September 16, 2002, our predecessor issued 100,000 unregistered shares of common stock to its founders in exchange for services rendered, which we valued at $1,000. On October 21, 2002, we issued 10,178,352 unregistered shares of common stock in connection with the merger with Applied DNA Sciences, Inc. We valued the shares at $1,018. our predecessor cancelled the previously issued and outstanding 100,000 shares of common stock in October, 2002. In October 2002, we issued 602,000 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $39,130. In October 2002, we issued 876,000 unregistered shares of common stock in connection with a subscription agreement, which we valued at $56,940. In January 2003, we issued 1,500,000 unregistered shares of common stock to Biowell Technology, Inc. as consideration for technology licensing agreement, which we valued at $97,500. In January 2003, we issued 586,250 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $76,213. In February 2003, we issued 9,000 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $585. In March 2003, we issued 10,140,000 unregistered shares of common stock to its Founders as consideration for services rendered, which we valued at $1,014. In March 2003, we issued 91,060 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $230,634. In March 2003, we issued 6,000 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $390. In March 2003, we issued 860,000 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $55,900. In April 2003, we issued 18,000 unregistered shares of common stock in exchange for $18,000. In April 2003, we issued 9,000 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $585. In April 2003, we issued 5,000 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $12,500. In June 2003, we issued 10,000 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $25,000. In June 2003, we issued 50,000 unregistered shares of common stock in exchange for $50,000. In June 2003, we issued 270,000 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $17,550. In July 2003, we issued 213,060 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $428,818. In July 2003, we issued 20,000 unregistered shares of common stock in exchange for $20,000. II-2 In July 2003, we issued 10,000 unregistered shares of common stock in exchange for $10,000. In August 2003, we issued 172,500 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $410,930. In August 2003, we issued 29,000 unregistered shares of common stock in exchange for $29,000. In September 2003, we issued 395,260 unregistered shares of common stock to consultants as consideration for services rendered, which we valued at $952,997. In September 2003, we sold 16 units at $4,000 a unit, for a total of $64,000. Each Unit consisted of 1,600 shares of our Common Stock plus 500 Common Stock Purchase Warrants, exercisable for a period of two years at a price of $3.50 a share. The Warrants are exercisable on a one for one basis at an exercise price of $3.50 per share for a two year exercise period from the date of issuance. In September, 2003, we issued 95,000 unregistered shares of common stock in exchange for $95,000. Between October and December 2003, we sold 167.5 units for a total of $670,000. Each Unit consisted of 1,600 shares of our Common Stock plus 500 Common Stock Purchase Warrants, exercisable for a period of two years at a price of $3.50 a share. From November through December 2003, we sold 23.25 units to accredited investors at a price of $50,000 per Unit for a total of $1,162,500. Each Unit consists of (i) a $50,000 Principal Amount 10% Secured Convertible Promissory Note, (ii) warrants to purchase 50,000 shares of our common stock, exercisable for a period of five years at a price of $3.20 per share and (iii) warrants to purchase 10,000 shares of our common stock, exercisable for a period of five years at a price of $0.10 per share. The Notes are convertible into shares of our common stock at a price of $2.50 per share. From October 7 through to October 30, 2003, we issued a total of 255,439 shares of our Common Stock to eight consultants for their marketing, investor relations and advisory services. These issuances are considered exempt from registration by reason of the Section 4(2) of the Securities Act of 1933. On October 9, 2003, we issued 120,000 shares to an investor in our 2003 Private Placement of Units for total proceeds of $300,000. This issuance is considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933 as well as Regulation D of the Act, and Rule 506 promulgated thereunder. In October 2003, the Company issued 32,000 shares of common stock in exchange for previously issued non-compensatory warrants exercised at $1.00 per share. This issuance is considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933. On November 3, 2003, we issued 100,000 shares to an employee as a signing bonus and for sales and marketing services in lieu of salary. This issuance is considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933. From November 18, 2003 through December 5, 2003, we issued a total of 106,400 shares of our Common Stock to two investors in our 2003 Private Placement of Units for total proceeds of $266,000. These issuances are considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933 as well as Regulation D of the Act, and Rule 506 promulgated thereunder. From December 5, 2003 through December 24, 2004, we issued a total of 275,500 shares of our Common Stock to consultants and employees for their investor relations, sales, marketing and advisory services. These issuances are considered exempt from registration by reason of the Section 4(2) of the Securities Act of 1933. II-3 On December 17, 2003, we issued a total of 1,850,000 shares to ten consultants in connection with our agreement with the company's investment bankers, Vertical Capital Partners, Inc.. These issuances are considered exempt from registration by reason of the Section 4(2) of the Securities Act of 1933. In January 2004, the Company issued a total of 41,600 shares of Common Stock at $2.50 per share in fulfillment of a stock subscription made in December 2003 to various consultants in exchange for administrative, marketing, financial advisory and legal consulting services. These issuances are considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933. To conserve capital, in February 2004, the Company issued 6,283 shares of Common Stock to employees in lieu of their cash salaries. Such issuances were considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933. In March 2004, the Company issued 44,740 shares of Common Stock in exchange for consulting services. Such issuances were considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933. In March 2004, the Company issued 55,000 of common stock for options exercised at $1.00 per share. In March 2004, the Company issued 125,018 shares of Common Stock in exchange for employee services. Such issuances were considered exempt from registration by reason of Section 4(2) of the Securities Act of 1933. In March 2004, the Company issued 22,500 of common stock at $0.10 for subscription of warrants to be exercised. This issuance is considered exempt under Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder, as well as Section 4(2) of the Act. In March 2004, the Company issued 5,443 of common stock at $3.00 per share in exchange for employee services valued at $16,344. In March 2004, the Company issued 5,769 of common stock at $3.15 per share in exchange for employee services valued at $18,177. In March 2004, the Company issued 8,806 of common stock at $3.03 per share in exchange for employee services valued at $26,639. In April 2004, the Company issued 22,500 shares of common stock at $0.10 for subscription of warrants to be exercised. In April 2004, the Company issued 9,860 shares of common stock at $2.58 per share in exchange for employee services valued at $25,441. In April 2004, the Company issued 11,712 shares of common stock at $2.35 per share in exchange for consulting services valued at $27,523. In April 2004, the Company issued 367,500 shares of common stock at $1.50 per share in exchange for consulting services valued at $551,250. In April 2004, the Company retired 50,000 shares of common stock previously issued for consulting services at $0.065 per share or $3,250. In May 2004, the Company issued 100,000 shares of common stock at $1.01 per share in exchange for consulting services valued at $101,250. In May 2004, the Company issued 10,000 shares of common stock at $0.10 per share in a stock subscription for $1,000. II-3 In May 2004, the Company issued 137,000 shares of common stock at $0.86 per share in exchange for consulting services valued at $119,413. In May 2004, the Company issued 26,380 shares of common stock at $1.15 per share in exchange for consulting services valued at $30,337. In June 2004, the Company retired 5,000 shares of common stock previously issued for consulting services at $0.065 per share or $325. In June 2004, the Company issued 270,500 shares of common stock at $0.67 per share in exchange for consulting services valued at $180,560. In June 2004, the Company issued 8,000 shares of common stock at $0.89 per share in exchange for consulting services valued at $7,120. In June 2004, the Company issued 50,000 shares of common stock at $0.64 1/2 per share in exchange for consulting services valued at $32,250. In June 2004, the Company sold 250,000 shares of common stock at $1.00 per share for total proceeds of $250,000 pursuant to private placement. On June 30, 2004, we issued 50,000 shares of our common stock to an investor relations firm as compensation for services performed on our behalf. On July 23, 2004 and August 2, 2004, we issued an aggregate of 55,000 shares of our common stock to our legal counsel as compensation for legal services performed on our behalf. From July through September 2004, we issued an aggregate of 1,550,000 shares of our common stock to certain of our officers, directors and employees as compensation for services performed on our behalf. On September 21, 2004, we issued 100,000 shares of our common stock pursuant to a conversion by one of the holders of our convertible preferred stock. On October 1, 2004, we issued a total of 199,999 shares to parties related to an investment banker with which we have a non-exclusive engagement. On October 13, 2004, we issued a total of 257,500 shares to two consultants for financial advisory and marketing services. On October 18, 2004, we issued a total of 347,500 shares to previous investors as consideration for our agreement to extend our registration commitment. On October 19, 2004, we issued 1,000,000 shares to a single investor for total proceeds of $500,000. On October 26, 2004, we issued a total of 500,000 shares to parties related to our investment banker in settlement for various breaches made in our Placement Agent Agreement. On November 4, 2004, we issued 100,000 to an employee as compensation for services previously rendered. On November 15, 2004 through December 17, 2004, we issued a total of 415,000 shares to a consultant for financial advisory services. On December 17, 2004, we issued 5,000 shares to an employee for services previously rendered. II-4 To obtain funding for our ongoing operations, we sold $1,465,000 in convertible promissory notes to 13 investors in December 2004. Each promissory note was automatically convertible into shares of our common stock, at a price of $0.50 per share, upon the closing of a private placement for $1 million or more. In connection with the sale of the convertible promissory notes, we issued 2,930,000 warrants to purchase shares of common stock. The warrants are exercisable until three years from the date of issuance at a purchase price of $0.75 per share. This issuance is considered exempt under Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder. On January 4, 2005, we issued 12,500 shares as a result of an investor's exercise of his $0.10 warrants. This issuance is considered exempt under Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder. Also on January 10, 2005, we issued additional shares to our investors in accordance with an adjustment provision in our private placement and placement agent agreement. We issued a total of 3,249,750 shares of Common Stock to 24 investors. This issuance is considered exempt under Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder. On January 13, 2005, we issued additional shares to two consultants in accordance with an adjustment provision in their consulting agreements. A total of 662,000 shares were issued. This issuance is considered exempt under Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder. To obtain funding for our ongoing operations, we conducted a private placement offering in January and February 2005, in which we sold $7,361,000 of 10% Secured Convertible Promissory Notes to 61 investors. The 10% Secured Convertible Promissory Notes automatically convert into shares of our common stock, at a price of $0.50 per share, upon the filing of this registration statement. In connection with the private placement offering, we have issued 15,222,000 warrants. The warrants are exercisable until five years from the date of issuance at a purchase price of $0.75 per share. This issuance is considered exempt under Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder. On January 28, 2005, we closed upon a private placement transaction in excess of $1 million, and on February 2, 2005, the promissory notes issued in December 2004 were converted into an aggregate of 2,930,000 shares of common stock. This issuance is considered exempt under Regulation D of the Securities Act of 1933 and Rule 506 promulgated thereunder. * All of the above offerings and sales were deemed to be exempt under rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of Applied DNA Sciences or executive officers of Applied DNA Sciences, and transfer was restricted by Applied DNA Sciences in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings. Except as expressly set forth above, the individuals and entities to whom we issued securities as indicated in this section of the registration statement are unaffiliated with us. II-5 ITEM 27. EXHIBITS. The following exhibits are included as part of this Form SB-2. References to "the Company" in this Exhibit List mean Applied DNA Sciences, Inc., a Nevada corporation. Exhibit No. Description 2.1 Articles of Merger of Foreign and Domestic Corporations, filed December 19, 1998 with the Nevada Secretary of State, filed as an exhibit to the annual report on Form 10-KSB filed with the Commission on December 29, 2003 and incorporated herein by reference. 3.1 Articles of Incorporation of DCC Acquisition Corporation, filed April 20, 1998 with the Nevada Secretary of State, filed as an exhibit to the annual report on Form 10-KSB filed with the Commission on December 29, 2003 and incorporated herein by reference. 3.2 Articles of Amendment of Articles of Incorporation of DCC Acquisition Corp. changing corporation name to ProHealth Medical Technologies, Inc. 3.3 Certificate of Designations, Powers, preferences and Rights of the Founders' Series of Convertible Preferred Stock, filed as an exhibit to the annual report on Form 10-KSB filed with the Commission on December 29, 2003 and incorporated herein by reference. 3.4 Articles of Amendment of Articles of Incorporation of Applied DNA Sciences, Inc. increasing the par value of the company's common stock, filed on December 3, 2003 with the Nevada Secretary of State, filed as an exhibit to the annual report on Form 10-KSB filed with the Commission on December 29, 2003 and incorporated herein by reference. 3.5 By-Laws of Applied DNA Sciences, Inc., filed as an exhibit to the annual report on Form 10-KSB filed with the Commission on December 29, 2003 and incorporated herein by reference. 4.1 Form of Subscription Agreement, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. 4.2 Form of 10% Secured Convertible Promissory Note, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. 4.3 Form of Warrant Agreement, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. 4.4 Registration Rights Agreement, dated January 28, 2005, between the Company and Vertical Capital Partners, Inc., on behalf of the investors, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. 4.5 Security Agreement, dated January 28, 2005, between the Company and Vertical Capital Partners, Inc., on behalf of the investors, filed as an exhibit to the current report on Form 8-K filed with the Commission on January 28, 2005 and incorporated herein by reference. 5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed herewith) 10.1 Exclusive License Agreement between Biowell Technology Corp. and Applied DNA Sciences, Inc. executed on October 8, 2002. 10.2 Sub-License Agreement with G. A. Corporate Finance Ltd. Applied DNA Sciences, Inc., executed on July 29, 2003, as amended, filed as an exhibit to the current report on Form 8-K filed with the Commission on September 29, 2003 and incorporated herein by reference. II-6 10.3 Indemnification Agreement with Larry Lee. 10.4 Indemnification Agreement with Robin Hutchison. 10.5 Indemnification Agreement with Michael Hill. 10.6 Indemnification Agreement with Peter Brocklesby. 10.7 Indemnification Agreement with Adrian Botash. 10.8 Indemnification Agreement with Karin Klemm 10.9 Indemnification Agreement with Ron Erickson 10.10 Giuliani Partners Strategic Marketing Partnership Agreement 10.11 Stock Purchase Agreement, dated as of January 28, 2005, by and between Applied DNA Sciences, Inc. and Biowell Technology, Inc., filed as an exhibit to the current report on Form 8-K filed with the Commission on February 2, 2005 and incorporated herein by reference. 10.12 Investment Advisory Agreement, dated as of February 14, 2005, by and between Applied DNA Sciences, Inc. and First London Finance, Ltd. 23.1 Consent of Russell Bedford Stefanou Mirchandani LLP (filed herewith). 23.2 Consent of legal counsel (see Exhibit 5.1). ITEM 28. UNDERTAKINGS. The undersigned registrant hereby undertakes to: (1) File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"); (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement, and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (4) For purposes of determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time it was declared effective. (5) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-7 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-8 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorizes this registration statement to be signed on its behalf by the undersigned, in the City of Los Angeles, State of California, on February 15, 2005. APPLIED DNA SCIENCES, INC. By:/s/ ROB HUTCHISON ------------------ Rob Hutchison, Chief Executive Officer, Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and Chairman of the Board of Directors In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated. SIGNATURE TITLE DATE /s/ ROB HUTCHISON Chief Executive Officer and February 15, 2005 - --------------------- Chairman of the Board of Directors Rob Hutchison /s/ PETER BROCKELSBY President and Director February 15, 2005 - --------------------- Peter Brockelsby /s/ LAWRENCE LEE Chief Technology Strategist February 15, 2005 - --------------------- and Director Lawrence Lee /s/ MICHAEL HILL Director February 15, 2005 - --------------------- Michael Hill /s/ RON ERICKSON Director February 15, 2005 - --------------------- Ron Erickson II-9 EX-5 2 feb142005ex51.txt EXHIBIT 5.1 SICHENZIA ROSS FRIEDMAN FERENCE LLP 1065 Avenue of the Americas, 21st Flr. New York, NY 10018 Telephone: (212) 930-9700 Facsimile: (212) 930-9725 February 14, 2005 VIA ELECTRONIC TRANSMISSION Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 RE: Applied DNA Sciences, Inc. Form SB-2 Registration Statement (File No. 333-) Ladies and Gentlemen: We refer to the above-captioned registration statement on Form SB-2 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), filed by Applied DNA Sciences, Inc., a Nevada corporation (the "Company"), with the Securities and Exchange Commission. We have examined the originals, photocopies, certified copies or other evidence of such records of the Company, certificates of officers of the Company and public officials, and other documents as we have deemed relevant and necessary as a basis for the opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as certified copies or photocopies and the authenticity of the originals of such latter documents. Based on our examination mentioned above, we are of the opinion that the securities being sold pursuant to the Registration Statement are duly authorized and will be, when issued in the manner described in the Registration Statement, legally and validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to our firm under "Legal Matters" in the related Prospectus. In giving the foregoing consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act, or the rules and regulations of the Securities and Exchange Commission. /s/ Sichenzia Ross Friedman Ference LLP - --------------------------------------- Sichenzia Ross Friedman Ference LLP EX-10 3 feb122005sb2ex101.txt Exhibit 10.1 EXCLUSIVE LICENSING AGREEMENT This Exclusive Licensing Agreement ("Agreement") is made as of Oct. 8, 2002 by and between Biowell Technology Inc., a company duly incorporated and organized under the laws of Taiwan, Republic of China, ("ROC), having its principal office at 18F, No. 959, Chung-Cheng Rd., Chung-Ho City, Taipei County, Taiwan, 235 ROC, (hereinafter referred to as "Biowell") and Applied DNA Sciences, Inc., a corporation duly incorporated under the laws of the State of Nevada, United States of America with principal office at 9255 West Sunset Blvd. Suite 805, Los Angeles, California 90069, USA ("Licensee"), either or both of which is referred to as a "party" or the "parties. RECITALS A. Biowell has developed various technologies and know-how including, without limitation, various DNA based anti-counterfeiting technologies ("Technology"), and owns the rights to patents and patent applications covering several aspects of this Technology. In addition Biowell possesses proprietary knowledge of the Technology. Biowell desires to license the right to manufacture Licensed Products for Licensee to manufacture Licensed Products in the Territory as defined in Exhibit 1 attached hereto using materials purchased from Biowell. Biowell also desires to sell various parts and components related to the Products to Licensee for Licensee to manufacture the Licensed Products. Biowell also desires to sell finished Biowell Products to Licensee. B. Licensee desires to: (a) purchase materials to manufacture the Licensed Products itself for sale in the Territory; or (b) purchase finished Biowell Products from Biowell for resale in the Territory. DEFINITIONS Unless the context requires otherwise, whenever used in this Agreement the following terms and expressions shall have the following meaning: "Agreement" shall mean this agreement including its Exhibits, as it may be amended from time to time by written agreement of both parties. "Average Biowell Share Price" means the average closing price of Biowell common shares as reported on the relevant national market exchange for each of the [fifteen (15)] trading days immediately preceding the date of exercising the Biowell Option. 1 "Average Licensee Share Price" means the average closing price of Licensee common shares as reported on the relevant national market exchange for each of the [fifteen (15)] trading days immediately preceding the date of exercising the Licensee Option. "Biowell Option" means the option issued to Licensee or its lawful successor-in-interest by Biowell as further described in Section 4. "Biowell Option Shares" means the number of shares of common stock in Biowell deliverable upon exercise of the Biowell Option, as adjusted from time to time. "Biowell Products" means Products manufactured by Biowell. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the city of Taipei and New York are authorized by law to close. "Business Methods" mean business methods developed, licensed to, and/or owned by Biowell relating to the Technology and Products. "Company" shall mean either Licensee or Biowell where relevant. "Confidential Information" includes all information, whether written or oral, in whatever form disclosed, concerning any technologies, products, developments, business methods, business plans, marketing, investment, management, financial and other business affairs in connection with all matters relating to or arising out of this Agreement, including without limitation the Technology, the Business Methods and Know How. "Customers" means any natural or legal person(s) or entities primarily solicited by Licensee under this Agreement in the Territory. "Delivery Date" shall mean the date specified by Licensee in a Purchase Order on which a Product or Product Material is required to be delivered by Biowell to Licensee. "Exercise Period" means the three calendar years immediately following the Effective Date of this Agreement. "Holder" means Licensee where Licensee is the holder of the Biowell Option or is offering to exercise the Biowell Option; and means Biowell where Biowell is the holder of the Licensee Option or is offering to exercise the Licensee Option. "Intellectual Property Rights" shall mean: (a) patents, designs, utility models, design rights, copyrights, database rights, topography rights, trade or service marks (whether or not registered) or any similar rights in brands; (b) applications for any of the foregoing and the right to apply therefor in any jurisdiction; 2 (c) Know-How, trade secrets and other Confidential Information; and (d) domain name registrations; (e) and all or any similar or equivalent rights arising or subsisting in any jurisdiction. "Know-How" means all technical, operational and commercial Confidential Information (including but not limited to Confidential Information relating to product development, business plans, business models, marketing, and other business affairs of the disclosing party) required for the exploitation of Technology or related to the Products, and including such Confidential Information as may relate to any Intellectual Property therein. "Maximum Licensee Shares" means 500,000 common shares in Licensee or Licensee's successor-in-interest. "Maximum Biowell Shares" means 500,000 common shares in Biowell. "Minimum Guarantee" shall mean the minimum quantity of business volume to be generated by Licensee on behalf of Biowell as further described in the attached Exhibit 2. "Product" means either Licensed Product or Biowell Product as the context requires, as specified in Exhibit 3 attached hereto. "Product Materials" means any and all raw materials required to manufacture the Licensed Products for resale in the Territory. "Purchase Order" shall mean an order for Biowell Products that Licensee submits and Biowell accepts. All Purchase Orders will be gathered and controlled by the terms of this Agreement unless otherwise agreed to in writing by Licensee and Biowell. "Licensee Option" means the option issued to Biowell by Licensee as further described in Section 4. "Licensee Option Shares" means the number of shares of common shares in Licensee or Licensee's successor-in-interest deliverable upon exercise of the Licensee Option, as adjusted from time to time. "Licensed Products" means Products as described in Exhibit 3 manufactured by Licensee incorporating Product Materials. "Territory" means the territories specified in Exhibit 1. 3 1. Grant of Exclusive Right 1.1 Subject to the terms and conditions of this Agreement and for so long as Licensee is in compliance with all of its obligations hereunder, Biowell hereby grants an exclusive right for Licensee to: (a) manufacture the Products using only Product Materials purchased from Biowell or its authorized designees for resale in the Territory; and (b) resell the Products, either purchased from Biowell directly or manufactured by Licensee using Product Materials purchased from Biowell, in the Territory (collectively, "Exclusive License"). Licensee shall purchase Product Materials only from Biowell or its authorized designees. The parties understand that the exclusivity of the manufacturing arrangement requires that Licensee give an undivided priority of the highest loyalty to the Products in all business endeavours. No express or implied licenses of any type for the Technology shall be granted to Licensee. 1.2 Licensee may also purchase finished completed Biowell Products from Biowell for resell in the Territory under the procedures set forth in this Agreement. 1.3 Upon the terms specified in this section, Biowell shall license any new improvements, modifications or alterations related to the Products in this Agreement to Licensee ("New Improvement License"). Subject to the terms of this Agreement, Biowell shall also grant an exclusive license to market every new anti-fraud products developed by Biowell while this Agreement remains in effect ("New Product License"), Such New Product License shall remain exclusive for 365 calendar days after the date Licensee can actually sell the New Products in the Territory. In order to maintain the exclusivity of such New Product License in Licensee's Territory for the second calendar year, Licensee must provide Biowell with received gross order for such every New Products amounting to US$100,000.00 ("Minimum Guarantee for New Products") during the first calendar year. Licensee will need to increase its sales by 20% annually in years 2, 3, 4, and 5 in order to keep its exclusive license for any new products at which point these products will fall into the same category and conditions placed on the original licensed product line. 1.4 Support. Biowell shall provide reasonable telephonic and electronic mail ("e-mail") support to Licensee on an as needed basis, during Biowell's regular business hours. Biowell shall appoint a liaison to communicate with Licensee, and Licensee shall funnel its inquiries through such appointed liaison so as to minimize any disruption to the staff of Biowell. Licensee agrees to provide Biowell with timely written notification containing specific details of problems to enable Biowell to diagnose such problems. 4 1.5 Professional Guidance Licensee wishes to build lab(s) in its Territory, at its own cost, for the purpose of analyzing, testing and/or manufacturing Licensed products, and Biowell agrees at its own discretion and at Licensee's cost, to assist Licensee by providing Licensee with reasonable professional guidance, technical support and training; the terms and conditions of which guidance, support and training will be subject to the written agreement of the parties. 2. Term 2.1 Unless terminated in accordance with the terms of this Agreement, this Agreement shall be effective as of the date of execution of this Agreement, and shall remain in effect for five calendar years following the execution of this Agreement ("Initial Term"). In the event that Licensee complies with all of the Minimum Guarantee targets described in Exhibit 2, this Agreement shall be automatically renewed for five calendar years following the Initial Term ("Second Term"). If during the Second Term, Licensee fails to fully comply with the Minimum Guarantee target set forth on paragraph (e) of Exhibit 2 in any calendar year during such Second Term, then Licensee shall forfeit its Exclusive License and Biowell reserves the right to terminate this Agreement with immediate effect by giving written notice to Licensee. Licensee reserves the right to remain as the non-exclusive Licensee with the term and conditions to be determined by both parties. 2.2 Biowell can not sell Products to Customers of the Licensee without Licensee's prior consent and without paying licensee its fee and without written consent by the licensee for the term of this agreement and for 1 (one) year following the expiration or termination of this Agreement, on condition that non-exclusive License Agreement is in effect. Introducing any new Products to these Customers may only be done with written consent by the Licensee and shall be done on such terms as are mutually agreed by both Licensee and Biowell. 2.3 NON CIRCUMVENTION. In the event of circumvention of this agreement by either party directly or indirectly; the circumvented party shall be entitled to a legal monetary penalty equal to the maximum benefit it should realize from such a transaction affected by such breach plus any and all expenses including but not limited to all legal costs and expenses incurred to recover the lost revenue. 2.4 In the event of termination not attributable to Licensee Biowell will have the responsibility to continue to honor this Agreement with Licensee in respect of assisting Licensee to fulfill any outstanding agreements with Customers of the Licensee. In the event of termination, Biowell will have the responsibility to continue to honor any outstanding agreements with customers of the Licensee and must pay Licensee or designee it's fees for the life of the relationship with this customer as the non-exclusive Licensee unless the parties have mutually agreed to end this relationship at which time Biowell will not be required to pay Licensee a fee to service the customers. Biowell only has a right to work with customers of Licensee that are under contract all others on the contact list provided by Licensee may not be contacted for a period of one year following any termination of this agreement. 5 3. Price and Payment 3.1 In consideration for receiving the Exclusive License for the Initial Term, Licensee shall issue or cause to be issued to Biowell one million five hundred thousand shares (1,500,000 shares) of the new publicly listed company following the proposed merger with ADNAS. This consideration will satisfy the royalty for the Initial Term of the Exclusive License and will be rendered to Biowell within 60 days after the closing of the proposed merger with a public company and such shares shall be non-refundable by Biowell under any circumstances. If for any reason, such as inability to obtain necessary government or third party approvals for the issuance contemplated in this Section, Biowell is unable to obtain such share issuance or is only able to obtain a portion of such share issuance within six (6) months following the execution of this Agreement, Biowell may terminate this Agreement. Full and timely fulfillment of its obligation concerning the above mentioned consideration shall entitle Licensee to receive such training sessions and written materials from Biowell related to Biowell Products, as Biowell in its sole discretion shall decide to provide. Biowell reserves all Intellectual Property Rights in any materials provided in such training. 3.2 Biowell agrees to negotiate the terms and to abide by a leak out agreement and conditions of a standstill agreement with Licensee. Upon acceptance of such terms and conditions by both Parties, Biowell shall execute such standstill agreement and shall agree not to sell its shares obtained under this agreement for a period of one calendar year after the expiration of the standstill period. Biowell agrees that if it decides to sell such shares, then each such transaction shall be subject to Rule 144 until Biowell's position is outside of Rule 144 and Biowell has decreased it's ownership in ADNAS below 10% at which time Biowell agrees to abide by a leak out not to exceed gross selling of 5% of the previous months trading volume. This stand still /leak out agreement will apply to any designee, assignee or successor that may gain ownership of said shares secured by Biowell under the terms or conditions of this Agreement. 6 3.3 The prices charged by Biowell for the Biowell Products and Product Materials shall be those set forth as Exhibit 4. All prices are FOB (Taiwan, ROC) and payment to Biowell from Licensee shall be due thirty calendar days after delivery of the relevant Biowell Products and Product Material to the carrier for shipment to Licensee. Prices are exclusive of costs of transportation, insurance, taxes, customs, duties, landing, storage and handling fees, and/or documents or certificates required for exportation or importation, which will be separately itemized and billed to Licensee in accordance with this Section 3.3. Both Parties agree to negotiate a fee for Biowell Product and Product Materials that will make the Licensee very competitive in the Territory with any other potential competition that may arise over the period. This competitive rate should not be increased more than the previous calendar years published inflation rate in the United States or 10 percent, whichever is higher without the consent by the Licensee. 3.4 No amounts payable to Biowell pursuant to the Agreement may be reduced due to counterclaim, set-off, adjustment or other right which Licensee may have against Biowell unless the Licensee has received defective product at which time Biowell will be obligated to rectify this situation in accordance with the relevant terms of this Agreement. Any payment not made within the due date specified in each relevant Purchase Order shall bear interest at a rate equal to the rate specified in the relevant Purchase Order affected by the late payment. 3.5 Security. Biowell reserves the right to request from the Licensee a cash deposit or letter of credit in a form to be approved by Biowell and issued by a bank acceptable to it in an amount not exceeding the total credit extended by Biowell for each Purchase Order, provided that Biowell reserves the right to obtain an increase in the amount of the letter of credit in its sole discretion (the "Letter of Credit"). Licensee agrees to continuously renew or replace the Letter of Credit, as necessary, to keep it in effect during the term of Biowell's extension of credit to Licensee under any Purchase Order and shall within ten (10) Business Days of any draw down on the Letter of Credit by Biowell, replenish any amounts drawn down so that the amount of the Letter of Credit never falls below the amount set forth in this Section, as the same may be increased pursuant to this Section. Nothing contained herein shall limit or be interpreted to limit Biowell's right. 7 4 Option and Subscription of Shares 4.1 Subject to obtaining the necessary corporate, third party and government approvals, including without limitation, the approval by the Securities and Futures Commission and the Investment Commission of the ROC, Licensee may subscribe for new shares of common stock issued by Biowell in an amount up to the Maximum Biowell Shares under the Biowell Option granted to Licensee under this Section 4. Biowell agrees to make such shares available to Licensee by any lawful means possible. 8 4.2 Grant of Licensee Option. For value received in the form of the mutual grant of warrants between the parties, Licensee hereby irrevocably grants to Biowell the Licensee Option as of the Effective Date of this Agreement (the "Option Issue Date"). Subject to the terms and conditions hereinafter set forth, Biowell is entitled, upon delivery of the Licensee Option at the principal office of Licensee (or at such other place as Licensee shall notify the Holder hereof in writing) in accordance with this Section 4, to purchase from Licensee such number of Licensee Option Shares up to the Maximum Licensee Shares at the strike price of US$ 2 per share or 20% below the Average Licensee Share Price, which ever is lower. The number of shares of Licensee Option Shares issuable pursuant to this Section 4.2 shall be subject to adjustment pursuant to this Agreement. 4.3 Grant of Biowell Option. For value received in the form of the mutual grant of warrants between the parties, Biowell hereby irrevocably grants to Licensee or its lawful successor-in-interest the Biowell Option as of the Effective Date of this Agreement (the "Option Issue Date"). Subject to the terms and conditions hereinafter set forth, Licensee is entitled, upon delivery of the Biowell Option at the principal office of Biowell (or at such other place as Biowell shall notify the Holder hereof in writing) in accordance with this Section 4, to purchase from Biowell such number of Biowell Option Shares up to the Maximum Biowell Shares at the strike price of US$ 3 per share or 20% below the Average Biowell Share Price, which ever is lower. The number of shares of Biowell Option Shares issuable pursuant to this Section 4.2 shall be subject to adjustment pursuant to this Agreement. 4.4 Both Biowell and Licensee shall use good faith and fair dealing to negotiate the standard industry terms and conditions for piggy back registration rights relating to their respective Option shares and the underlying shares, where permitted under the local laws. 4.5 Exercise Period of Option. The Licensee Option and Biowell Option shall be exercisable, in whole or in part, from their respective Option Issue Date and shall terminate at 5:00 p.m. Taipei time on the Business Day immediately following the end of the Exercise Period. 4.6 Method of Exercise of Option. While the option of either Parties remain outstanding and exercisable in accordance with this Section 4, the respective Holder of such Option may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: 9 (a) the surrender of the respective Option, together with a duly executed copy of the form of Notice of Election attached hereto as Exhibit 5, to the secretary of the relevant company at its principal office ("Exercise Notice") at the address listed in this Agreement; and (b) the payment to the relevant company of an amount equal to the relevant exercise price for the relevant shares being purchased. 4.6 Upon such delivery and payment, the Holder shall be deemed to be the Holder of record of the relevant Licensee Option Shares or Biowell Option Shares, as the case may be, notwithstanding that the stock transfer books of the relevant company shall then be closed or that certificates representing such shares shall not then be actually delivered to the Holder or that, to the extent permitted by law, the covenants undertaken in Exhibit 6 have not all been performed. 4.7 Covenants of Both Parties. Each Party hereby covenants to the other Party to undertake the activities listed in Exhibit 6, attached and made a part of this Agreement. 4.8 Representations & Warranties of Both Parties. Each Party hereby warrants and represents to the other Party that the matters stated in Exhibit 7 are substantially true and correct as of the date of this Agreement. In addition, Licensee represents and warrants to Biowell that it has the necessary ability and experience to carry out the obligations assumed by it under this Agreement with the highest standards of the industry. Licensee further warrants that by entering into this Agreement, it is not and will not be in breach of any express or implied obligation to any third party. 4.9 Adjustment of Shares. The number of and kind of shares purchasable upon exercise of the relevant option and the relevant option exercise price shall be subject to adjustment from time to time as follows: (a) Subdivisions, Combinations and Other Issuances. If the Company shall at any time prior to the expiration of the Exercise Period subdivide its common shares, by split-up or otherwise, or combine its common shares, or issue additional shares of its common shares as a dividend, the number of Shares issuable on the exercise of the relevant option shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the purchase price payable per share, but the aggregate purchase price payable for the total number of the relevant option shares purchasable under the relevant option (as adjusted) shall remain the same. Any adjustment under this Section 4.9(a) shall become effective at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend. 10 (b) Reclassification, Reorganization and Consolidation. In case of any reclassification, capital reorganization, or change in the common shares of the relevant Company (other than as a result of a subdivision, combination, or stock dividend provided for in Section 4.9(a) above), then, as a condition of such reclassification, reorganization, or change, lawful provision shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the expiration of the relevant option to purchase, at a total price equal to that payable upon the exercise of the relevant option, the kind and amount of shares of stock and other securities and property receivable in connection with such reclassification, reorganization, or change by a Holder of the same number of shares of common stock as were purchasable by the Holder immediately prior to such reclassification, reorganization, or change. In any such case appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities and property deliverable upon exercise hereof, and appropriate adjustments shall be made to the purchase price per share payable hereunder, provided the aggregate relevant exercise price shall remain the same. (c) Notice of Adjustment. When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of the relevant option, or in the relevant option exercise price, the Company shall promptly notify the Holder of such event and of the number of shares of the relevant option shares or other securities or property thereafter purchasable upon exercise of the relevant option. (d) No Impairment. The Company and the relevant Holder will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company or the Holder, respectively, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4.9 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Company and the Holder against impairment. 11 4.10 Issuance of Shares. The Company shall ensure that the relevant shares, when issued pursuant to the exercise of the relevant option, will be duly and validly issued, fully paid and nonassessable and free from all taxes, liens, and charges with respect to the issuance thereof. 4.11 Transfer of Option. Subject to compliance with applicable securities laws, the options granted hereunder and all rights (but only with all related obligations) hereunder are transferable in whole or in part by the Holder upon the prior written consent of the Company. The transfer shall be recorded on the books of the Company upon (i) the surrender of the relevant option, properly endorsed, to the Company at its principal offices, (ii) the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer and (iii) such transferee's agreement in writing to be bound by and subject to the terms and conditions of the relevant option. In the event of a partial transfer, the Company shall issue to the holders one or more appropriate new options. 5. Board of Advisor and Consultant 5.1 Dr. Sheu or his authorized nominee or Biowell will have the right to serve as Board of Advisor in Licensee, who will have right to receive notice of and participate in the meetings of the board of director of Licensee without voting powers. 5.2 Biowell will invite a nominee of Licensee as a consultant to participate meetings of the board of directors of Biowell without voting powers. 6. Licensee Obligations 6.1 Licensee will source, solicit, and attract potential customers in the Territory for purchasing Products either made by Licensee using Product Materials or purchased directly from Biowell and Licensee shall promote, market, and extend the sale of the Products in the Territory to potential customers in the Territory. Licensee shall not bind Biowell to any express or implied legal obligation with any third parties, including Licensee's customers, while Licensee is executing this Agreement. Licensee shall market, promote, and resell the Products on its own behalf and not as an agent or representative of Biowell. 6.2 Licensee will perform any and all post-sale servicing of any type for customers. Biowell shall not perform any support services to Licensee's customers unless both parties agree otherwise in writing. 12 6.3 If any dispute arises in the Territory involving Biowell under this Agreement, Licensee will use its best endeavors to limit the potential damages to Biowell that could be caused by the dispute. Further, Licensee will inform Biowell without undue delay of the nature of the dispute and comply with all reasonable directions of Biowell in relation thereto. 6.4 Licensee shall have the right to sub-license in its Territory in accordance with this Section 6.4. Specifically, Licensee shall have the right to authorize any third party to receive or utilize any benefit derived by Licensee under this Agreement. Each, such authorization or sub-licensing must be approved by Biowell and any resulting agreement must be co-signed by Biowell. Biowell shall be reasonable with any such request. Any new sub licensee shall comply in all respects with the same restrictions placed on Licensee by Biowell in the original license. 7. Indemnity 7.1 Indemnity against any Third Party Claims. Each Party ("Indemnifying Party") will indemnify, defend, and hold the other Party, its officers, directors, agents, employees, and affiliates, ("Indemnity Parties") harmless from and against any and all liabilities, damages, losses, expenses, claims, demands, suits, fines or judgments, including reasonable attorney fees, costs and expenses incidental thereto, which may be suffered by, accrued against, charged to or recoverable from the Indemnity Parties, arising out of any third party claim. Promptly after receipt by the Indemnity Parties of a threat of any action, or a notice of the commencement or filing of any action against which the Indemnity Party may be indemnified hereunder, the Indemnity Party shall give written notice thereof to Indemnifying Party. Indemnifying Party shall have sole control of the defense and of all negotiations for settlement of such action. The indemnity provided herein shall not apply if the alleged claim arises from any action or inaction however attributable to Indemnity Parties. 8. Product & Product Materials Ordering Procedure, Forecasts, Change Orders, & Cancellation 13 8.1 Biowell, within the limitations contained in this Agreement, agrees to use best efforts to sell to Licensee, respectively, such quantities of Product and Product Materials as Licensee may order in accordance herewith. 8.2 Purchase of Products. Subject to the terms and conditions of this Agreement, Biowell hereby agrees to sell and Licensee agrees to purchase the Products and Product Materials during the term of this Agreement. 8.3 Licensee agrees to meet the relevant Minimum Guarantee as set forth in Exhibit 2 attached to this Agreement for each relevant sales period described in Exhibit 2. Failure to meet the Minimum Guarantee on any single occasion constitutes a material breach of this Agreement permitting Biowell to terminate this Agreement after written notice has been given to the Licensee and the Licensee has been given 60 days to comply with the relevant Minimum Guarantee not met by Licensee by either making up the shortfall in cash payable to Biowell or new Purchase Orders in order to rectify any potential breach of this agreement. 8.4 Forecast. Approximately thirty (30) Business Days prior to the first calendar day of each calendar month during the term of this Agreement, Licensee will provide Biowell with a [six (6)] month binding forward-looking rolling forecast for internal planning requirements (the "Forecast"). Licensee shall provide the first of such Forecast three (3) months after the signing date of this Agreement. 8.5 Purchase Orders. Purchases shall be initiated by Licensee's written or electronically dispatched Purchase Orders referencing the quantity, the Product, applicable price, shipping instructions and requested Delivery Dates. All Purchase Orders for Products and Product Materials placed by Licensee hereunder shall be governed by the terms and conditions of this Agreement. In the event of a conflict between the provisions of this Agreement and the terms and conditions of Licensee's Purchase Order or Biowell's acknowledgement or other written or oral communications, the provisions of this Agreement shall prevail and any such conflicting terms and conditions are hereby rejected. Biowell shall use reasonable efforts to fill orders promptly, but shall not be liable for any damage to Licensee or any third party for failure to fill any orders, or for any delay in delivery or error in filling any orders. Biowell will use its best efforts to accept each Purchase Order issued by Licensee. Biowell will ship all Product within the Lead Time unless Licensee's Purchase Order specifically states a delivery schedule for Product different from such lead time and such delivery schedule is accepted in writing by Biowell. 8.6 Purchase Order Information. Purchase Orders issued by Licensee shall, to the extent necessary for Biowell to fulfill the terms thereof, include: (i) description of Products and Product Materials, (ii) quantity of Products and/or Product Materials, (iii) price per unit of Products and Product 14 Materials (iv) total order price, (v) Delivery Date, and (vi) delivery location. Except as otherwise explicitly provided in this Agreement, any changes to or rescheduling of an accepted Purchase Order must be mutually agreed and incorporated into a written Change Order referencing the original Purchase Order. 8.7 Confirmation. Within five calendar days of its receipt of the Purchase Order, Licensor must send written notice to LICENSEE for acceptance of the order ("Confirmation"); 8.8 Delivery Terms. All Products delivered to Licensee shall be FOB (Taipei, Taiwan, ROC) or other place of shipment as specified in writing by Licensee and agreed to by Biowell. Biowell may ship partial orders provided Biowell notifies Licensee and Licensee agrees prior to shipment. Licensee's Purchase Order shall specify the carrier or means of transportation or routing, and Biowell will comply with Licensee's instructions. If Licensee fails to provide shipping instructions, Biowell shall select the best available carrier, on a commercially reasonable basis. 8.9 Change Orders and Rescheduling. Any modification to a Purchase Order shall be made in writing by an authorized representative of Licensee ("Change Order") and sent to Biowell, and such Change Order shall be subject to acceptance in writing by Biowell and shall not be binding until such acceptance. 9. Non-competition & Non-solicitation 9.1 During the term of this Agreement, Biowell shall not solicit Customers solely developed by Licensee. Upon any termination of this Agreement, the above restriction shall apply for a period of one year with the exception of customers under contract to receive Product from Biowell. Biowell shall be entitled to a detailed and exhaustive list of all contact information for any and all Customers under contract to receive Biowell Products. This is due to Biowell within five Business Days of the date of termination of this Agreement and will follow provisions as described in section 2 (2.4). 9.2 Customers of the Licensee are the sole property of the licensee and are not under any restraints or conditions implied by Biowell and will not be contacted or solicited by Biowell for a period of one year following any termination or dissolution of this agreement with the exception of 2 (2.4). 9.3 Licensee and Biowell shall not, without the prior written consent from the other party directly or indirectly (including without limitation, through any Affiliate of either party), (i) solicit or request any person who is at the time an employee of or a consultant of the other party to leave the employment of or terminate such person's relationship with that party or (ii) employ, hire, engage or be associated with, or endeavor to entice away from the respected party any such person. 15 9.4 Licensee or Biowell shall not, directly or indirectly (including without limitation, through any Affiliate of either party) (i) solicit any existing customer of either party or any entity that shall have been a customer of that party at any time within twelve (12) months of terminating this agreement to cease doing business in whole or in part with that party (ii)?intentionally attempt to limit or interfere with any business agreement or relationship existing between either party and/or its Affiliates with any third party; or (iii) disparage the business reputation of the party (or its management team) or take any actions that are harmful to the parties goodwill with its customers, providers, vendors, employees, the media or the public. 10. Confidentiality 10.1 Licensee shall not use or divulge or communicate to any person (other than those whose province it is to know the same or as permitted or contemplated by this Agreement or with the written approval of the other party or as may be required by law): (i) any Confidential Information ; or (ii) any of the terms of this Agreement 10.2 Licensee shall prevent the unauthorised publication or disclosure of any such information, materials or documents and ensure that any person, subject to the written approval of Biowell, to whom the information, materials or documents are disclosed is aware that the same is confidential and is covered by a similar duty to maintain confidentiality. 10.3 Licensee shall ensure that its employees are aware of and comply with the confidentiality and non-disclosure provisions contained in this Section and shall indemnify Biowell against any loss or damage which Biowell may sustain or incur as a result of any breach of confidence by Licensee's employees. 10.4 The provisions of this section 10 shall survive the termination of this Agreement with 10 years. 16 11. Reservation of Rights 11.1 Biowell reserves the right at any time: ( i ) to make modifications or additions to the Technology, Product Materials, and Products in respect to any designs as Biowell may in its discretion determine; and such modifications or additions will be automatically granted to the licensee and will be considered an improvement to the licensed product line; (ii) to discontinue selling Product Materials and Products if those products or parts therefor are discontinued or replaced except for those Products and Product Materials accepted to be delivered under a confirmed purchase order; and (iii) to require Licensee either not to use or to cease to use any advertising or promotional material in respect to the Product Materials and Products which Biowell considers not to be in Biowell's best interests, upon 30 days written notice to licensee. 12. Legal Relationship 12.1 Nothing herein shall contain any facts as to suggest that Biowell and Licensee are engaging in a joint venture or partnership. Licensee shall have no authority to bind Biowell in any legal obligation. Licensee shall only contract with customers on its own behalf. 13. Termination Notwithstanding anything else contained herein, this Agreement may be terminated. 13.1 Biowell may terminate this agreement if the Licensee: (a) sells, assigns, attempts to sell or assign, or ceases to carry on, its main business or the business related to this Agreement unless parties mutually agree otherwise; (b) fails to meet any Minimum Guarantee target (not including the relevant Minimum Guarantee for New Products under Section 1.3, which shall be subject to Section 13.6) during the then current term of the Agreement; or (c) fails to comply with any of its obligations under this Agreement; 13.2 Immediately by Biowell if the control of Licensee has been transferred without the prior written approval of Biowell which approval shall not be unreasonably denied; 13.3 Immediately by either if the other party becomes insolvent or starts negotiations about re-composition with its creditors or a petition in bankruptcy is filed by or against it or it makes an assignment for the benefit of its creditors; 17 13.4 by either party after having given 60 days notice in writing to the other party if the other party breach any of its material obligations under this Agreement and such breach is not cured within the above-mentioned period; 13.5 Licensee shall not be entitled to any compensation (whether for loss of distribution rights, goodwill or otherwise) as a result of the termination of this Agreement in accordance with its terms. 13.6 Except as otherwise stated herein, in case Biowell has ground(s) to terminate this Agreement because Licensee had failed to meet any Minimum Guarantee target (not including the relevant Minimum Guarantee for New Products under Section 1.3) during the then current term of the Agreement, Biowell (in addition to asserting any legal right and remedy at law or in equity) shall have the right to terminate the Exclusive License granted in this Agreement in which case such Agreement shall remain effective to the extent that Licensee shall remain as a non-exclusive Licensee, with the same shipping terms and conditions and the same price for Products for existing Customers as of the date of termination, but price for the Products may be increased by up to 10% for new Customer orders only. All other terms and conditions shall be subjected to the Parties' agreement. For the avoidance of any doubt, such right to remain as a non-exclusive Licensee shall not be available to Licensee in case Biowell terminates this Agreement for any other reason specified in this agreement. 13.7 Remedy of Breach and Alternative to Termination: Licensee shall have 60 days to remedy/cure any potential breach or violation of terms in this agreement from the date it receives written notification by courier or US mail. Biowell hereby grants to Licensee a special termination-option to convert its Licensee designation to that of a non-exclusive manufacturer in the event of a non-curable breach. As an alternative to forced termination, Licensee may, at its own discretion, exercise this option prior to the initiation of termination. Licensee shall have this option available, in lieu of termination for any reason and at its sole discretion, to become a non-exclusive manufacturer of Biowell and/or a Licensee for the Products and Technology in the Territory on such terms and conditions to be determined by the parties. 14. Effect of Termination On the termination of this Agreement: 14.1 All rights and obligations of the parties hereunder shall automatically terminate except for such rights of action as shall have accrued prior to such termination and any obligation which expressly or by implication are intended to come into or continue in force on or after such termination; 18 14.2 Licensee shall, at its own expense, return to Biowell or otherwise dispose of as Biowell may instruct, all technical and promotional materials and other documents and papers whatsoever sent to Licensee and relating to the Technology, Product Materials and Products or the business of Biowell (other than correspondence between the parties) and all property of Biowell in Licensee's possession or under its control. 15. Exclusion of Liability 15.1 Except as set out in this Agreement or to the extent prohibited by law, all conditions, warranties and representations, expressed or implied by (i) statute, (ii) civil code or (iii) otherwise, in relation to any Technology, Product Materials and Products, are excluded by Biowell. 15.2 Except as otherwise provided in this Agreement, Biowell shall not be liable to Licensee, whether for negligence, breach of contract, misrepresentation or otherwise, for: (a) loss or damage incurred by Licensee as a result of third party claims (whether in relation to Intellectual Property Rights or otherwise); or (b) indirect or consequential damage suffered by Licensee, including, without limitation, loss of profits, goodwill, business opportunity or anticipated saving. 15.3 Biowell shall not be liable for any loss, damages, expenses or liabilities arising from an infringement or claim of infringement of third party rights in the Intellectual Property Rights subsisting in the Technology, Product Materials and Products howsoever arising in connection with this Agreement. 15.4 Limited Warranty. ---------------- Biowell warrants that all Products and Product Materials sold by Biowell to Licensee under the terms of this Agreement will be materially free from defects in workmanship and materials and substantially conform to the relevant Specifications under normal use and service for a period of [ twelve 12 ] months after delivery to the carrier for shipment to Licensee. Within five Business Days of Licensee's receipt of the relevant Product Materials and Products, Licensee shall notify Biowell if any Product Materials or Products contains a material defect in materials or workmanship, or otherwise fails to materially conform to the Specifications during the warranty period. Biowell shall at its expense correct any such defect by repairing such defective Product Materials and Products or, at Biowell's option, by delivering to Licensee an equivalent Product Materials and Products replacing such defective Product Materials and Products. Biowell may inspect and verify such alleged defect in the Territory and Licensee will not need to ship the alleged defective items to Taiwan. Such remedies for any breach of warranty as listed in this Section 15.4 shall be the sole and exclusive remedies available to Licensee at law or in equity. 19 15.5 WARRANTY EXCLUSIONS. BIOWELL SHALL NOT BE LIABLE UNDER ANY WARRANTY IF ITS TESTING AND EXAMINATION DISCLOSES THAT THE ALLEGED DEFECT IN THE PRODUCT OR PRODUCT MATERIAL DOES NOT EXIST OR WAS CAUSED BY LICENSEE'S OR ITS END USER'S MISUSE, NEGLECT, IMPROPER INSTALLATION OR TESTING, UNAUTHORIZED ATTEMPTS TO REPAIR, OR BY ACCIDENT, FIRE, LIGHTNING OR OTHER HAZARD. 15.6 Biowell will be liable for the product manufactured by Biowell. Biowell will cause such action to take place as necessary that will grant the representative the rights to handle product liability for clients in the territory. Licensee's customers are not required to go to licensor directly to file a claim against product liability. Licensee will handle the liability on behalf of the licensor. All expenses in this matter shall be paid by licensor or licensor's insure. 15.7 EXCEPT FOR THE EXPRESS WARRANTIES CREATED UNDER THIS AGREEMENT AND EXCEPT AS SET FORTH OTHERWISE IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES OF ANY KIND OR NATURE ARISING OUT OF THIS AGREEMENT OR THE SALE OF PRODUCTS, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING THE POSSIBILITY OF NEGLIGENCE OR STRICT LIABILITY), OR OTHERWISE, EVEN IF THE PARTY HAS BEEN WARNED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE, AND EVEN IF ANY OF THE LIMITED REMEDIES IN THIS AGREEMENT FAIL OF THEIR ESSENTIAL PURPOSE. In no event shall the aggregate liability of Biowell in connection with this Agreement, or any other materials or services provided under this Agreement, whether arising in contract, tort or under any other legal theory (including, without limitation, negligence or strict liability), exceed the total value of the relevant Purchase Order. 15.7 Licensee will not pass through to its retailers or customers or any other third party any warranties made by Biowell hereunder and will expressly indicate to its retailers or customers that they must look solely to Licensee in connection with any problems, warranty claims or other matters concerning the Product. 20 16. Intellectual Property Rights 16.1 All Intellectual Property Rights, including without limitation patents, designs, utility models, copyrights trade or service marks, Know-How, trade secrets and other proprietary information, in or relating to the Technology, Product Materials and Products and any other products and services related thereto are and shall remain the sole and exclusive property of Biowell. Licensee shall have no right to obtain or grant any licenses with respect to the Technology, Products, Product Materials, or any other related products or services or any of the Intellectual Property Rights therein or relating thereto. 16.2 Licensee shall notify Biowell as soon as it receives any knowledge of any illegal or unauthorized use of any of the Technology and Products or any of the Intellectual Property Rights therein or relating thereto and will assist Biowell (at Biowell's expense) in taking all steps necessary to defend Biowell's rights therein. 16.3 Licensee shall not in any way: (a) modify, disassemble, decompile, or reverse engineer the Technology, Product Materials, and Products and any related products supplied hereunder; (b) transfer possession of any Technology, Product Materials, and Products and any related products supplied hereunder to another party, except as expressly permitted herein; or (c) use the Technology, Product Materials, and Products and any related products supplied hereunder in any way not expressly provided for this Agreement. There will be no implied licenses. 16.4 Subject to the express prior written approval of Biowell, Licensee may use the trademarks and logos of Biowell for the sole purpose of marketing, reselling and promoting the Products in the Territory under, and during the term of, this Agreement. 16.5 The provisions of this section 16 will survive the termination of this Agreement. 17. General 17.1 Governing Law and Dispute Resolution. This Agreement shall be governed by, construed and take effect in accordance with ROC law without regard to the choice of law principles thereof. Any dispute, controversy, or claims arising out of or relating to this Agreement which cannot be resolved within sixty (60) business days shall be exclusively submitted to final resolution by arbitration pursuant to the Arbitration Law in Hong Kong. 17.2 Counterparts and Facsimile Execution. This Agreement may be executed in any number of counterparts, each of which will be an original but all of which together will form one agreement. Delivery of an executed copy of this Agreement by facsimile transmission will have the same effect as delivery of an original signed counterpart. 21 17.3 Waiver. The failure of either party hereto to insist upon the strict adherence to any term of this Agreement on any occasion shall not be considered as a waiver of any right hereunder nor shall it deprive that party of the right to insist upon the strict adherence to that term or any other term of this Agreement at some other time. 17.4 Taxes & Fees. Licensee, and not Biowell, will be responsible for all taxes and expenses incurred in Licensee's business, including Licensee's business with Biowell. If Licensee is required by law to make any deduction or withholding from any payment due hereunder to Biowell, then, notwithstanding anything in this agreement to the contrary, the gross amount payable by Licensee to Biowell, will be increased so that, after any such deduction or withholding for taxes, the net amount received by Biowell will not be less than the amount that would have received had such deduction or withholding not been required. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in two copies of which each has received one. Biowell Technology Inc. Applied DNA Sciences, Inc. By: /s/ JUN-JEI SHEU By: /s/ LARRY LEE ---------------- ------------- Name: Jun-Jei Sheu Name: Larry Lee Title: Chairman & CEO Title: President Date: 08 Oct. 2002 Date: 07 Oct. 2002 22 EX-10 4 feb122005sb2ex103.txt Exhibit 10.3 INDEMNITY AGREEMENT This Indemnity Agreement ("Agreement") is made as of November 8, 2002, by and between Applied DNA Sciences, Inc., a Nevada corporation (the "Company"), and Larry Lee ("Indemnitee"), a director and/or officer or key executive, employee or consultant of the Company, or a person serving at the request of the Company as a director, officer, employee or agent of another enterprise. RECITALS A. The Indemnitee is currently serving or has agreed to serve as a director and/or officer of the Company and in such capacity has rendered and/or will render valuable services to the Company. B. The Company has investigated the availability and sufficiency of liability insurance and applicable statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company and has concluded that such insurance may be unavailable or too costly, and even if purchased it, and the statutory provisions, may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and/or officers. C. It is essential to the Company that it attract and retain as officers and directors the most capable persons available and in order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve or continue to serve as a director and/or officer of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of the Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company and its stockholders. NOW, THEREFORE, in consideration of the services or continued services of the Indemnitee and in order to induce the Indemnitee to serve or continue to serve as director and/or officer, the Company and the Indemnitee do hereby agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed inquiry, hearing, investigation, action, suit, arbitration or other alternative dispute resolution mechanism or proceeding, formal or informal, whether brought in the name of the Company or otherwise and whether of a civil, 1 criminal or administrative or investigative nature, by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he/she is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement. (b) The term "Expenses" includes, without limitation: attorneys' fees, costs, disbursements and retainers; accounting and witness fees; fees of experts; travel and deposition costs; transcript costs, filing fees, telephone charges, postage, copying costs, delivery service fees and other expenses and obligations of any nature whatsoever paid or incurred in connection with any investigations, judicial or administrative proceedings and appeals, amounts paid in settlement by or on behalf of Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he/she is not otherwise compensated by the Company or any third party. The term "Expenses" does not include the amount of judgments, fines, penalties or ERISA excise taxes actually levied against the Indemnitee. 2. Agreement to Serve. The Indemnitee agrees to serve or to continue to serve as a director and/or officer of the Company for so long as he/she is duly elected or appointed or until such time as he/she tenders his/her resignation in writing or is removed as a director and/or officer. However, nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company, any subsidiary or any other person. 3. Indemnification in Third Party Actions. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other that a Proceeding by or in the name of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of 2 Incorporation; provided that any settlement of a Proceeding be approved in writing by the Company. 4. Indemnification in Proceedings by or In the Name of the Company. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation. 5. Conclusive Presumption Regarding Standards of Conduct. The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, if any, as defined by applicable corporate law, for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards (i) by the Board of Directors by a majority vote of a quorum thereof consisting of directors who were not parties to the Proceeding due to which a claim is made under this Agreement, (ii) by the shareholders of the Company by majority vote of a quorum thereof consisting of shareholders who are not parties to the Proceeding due to which a claim is made under this Agreement, (iii) in a written opinion by independent counsel, selection of whom has been approved by the Indemnitee in writing, or (iv) by a court of competent jurisdiction. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of the Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice or the settlement of a Proceeding without an admission of liability, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by applicable corporate law. 7. Advances of Expenses. The Expenses incurred by the Indemnitee in any 3 Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable corporate law; provided that the Indemnitee shall undertake in writing to repay any advances if it is ultimately determined that the Indemnitee is not entitled to indemnification. 8. Partial Indemnification. If the Indemnitee is entitled under any provision of the Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, penalties or ERISA excise taxes actually and reasonably incurred by him/her in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount of his/her Expenses, judgments, fines, penalties or ERISA excise taxes, the Company shall nevertheless indemnify the Indemnitee for the portion of Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 9. Indemnification Procedure; Determination of Right to Indemnification. (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing. The omission to so notify the Company, however, shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. (b) If a claim for indemnification or advances under this Agreement is not paid by the Company within thirty (30) days of receipt of written notice, the rights provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the directors or stockholders of the Company or its independent legal counsel to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, if any, nor an actual determination by the directors or shareholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the Indemnitee has not been the applicable standard of conduct. (c) The Indemnitee's Expenses incurred in connection with any 4 Proceeding concerning his/her right to indemnification or advances in whole or part pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such Proceeding. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employee his/her counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advances by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has concluded that there may be a conflict of interest between the Company and the Indemnitee. 10. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee expenses with respect to Proceeding initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable corporate law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee for any Expenses, judgment, fines, penalties or ERISA excise taxes sustained in any Proceeding for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; 5 (c) To indemnify the Indemnitee for any Expenses, judgment, fines, and/or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; and (d) If a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful. 11. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as a director and/or officer of the Company and thereafter as long as the Indemnitee may be subject to any possible Proceeding, the Company, subject to subsection (c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) In all D&O insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and/or officers. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines, in its sole discretion, that such insurance is not reasonably available, the premium costs for such insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 12. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Articles of Incorporation, Bylaws, any agreement, vote of shareholders or disinterested directors, provision of applicable corporate law, or otherwise, both as to action in his/her official capacity and as to action in another capacity on behalf of the Company while holding such office. 13. Successors and Assigns. This Agreement shall be binding upon, and shall 6 inure to the benefit of the Indemnitee and his/her heirs, executors, administrators and assigns, whether or not Indemnitee has ceased to be a director or officer, and the Company and its successors and assigns. 14. Severability. Each and every paragraph, sentence, term and provision hereof is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Agreement shall be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable corporate law. 15. Savings Clause. If this Agreement or any paragraph, sentence, term or provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, penalties for ERISA excise taxes incurred with respect to any Proceeding to the full extent permitted by any applicable paragraph, sentence, term or provision of this Agreement that has not been invalidated or by any other applicable provision of applicable corporate law. 16. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Delaware. 17. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Articles of Incorporation, Bylaws, or by other agreements, including D&O Insurance policies. 18. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and 7 shall become effective when one or more counterparts have been signed by each party and delivered to the other. 19. Notices. Any notice required to be given under this Agreement shall be directed: TO: Applied DNA Sciences, Inc. With a copy to: Andrea Cataneo, Esq. 81 Meadowbrook Road Randolph, NJ 07869 TO: Lawrence Lee ----------------------- ----------------------- ----------------------- (Insert home address) or to such other address as either shall designate in writing. IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as of the date first written above. INDEMNITEE: /s/ Larry Lee ------------- Larry Lee APPLIED DNA SCIENCES, INC. /s/ JAIME CARDONA ------------------ Jaime Cardona, Secretary EX-10 5 feb122005sb2ex104.txt Exhibit 10.4 INDEMNITY AGREEMENT This Indemnity Agreement ("Agreement") is made as of November 13, 2003, by and between Applied DNA Sciences, Inc. a Nevada corporation ("Company"), and Robin B. Hutchison ("Indemnitee"), a director and/or officer or key executive, employee or consultant of the Company, or a person serving at the request of the Company as a director, officer, employee or agent of another enterprise. RECITALS A. The Indemnitee is currently serving or has agreed to serve as a director and/or officer of the Company and in such capacity has rendered and/or will render valuable services to the Company. B. The Company has investigated the availability and sufficiency of liability insurance and applicable statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company and has concluded that such insurance may be unavailable or too costly, and even if purchased it, and the statutory provisions, may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and/or officers. C. It is essential to the Company that it attract and retain as officers and directors the most capable persons available and in order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve or continue to serve as a director and/or officer of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of the Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company and its stockholders. NOW, THEREFORE, in consideration of the services or continued services of the Indemnitee and in order to induce the Indemnitee to serve or continue to serve as director and/or officer, the Company and the Indemnitee do hereby agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed inquiry, hearing, investigation, action, suit, arbitration or other alternative dispute resolution mechanism or proceeding, formal or informal, 1 whether brought in the name of the Company or otherwise and whether of a civil, criminal or administrative or investigative nature, by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he/she is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement. (b) The term "Expenses" includes, without limitation: attorneys' fees, costs, disbursements and retainers; accounting and witness fees; fees of experts; travel and deposition costs; transcript costs, filing fees, telephone charges, postage, copying costs, delivery service fees and other expenses and obligations of any nature whatsoever paid or incurred in connection with any investigations, judicial or administrative proceedings and appeals, amounts paid in settlement by or on behalf of Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he/she is not otherwise compensated by the Company or any third party. The term "Expenses" does not include the amount of judgments, fines, penalties or ERISA excise taxes actually levied against the Indemnitee. 2. Agreement to Serve. The Indemnitee agrees to serve or to continue to serve as a director and/or officer of the Company for so long as he/she is duly elected or appointed or until such time as he/she tenders his/her resignation in writing or is removed as a director and/or officer. However, nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company, any subsidiary or any other person. 3. Indemnification in Third Party Actions. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other that a Proceeding by or in the name of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in 2 connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation; provided that any settlement of a Proceeding be approved in writing by the Company. 4. Indemnification in Proceedings by or In the Name of the Company. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation. 5. Conclusive Presumption Regarding Standards of Conduct. The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, if any, as defined by applicable corporate law, for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards (i) by the Board of Directors by a majority vote of a quorum thereof consisting of directors who were not parties to the Proceeding due to which a claim is made under this Agreement, (ii) by the shareholders of the Company by majority vote of a quorum thereof consisting of shareholders who are not parties to the Proceeding due to which a claim is made under this Agreement, (iii) in a written opinion by independent counsel, selection of whom has been approved by the Indemnitee in writing, or (iv) by a court of competent jurisdiction. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of the Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice or the settlement of a Proceeding without an admission of liability, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by applicable corporate law. 3 7. Advances of Expenses. The Expenses incurred by the Indemnitee in any Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable corporate law; provided that the Indemnitee shall undertake in writing to repay any advances if it is ultimately determined that the Indemnitee is not entitled to indemnification. 8. Partial Indemnification. If the Indemnitee is entitled under any provision of the Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, penalties or ERISA excise taxes actually and reasonably incurred by him/her in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount of his/her Expenses, judgments, fines, penalties or ERISA excise taxes, the Company shall nevertheless indemnify the Indemnitee for the portion of Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 9. Indemnification Procedure; Determination of Right to Indemnification. (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing. The omission to so notify the Company, however, shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. (b) If a claim for indemnification or advances under this Agreement is not paid by the Company within thirty (30) days of receipt of written notice, the rights provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the directors or stockholders of the Company or its independent legal counsel to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, if any, nor an actual determination by the directors or shareholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the Indemnitee has not been the applicable standard of conduct. 4 (c) The Indemnitee's Expenses incurred in connection with any Proceeding concerning his/her right to indemnification or advances in whole or part pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such Proceeding. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employee his/her counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advances by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has concluded that there may be a conflict of interest between the Company and the Indemnitee. 10. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee expenses with respect to Proceeding initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable corporate law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee for any Expenses, judgment, fines, penalties or ERISA excise taxes sustained in any Proceeding for which payment is 5 actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) To indemnify the Indemnitee for any Expenses, judgment, fines, and/or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; and (d) If a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful. 11. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as a director and/or officer of the Company and thereafter as long as the Indemnitee may be subject to any possible Proceeding, the Company, subject to subsection (c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) In all D&O insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and/or officers. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines, in its sole discretion, that such insurance is not reasonably available, the premium costs for such insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 12. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Articles of Incorporation, Bylaws, any agreement, vote of shareholders or disinterested directors, provision of applicable corporate law, or otherwise, both as to action in his/her official capacity and as to action in another capacity on behalf of the Company while holding such office. 6 13. Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of the Indemnitee and his/her heirs, executors, administrators and assigns, whether or not Indemnitee has ceased to be a director or officer, and the Company and its successors and assigns. 14. Severability. Each and every paragraph, sentence, term and provision hereof is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Agreement shall be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable corporate law. 15. Savings Clause. If this Agreement or any paragraph, sentence, term or provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, penalties for ERISA excise taxes incurred with respect to any Proceeding to the full extent permitted by any applicable paragraph, sentence, term or provision of this Agreement that has not been invalidated or by any other applicable provision of applicable corporate law. 16. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Nevada. 17. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Articles of Incorporation, Bylaws, or by other agreements, including D&O Insurance policies. 18. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 7 19. Notices. Any notice required to be given under this Agreement shall be directed: TO: ADNAS, Inc. ----------------- ----------------- ----------------- With a copy to: Andrea Cataneo, Esq. 81 Meadowbrook Road Randolph, NJ 07869 TO: Robin B. Hutchison (please insert address) --------------------- --------------------- --------------------- or to such other address as either shall designate in writing. 8 IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as of the date first written above. INDEMNITEE: /s/ ROBIN B. HUTCHISON ---------------------- Robin B. Hutchison APPLIED DNA SCIENCES, INC. /s/ LARRY LEE -------------- Larry Lee, President EX-10 6 feb122005sb2ex105.txt Exhibit 10.5 INDEMNITY AGREEMENT This Indemnity Agreement ("Agreement") is made as of November 8, 2002, by and between Applied DNA Sciences, Inc., a Nevada corporation (the "Company"), and Michael Hill ("Indemnitee"), a director and/or officer or key executive, employee or consultant of the Company, or a person serving at the request of the Company as a director, officer, employee or agent of another enterprise. RECITALS A. The Indemnitee is currently serving or has agreed to serve as a director and/or officer of the Company and in such capacity has rendered and/or will render valuable services to the Company. B. The Company has investigated the availability and sufficiency of liability insurance and applicable statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company and has concluded that such insurance may be unavailable or too costly, and even if purchased it, and the statutory provisions, may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and/or officers. C. It is essential to the Company that it attract and retain as officers and directors the most capable persons available and in order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve or continue to serve as a director and/or officer of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of the Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company and its stockholders. NOW, THEREFORE, in consideration of the services or continued services of the Indemnitee and in order to induce the Indemnitee to serve or continue to serve as director and/or officer, the Company and the Indemnitee do hereby agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed inquiry, hearing, investigation, action, suit, arbitration or other 1 alternative dispute resolution mechanism or proceeding, formal or informal, whether brought in the name of the Company or otherwise and whether of a civil, criminal or administrative or investigative nature, by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he/she is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement. (b) The term "Expenses" includes, without limitation: attorneys' fees, costs, disbursements and retainers; accounting and witness fees; fees of experts; travel and deposition costs; transcript costs, filing fees, telephone charges, postage, copying costs, delivery service fees and other expenses and obligations of any nature whatsoever paid or incurred in connection with any investigations, judicial or administrative proceedings and appeals, amounts paid in settlement by or on behalf of Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he/she is not otherwise compensated by the Company or any third party. The term "Expenses" does not include the amount of judgments, fines, penalties or ERISA excise taxes actually levied against the Indemnitee. 2. Agreement to Serve. The Indemnitee agrees to serve or to continue to serve as a director and/or officer of the Company for so long as he/she is duly elected or appointed or until such time as he/she tenders his/her resignation in writing or is removed as a director and/or officer. However, nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company, any subsidiary or any other person. 3. Indemnification in Third Party Actions. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other that a Proceeding by or in the name of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation; provided that any settlement of a Proceeding be approved in writing by the Company. 2 4. Indemnification in Proceedings by or In the Name of the Company. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation. 5. Conclusive Presumption Regarding Standards of Conduct. The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, if any, as defined by applicable corporate law, for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards (i) by the Board of Directors by a majority vote of a quorum thereof consisting of directors who were not parties to the Proceeding due to which a claim is made under this Agreement, (ii) by the shareholders of the Company by majority vote of a quorum thereof consisting of shareholders who are not parties to the Proceeding due to which a claim is made under this Agreement, (iii) in a written opinion by independent counsel, selection of whom has been approved by the Indemnitee in writing, or (iv) by a court of competent jurisdiction. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of the Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice or the settlement of a Proceeding without an admission of liability, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by applicable corporate law. 3 7. Advances of Expenses. The Expenses incurred by the Indemnitee in any Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable corporate law; provided that the Indemnitee shall undertake in writing to repay any advances if it is ultimately determined that the Indemnitee is not entitled to indemnification. 8. Partial Indemnification. If the Indemnitee is entitled under any provision of the Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, penalties or ERISA excise taxes actually and reasonably incurred by him/her in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount of his/her Expenses, judgments, fines, penalties or ERISA excise taxes, the Company shall nevertheless indemnify the Indemnitee for the portion of Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 9. Indemnification Procedure; Determination of Right to Indemnification. (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing. The omission to so notify the Company, however, shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. (b) If a claim for indemnification or advances under this Agreement is not paid by the Company within thirty (30) days of receipt of written notice, the rights provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the directors or stockholders of the Company or its independent legal counsel to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, if any, nor an actual determination by the directors or shareholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the Indemnitee has not been the applicable standard of conduct. 4 (c) The Indemnitee's Expenses incurred in connection with any Proceeding concerning his/her right to indemnification or advances in whole or part pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such Proceeding. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employee his/her counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advances by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has concluded that there may be a conflict of interest between the Company and the Indemnitee. 10. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee expenses with respect to Proceeding initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable corporate law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee for any Expenses, judgment, fines, penalties or ERISA excise taxes sustained in any Proceeding for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, 5 except in respect of any excess beyond the amount of payment under such insurance; (c) To indemnify the Indemnitee for any Expenses, judgment, fines, and/or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; and (d) If a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful. 11. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as a director and/or officer of the Company and thereafter as long as the Indemnitee may be subject to any possible Proceeding, the Company, subject to subsection (c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) In all D&O insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and/or officers. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines, in its sole discretion, that such insurance is not reasonably available, the premium costs for such insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 12. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Articles of Incorporation, Bylaws, any agreement, vote of shareholders or disinterested directors, provision of applicable corporate law, or otherwise, both as to action in his/her official capacity and as to action in another capacity on behalf of the Company while holding such office. 6 13. Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of the Indemnitee and his/her heirs, executors, administrators and assigns, whether or not Indemnitee has ceased to be a director or officer, and the Company and its successors and assigns. 14. Severability. Each and every paragraph, sentence, term and provision hereof is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Agreement shall be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable corporate law. 15. Savings Clause. If this Agreement or any paragraph, sentence, term or provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, penalties for ERISA excise taxes incurred with respect to any Proceeding to the full extent permitted by any applicable paragraph, sentence, term or provision of this Agreement that has not been invalidated or by any other applicable provision of applicable corporate law. 16. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Delaware. 17. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Articles of Incorporation, Bylaws, or by other agreements, including D&O Insurance policies. 18. Counterparts. This Agreement may be executed in one or more 7 counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 19. Notices. Any notice required to be given under this Agreement shall be directed: TO: Applied DNA Sciences, Inc. With a copy to: Andrea Cataneo, Esq. 81 Meadowbrook Road Randolph, NJ 07869 TO: Michael Hill ------------------- ------------------- ------------------- (Insert home address) or to such other address as either shall designate in writing. IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as of the date first written above. INDEMNITEE: /s/ MICHAEL HILL ---------------- Michael Hill APPLIED DNA SCIENCES, INC. /s/ LARRY LEE ------------- Larry Lee, President EX-10 7 feb122005sb2ex106.txt Exhibit 10.6 INDEMNITY AGREEMENT This Indemnity Agreement ("Agreement") is made as of 2004, by and between Applied DNA Sciences, Inc., a Nevada corporation (the "Company"), and Peter Brockelsby ("Indemnitee"), a director and/or officer or key executive, employee or consultant of the Company, or a person serving at the request of the Company as a director, officer, employee or agent of another enterprise. RECITALS A. The Indemnitee is currently serving or has agreed to serve as a director and/or officer of the Company and in such capacity has rendered and/or will render valuable services to the Company. B. The Company has investigated the availability and sufficiency of liability insurance and applicable statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company and has concluded that such insurance may be unavailable or too costly, and even if purchased it, and the statutory provisions, may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and/or officers. C. It is essential to the Company that it attract and retain as officers and directors the most capable persons available and in order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve or continue to serve as a director and/or officer of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of the Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company and its stockholders. NOW, THEREFORE, in consideration of the services or continued services of the Indemnitee and in order to induce the Indemnitee to serve or continue to serve as director and/or officer, the Company and the Indemnitee do hereby agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed inquiry, hearing, investigation, action, suit, arbitration or other alternative dispute resolution mechanism or proceeding, formal or informal, 1 whether brought in the name of the Company or otherwise and whether of a civil, criminal or administrative or investigative nature, by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he/she is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement. (b) The term "Expenses" includes, without limitation: attorneys' fees, costs, disbursements and retainers; accounting and witness fees; fees of experts; travel and deposition costs; transcript costs, filing fees, telephone charges, postage, copying costs, delivery service fees and other expenses and obligations of any nature whatsoever paid or incurred in connection with any investigations, judicial or administrative proceedings and appeals, amounts paid in settlement by or on behalf of Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he/she is not otherwise compensated by the Company or any third party. The term "Expenses" does not include the amount of judgments, fines, penalties or ERISA excise taxes actually levied against the Indemnitee. 2. Agreement to Serve. The Indemnitee agrees to serve or to continue to serve as a director and/or officer of the Company for so long as he/she is duly elected or appointed or until such time as he/she tenders his/her resignation in writing or is removed as a director and/or officer. However, nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company, any subsidiary or any other person. 3. Indemnification in Third Party Actions. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other that a Proceeding by or in the name of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation; provided that any settlement of a Proceeding be approved in writing by the Company. 2 4. Indemnification in Proceedings by or In the Name of the Company. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation. 5. Conclusive Presumption Regarding Standards of Conduct. The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, if any, as defined by applicable corporate law, for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards (i) by the Board of Directors by a majority vote of a quorum thereof consisting of directors who were not parties to the Proceeding due to which a claim is made under this Agreement, (ii) by the shareholders of the Company by majority vote of a quorum thereof consisting of shareholders who are not parties to the Proceeding due to which a claim is made under this Agreement, (iii) in a written opinion by independent counsel, selection of whom has been approved by the Indemnitee in writing, or (iv) by a court of competent jurisdiction. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of the Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice or the settlement of a Proceeding without an admission of liability, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by applicable corporate law. 7. Advances of Expenses. The Expenses incurred by the Indemnitee in any 3 Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable corporate law; provided that the Indemnitee shall undertake in writing to repay any advances if it is ultimately determined that the Indemnitee is not entitled to indemnification. 8. Partial Indemnification. If the Indemnitee is entitled under any provision of the Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, penalties or ERISA excise taxes actually and reasonably incurred by him/her in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount of his/her Expenses, judgments, fines, penalties or ERISA excise taxes, the Company shall nevertheless indemnify the Indemnitee for the portion of Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 9. Indemnification Procedure; Determination of Right to Indemnification. (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing. The omission to so notify the Company, however, shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. (b) If a claim for indemnification or advances under this Agreement is not paid by the Company within thirty (30) days of receipt of written notice, the rights provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the directors or stockholders of the Company or its independent legal counsel to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, if any, nor an actual determination by the directors or shareholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the Indemnitee has not been the applicable standard of conduct. (c) The Indemnitee's Expenses incurred in connection with any Proceeding 4 concerning his/her right to indemnification or advances in whole or part pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such Proceeding. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employee his/her counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advances by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has concluded that there may be a conflict of interest between the Company and the Indemnitee. 10. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee expenses with respect to Proceeding initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable corporate law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee for any Expenses, judgment, fines, penalties or ERISA excise taxes sustained in any Proceeding for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; 5 (c) To indemnify the Indemnitee for any Expenses, judgment, fines, and/or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; and (d) If a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful. 11. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as a director and/or officer of the Company and thereafter as long as the Indemnitee may be subject to any possible Proceeding, the Company, subject to subsection (c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) In all D&O insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and/or officers. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines, in its sole discretion, that such insurance is not reasonably available, the premium costs for such insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 12. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Articles of Incorporation, Bylaws, any agreement, vote of shareholders or disinterested directors, provision of applicable corporate law, or otherwise, both as to action in his/her official capacity and as to action in another capacity on behalf of the Company while holding such office. 13. Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of the Indemnitee and his/her heirs, executors, administrators and assigns, whether or not Indemnitee has ceased to be a director or officer, and the Company and its successors and assigns. 6 14. Severability. Each and every paragraph, sentence, term and provision hereof is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Agreement shall be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable corporate law. 15. Savings Clause. If this Agreement or any paragraph, sentence, term or provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, penalties for ERISA excise taxes incurred with respect to any Proceeding to the full extent permitted by any applicable paragraph, sentence, term or provision of this Agreement that has not been invalidated or by any other applicable provision of applicable corporate law. 16. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Delaware. 17. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Articles of Incorporation, Bylaws, or by other agreements, including D&O Insurance policies. 18. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and 7 shall become effective when one or more counterparts have been signed by each party and delivered to the other. 19. Notices. Any notice required to be given under this Agreement shall be directed: TO: Applied DNA Sciences, Inc. With a copy to: Andrea Cataneo, Esq. SICHENZIA ROSS FRIEDMAN FERRENCE LLP 81 Meadowbrook Road Randolph, NJ 07869 TO: Peter Brockelsby ------------------- ------------------- ------------------- (Insert home address) or to such other address as either shall designate in writing. IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as of the date first written above. INDEMNITEE: /s/ PETER BROCKELSBY ---------------- Peter Brockelsby APPLIED DNA SCIENCES, INC. /s/ ROBIN B. HUTCHISON ---------------------- Robin B. Hutchison, CEO 8 EX-10 8 feb122005sb2ex107.txt Exhibit 10.7 INDEMNITY AGREEMENT This Indemnity Agreement ("Agreement") is made as of March 31, 2004, by and between Applied DNA Sciences, Inc., a Nevada corporation (the "Company"), and Adrian Butash ("Indemnitee"), a director and/or officer or key executive, employee or consultant of the Company, or a person serving at the request of the Company as a director, officer, employee or agent of another enterprise. RECITALS A. The Indemnitee is currently serving or has agreed to serve as a director and/or officer of the Company and in such capacity has rendered and/or will render valuable services to the Company. B. The Company has investigated the availability and sufficiency of liability insurance and applicable statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company and has concluded that such insurance may be unavailable or too costly, and even if purchased it, and the statutory provisions, may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and/or officers. C. It is essential to the Company that it attract and retain as officers and directors the most capable persons available and in order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve or continue to serve as a director and/or officer of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of the Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company and its stockholders. NOW, THEREFORE, in consideration of the services or continued services of the Indemnitee and in order to induce the Indemnitee to serve or continue to serve as director and/or officer, the Company and the Indemnitee do hereby agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed inquiry, hearing, investigation, action, suit, arbitration or other alternative dispute resolution mechanism or proceeding, formal or informal, 1 whether brought in the name of the Company or otherwise and whether of a civil, criminal or administrative or investigative nature, by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he/she is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement. (b) The term "Expenses" includes, without limitation: attorneys' fees, costs, disbursements and retainers; accounting and witness fees; fees of experts; travel and deposition costs; transcript costs, filing fees, telephone charges, postage, copying costs, delivery service fees and other expenses and obligations of any nature whatsoever paid or incurred in connection with any investigations, judicial or administrative proceedings and appeals, amounts paid in settlement by or on behalf of Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he/she is not otherwise compensated by the Company or any third party. The term "Expenses" does not include the amount of judgments, fines, penalties or ERISA excise taxes actually levied against the Indemnitee. 2. Agreement to Serve. The Indemnitee agrees to serve or to continue to serve as a director and/or officer of the Company for so long as he/she is duly elected or appointed or until such time as he/she tenders his/her resignation in writing or is removed as a director and/or officer. However, nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company, any subsidiary or any other person. 3. Indemnification in Third Party Actions. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other that a Proceeding by or in the name of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in 2 connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation; provided that any settlement of a Proceeding be approved in writing by the Company. 4. Indemnification in Proceedings by or In the Name of the Company. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation. 5. Conclusive Presumption Regarding Standards of Conduct. The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, if any, as defined by applicable corporate law, for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards (i) by the Board of Directors by a majority vote of a quorum thereof consisting of directors who were not parties to the Proceeding due to which a claim is made under this Agreement, (ii) by the shareholders of the Company by majority vote of a quorum thereof consisting of shareholders who are not parties to the Proceeding due to which a claim is made under this Agreement, (iii) in a written opinion by independent counsel, selection of whom has been approved by the Indemnitee in writing, or (iv) by a court of competent jurisdiction. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of the Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice or the settlement of a Proceeding without an admission of liability, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by applicable corporate law. 3 7. Advances of Expenses. The Expenses incurred by the Indemnitee in any Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable corporate law; provided that the Indemnitee shall undertake in writing to repay any advances if it is ultimately determined that the Indemnitee is not entitled to indemnification. 8. Partial Indemnification. If the Indemnitee is entitled under any provision of the Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, penalties or ERISA excise taxes actually and reasonably incurred by him/her in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount of his/her Expenses, judgments, fines, penalties or ERISA excise taxes, the Company shall nevertheless indemnify the Indemnitee for the portion of Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 9. Indemnification Procedure; Determination of Right to Indemnification. (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing. The omission to so notify the Company, however, shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. (b) If a claim for indemnification or advances under this Agreement is not paid by the Company within thirty (30) days of receipt of written notice, the rights provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the directors or stockholders of the Company or its independent legal counsel to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, if any, nor an actual determination by the directors or shareholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the Indemnitee has not been the applicable standard of conduct. 4 (c) The Indemnitee's Expenses incurred in connection with any Proceeding concerning his/her right to indemnification or advances in whole or part pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such Proceeding. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employee his/her counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advances by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has concluded that there may be a conflict of interest between the Company and the Indemnitee. 10. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee expenses with respect to Proceeding initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable corporate law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee for any Expenses, judgment, fines, penalties or ERISA excise taxes sustained in any Proceeding for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, 5 except in respect of any excess beyond the amount of payment under such insurance; (c) To indemnify the Indemnitee for any Expenses, judgment, fines, and/or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; and (d) If a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful. 11. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as a director and/or officer of the Company and thereafter as long as the Indemnitee may be subject to any possible Proceeding, the Company, subject to subsection (c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) In all D&O insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and/or officers. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines, in its sole discretion, that such insurance is not reasonably available, the premium costs for such insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 12. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Articles of Incorporation, Bylaws, any agreement, vote of shareholders or disinterested directors, provision of applicable corporate law, or otherwise, both as to action in his/her official capacity and as to action in another capacity on behalf of the Company while holding such office. 6 13. Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of the Indemnitee and his/her heirs, executors, administrators and assigns, whether or not Indemnitee has ceased to be a director or officer, and the Company and its successors and assigns. 14. Severability. Each and every paragraph, sentence, term and provision hereof is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Agreement shall be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable corporate law. 15. Savings Clause. If this Agreement or any paragraph, sentence, term or provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, penalties for ERISA excise taxes incurred with respect to any Proceeding to the full extent permitted by any applicable paragraph, sentence, term or provision of this Agreement that has not been invalidated or by any other applicable provision of applicable corporate law. 16. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Delaware. 17. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Articles of Incorporation, Bylaws, or by other agreements, including D&O Insurance policies. 18. Counterparts. This Agreement may be executed in one or more 7 counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 19. Notices. Any notice required to be given under this Agreement shall be directed: TO: Applied DNA Sciences, Inc. With a copy to: Andrea Cataneo, Esq. 81 Meadowbrook Road Randolph, NJ 07869 TO: Adrian Butash ------------------ ------------------ ------------------ (Insert home address) or to such other address as either shall designate in writing. IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as of the date first written above. INDEMNITEE: /s/ ADRIAN BUTASH ----------------- Adrian Butash APPLIED DNA SCIENCES, INC. /s/ PETER BROCKELSBY -------------------- Peter Brockelsby, President 8 EX-10 9 feb122005sb2ex108.txt Exhibit 10.8 INDEMNITY AGREEMENT This Indemnity Agreement ("Agreement") is made as of June 30, 2004, by and between Applied DNA Sciences, Inc., a Nevada corporation (the "Company"), and Karin Klemm ("Indemnitee"), a director and/or officer or key executive, employee or consultant of the Company, or a person serving at the request of the Company as a director, officer, employee or agent of another enterprise. RECITALS A. The Indemnitee is currently serving or has agreed to serve as a director and/or officer of the Company and in such capacity has rendered and/or will render valuable services to the Company. B. The Company has investigated the availability and sufficiency of liability insurance and applicable statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company and has concluded that such insurance may be unavailable or too costly, and even if purchased it, and the statutory provisions, may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and/or officers. C. It is essential to the Company that it attract and retain as officers and directors the most capable persons available and in order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve or continue to serve as a director and/or officer of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of the Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company and its stockholders. NOW, THEREFORE, in consideration of the services or continued services of the Indemnitee and in order to induce the Indemnitee to serve or continue to serve as director and/or officer, the Company and the Indemnitee do hereby agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed inquiry, hearing, investigation, action, suit, arbitration or other alternative dispute resolution mechanism or proceeding, formal or informal, whether brought in the name of the Company or otherwise and whether of a civil, criminal or administrative or investigative nature, by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he/she is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement. 1 (b) The term "Expenses" includes, without limitation: attorneys' fees, costs, disbursements and retainers; accounting and witness fees; fees of experts; travel and deposition costs; transcript costs, filing fees, telephone charges, postage, copying costs, delivery service fees and other expenses and obligations of any nature whatsoever paid or incurred in connection with any investigations, judicial or administrative proceedings and appeals, amounts paid in settlement by or on behalf of Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he/she is not otherwise compensated by the Company or any third party. The term "Expenses" does not include the amount of judgments, fines, penalties or ERISA excise taxes actually levied against the Indemnitee. 2. Agreement to Serve. The Indemnitee agrees to serve or to continue to serve as a director and/or officer of the Company for so long as he/she is duly elected or appointed or until such time as he/she tenders his/her resignation in writing or is removed as a director and/or officer. However, nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company, any subsidiary or any other person. 3. Indemnification in Third Party Actions. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other that a Proceeding by or in the name of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation; provided that any settlement of a Proceeding be approved in writing by the Company. 2 4. Indemnification in Proceedings by or In the Name of the Company. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation. 5. Conclusive Presumption Regarding Standards of Conduct. The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, if any, as defined by applicable corporate law, for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards (i) by the Board of Directors by a majority vote of a quorum thereof consisting of directors who were not parties to the Proceeding due to which a claim is made under this Agreement, (ii) by the shareholders of the Company by majority vote of a quorum thereof consisting of shareholders who are not parties to the Proceeding due to which a claim is made under this Agreement, (iii) in a written opinion by independent counsel, selection of whom has been approved by the Indemnitee in writing, or (iv) by a court of competent jurisdiction. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of the Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice or the settlement of a Proceeding without an admission of liability, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by applicable corporate law. 3 7. Advances of Expenses. The Expenses incurred by the Indemnitee in any Proceeding shall be paid promptly by the Company in advance of the final disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable corporate law; provided that the Indemnitee shall undertake in writing to repay any advances if it is ultimately determined that the Indemnitee is not entitled to indemnification. 8. Partial Indemnification. If the Indemnitee is entitled under any provision of the Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, penalties or ERISA excise taxes actually and reasonably incurred by him/her in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount of his/her Expenses, judgments, fines, penalties or ERISA excise taxes, the Company shall nevertheless indemnify the Indemnitee for the portion of Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 9. Indemnification Procedure; Determination of Right to Indemnification. (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing. The omission to so notify the Company, however, shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. (b) If a claim for indemnification or advances under this Agreement is not paid by the Company within thirty (30) days of receipt of written notice, the rights provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the directors or stockholders of the Company or its independent legal counsel to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, if any, nor an actual determination by the directors or shareholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the Indemnitee has not been the applicable standard of conduct. 4 (c) The Indemnitee's Expenses incurred in connection with any Proceeding concerning his/her right to indemnification or advances in whole or part pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such Proceeding. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employee his/her counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advances by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has concluded that there may be a conflict of interest between the Company and the Indemnitee. 10. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee expenses with respect to Proceeding initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable corporate law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee for any Expenses, judgment, fines, penalties or ERISA excise taxes sustained in any Proceeding for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; 5 (c) To indemnify the Indemnitee for any Expenses, judgment, fines, and/or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; and (d) If a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful. 11. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as a director and/or officer of the Company and thereafter as long as the Indemnitee may be subject to any possible Proceeding, the Company, subject to subsection (c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) In all D&O insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and/or officers. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines, in its sole discretion, that such insurance is not reasonably available, the premium costs for such insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 12. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Articles of Incorporation, Bylaws, any agreement, vote of shareholders or disinterested directors, provision of applicable corporate law, or otherwise, both as to action in his/her official capacity and as to action in another capacity on behalf of the Company while holding such office. 6 13. Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of the Indemnitee and his/her heirs, executors, administrators and assigns, whether or not Indemnitee has ceased to be a director or officer, and the Company and its successors and assigns. 14. Severability. Each and every paragraph, sentence, term and provision hereof is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Agreement shall be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable corporate law. 15. Savings Clause. If this Agreement or any paragraph, sentence, term or provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, penalties for ERISA excise taxes incurred with respect to any Proceeding to the full extent permitted by any applicable paragraph, sentence, term or provision of this Agreement that has not been invalidated or by any other applicable provision of applicable corporate law. 16. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Delaware. 17. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Articles of Incorporation, Bylaws, or by other agreements, including D&O Insurance policies. 7 18. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other. 19. Notices. Any notice required to be given under this Agreement shall be directed: TO: Applied DNA Sciences, Inc. With a copy to: Andrea Cataneo, Esq. Sichenzia Ross Friedman Ference, LLP 81 Meadowbrook Road Randolph, NJ 07869 TO: Karin Klemm __________________ __________________ __________________ (Insert home address) or to such other address as either shall designate in writing. IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as of the date first written above. INDEMNITEE: /s/ Karin Klemm --------------- Karin Klemm APPLIED DNA SCIENCES, INC. /s/ PETER BROCKELSBY -------------------- Peter Brockelsby, President 8 EX-10 10 feb122005sb2ex109.txt Exhibit 10.9 INDEMNITY AGREEMENT This Indemnity Agreement ("Agreement") is made as of January 21, 2004, by and between Applied DNA Sciences, Inc. a Nevada corporation ("Company"), and Ron Erickson ("Indemnitee"), a director and/or officer or key executive, employee or consultant of the Company, or a person serving at the request of the Company as a director, officer, employee or agent of another enterprise. RECITALS A. The Indemnitee is currently serving or has agreed to serve as a director and/or officer of the Company and in such capacity has rendered and/or will render valuable services to the Company. B. The Company has investigated the availability and sufficiency of liability insurance and applicable statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their positions with the Company and has concluded that such insurance may be unavailable or too costly, and even if purchased it, and the statutory provisions, may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and/or officers. C. It is essential to the Company that it attract and retain as officers and directors the most capable persons available and in order to induce and encourage highly experienced and capable persons such as the Indemnitee to serve or continue to serve as a director and/or officer of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of the Agreement and the various other options available to the Company and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company and its stockholders. NOW, THEREFORE, in consideration of the services or continued services of the Indemnitee and in order to induce the Indemnitee to serve or continue to serve as director and/or officer, the Company and the Indemnitee do hereby agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed inquiry, hearing, investigation, action, suit, arbitration or other alternative dispute resolution mechanism or proceeding, formal or informal, whether brought in the name of the Company or otherwise and whether of a civil, 1 criminal or administrative or investigative nature, by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, whether or not he/she is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement is to be provided under this Agreement. (b) The term "Expenses" includes, without limitation: attorneys' fees, costs, disbursements and retainers; accounting and witness fees; fees of experts; travel and deposition costs; transcript costs, filing fees, telephone charges, postage, copying costs, delivery service fees and other expenses and obligations of any nature whatsoever paid or incurred in connection with any investigations, judicial or administrative proceedings and appeals, amounts paid in settlement by or on behalf of Indemnitee, and any expenses of establishing a right to indemnification, pursuant to this Agreement or otherwise, including reasonable compensation for time spent by the Indemnitee in connection with the investigation, defense or appeal of a Proceeding or action for indemnification for which he/she is not otherwise compensated by the Company or any third party. The term "Expenses" does not include the amount of judgments, fines, penalties or ERISA excise taxes actually levied against the Indemnitee. 2. Agreement to Serve. The Indemnitee agrees to serve or to continue to serve as a director and/or officer of the Company for so long as he/she is duly elected or appointed or until such time as he/she tenders his/her resignation in writing or is removed as a director and/or officer. However, nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company, any subsidiary or any other person. 3. Indemnification in Third Party Actions. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding (other that a Proceeding by or in the name of the Company to procure a judgment in its favor), by reason of the fact that the Indemnitee is or was a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of 2 Incorporation; provided that any settlement of a Proceeding be approved in writing by the Company. 4. Indemnification in Proceedings by or In the Name of the Company. The Company shall indemnify the Indemnitee if the Indemnitee is a party to or threatened to be made a party to or is otherwise involved in any Proceeding by or in the name of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is a director and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against all Expenses, judgments, fines penalties and ERISA excise taxes actually and reasonably incurred by the Indemnitee in connection with the defense or settlement of such a Proceeding, to the fullest extent permitted by applicable corporate law and the Company's Articles of Incorporation. 5. Conclusive Presumption Regarding Standards of Conduct. The Indemnitee shall be conclusively presumed to have met the relevant standards of conduct, if any, as defined by applicable corporate law, for indemnification pursuant to this Agreement, unless a determination is made that the Indemnitee has not met such standards (i) by the Board of Directors by a majority vote of a quorum thereof consisting of directors who were not parties to the Proceeding due to which a claim is made under this Agreement, (ii) by the shareholders of the Company by majority vote of a quorum thereof consisting of shareholders who are not parties to the Proceeding due to which a claim is made under this Agreement, (iii) in a written opinion by independent counsel, selection of whom has been approved by the Indemnitee in writing, or (iv) by a court of competent jurisdiction. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provision of the Agreement, to the extent that the Indemnitee has been successful in defense of any Proceeding or in defense of any claim, issue or matter therein, on the merits or otherwise, including the dismissal of a Proceeding without prejudice or the settlement of a Proceeding without an admission of liability, the Indemnitee shall be indemnified against all Expenses incurred in connection therewith to the fullest extent permitted by applicable corporate law. 7. Advances of Expenses. The Expenses incurred by the Indemnitee in any Proceeding shall be paid promptly by the Company in advance of the final 3 disposition of the Proceeding at the written request of the Indemnitee to the fullest extent permitted by applicable corporate law; provided that the Indemnitee shall undertake in writing to repay any advances if it is ultimately determined that the Indemnitee is not entitled to indemnification. 8. Partial Indemnification. If the Indemnitee is entitled under any provision of the Agreement to indemnification by the Company for a portion of the Expenses, judgments, fines, penalties or ERISA excise taxes actually and reasonably incurred by him/her in the investigation, defense, appeal or settlement of any Proceeding but not, however, for the total amount of his/her Expenses, judgments, fines, penalties or ERISA excise taxes, the Company shall nevertheless indemnify the Indemnitee for the portion of Expenses, judgments, fines, penalties or ERISA excise taxes to which the Indemnitee is entitled. 9. Indemnification Procedure; Determination of Right to Indemnification. (a) Promptly after receipt by the Indemnitee of notice of the commencement of any Proceeding, the Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof in writing. The omission to so notify the Company, however, shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Agreement. (b) If a claim for indemnification or advances under this Agreement is not paid by the Company within thirty (30) days of receipt of written notice, the rights provided by this Agreement shall be enforceable by the Indemnitee in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure of the directors or stockholders of the Company or its independent legal counsel to have made a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because the Indemnitee has met the applicable standard of conduct, if any, nor an actual determination by the directors or shareholders of the Company or independent legal counsel that the Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption for the purpose of an action that the Indemnitee has not been the applicable standard of conduct. (c) The Indemnitee's Expenses incurred in connection with any Proceeding concerning his/her right to indemnification or advances in whole or part 4 pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such Proceeding. (d) With respect to any Proceeding for which indemnification is requested, the Company will be entitled to participate therein at its own expense and, except as otherwise provided below, to the extent that it may wish, the Company may assume the defense thereof, with counsel satisfactory to the Indemnitee. After notice from the Company to the Indemnitee of its election to assume the defense of a Proceeding, the Company will not be liable to the Indemnitee for any Expenses subsequently incurred by the Indemnitee in connection with the defense thereof, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent. The Indemnitee shall have the right to employee his/her counsel in any Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense of the Proceeding shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been authorized by the Company, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of the defense of a Proceeding, in each of which cases the fees and expenses of the Indemnitee's counsel shall be advances by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which the Indemnitee has concluded that there may be a conflict of interest between the Company and the Indemnitee. 10. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to the Indemnitee expenses with respect to Proceeding initiated or brought voluntarily by the Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable corporate law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify the Indemnitee for any Expenses, judgment, fines, penalties or ERISA excise taxes sustained in any Proceeding for which payment is actually made to the Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; 5 (c) To indemnify the Indemnitee for any Expenses, judgment, fines, and/or penalties sustained in any Proceeding for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; and (d) If a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful. 11. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, as long as the Indemnitee continues to serve as a director and/or officer of the Company and thereafter as long as the Indemnitee may be subject to any possible Proceeding, the Company, subject to subsection (c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) In all D&O insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors and/or officers. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines, in its sole discretion, that such insurance is not reasonably available, the premium costs for such insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 12. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Articles of Incorporation, Bylaws, any agreement, vote of shareholders or disinterested directors, provision of applicable corporate law, or otherwise, both as to action in his/her official capacity and as to action in another capacity on behalf of the Company while holding such office. 13. Successors and Assigns. This Agreement shall be binding upon, and shall 6 inure to the benefit of the Indemnitee and his/her heirs, executors, administrators and assigns, whether or not Indemnitee has ceased to be a director or officer, and the Company and its successors and assigns. 14. Severability. Each and every paragraph, sentence, term and provision hereof is separate and distinct so that if any paragraph, sentence, term or provision hereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of any other paragraph, sentence, term or provision hereof. To the extent required, any paragraph, sentence, term or provision of this Agreement shall be modified by a court of competent jurisdiction to preserve its validity and to provide the Indemnitee with the broadest possible indemnification permitted under applicable corporate law. 15. Savings Clause. If this Agreement or any paragraph, sentence, term or provision hereof is invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify the Indemnitee as to any Expenses, judgments, fines, penalties for ERISA excise taxes incurred with respect to any Proceeding to the full extent permitted by any applicable paragraph, sentence, term or provision of this Agreement that has not been invalidated or by any other applicable provision of applicable corporate law. 16. Interpretation; Governing Law. This Agreement shall be construed as a whole and in accordance with its fair meaning. Headings are for convenience only and shall not be used in construing meaning. This Agreement shall be governed and interpreted in accordance with the laws of the State of Nevada. 17. Amendments. No amendment, waiver, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by the party against whom enforcement is sought. The indemnification rights afforded to the Indemnitee hereby are contract rights and may not be diminished, eliminated or otherwise affected by amendments to the Articles of Incorporation, Bylaws, or by other agreements, including D&O Insurance policies. 18. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and 7 shall become effective when one or more counterparts have been signed by each party and delivered to the other. 19. Notices. Any notice required to be given under this Agreement shall be directed: TO: ADNAS, Inc. 8229 West Sunset Boulevard Los Angeles, CA 90069 With a copy to: Andrea Cataneo, Esq. 81 Meadowbrook Road Randolph, NJ 07869 TO: Indemnitee Ron Erickson ----------------- ----------------- ----------------- (insert address where you would like this sent) or to such other address as either shall designate in writing. IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as of the date first written above. INDEMNITEE: /s/ RON ERICKSON ---------------- Ron Erickson APPLIED DNA SCIENCES, INC. /s/ ROBIN B. HUTCHISON ---------------------- Robin B. Hutchison, CEO 8 EX-10 11 feb122005sb2ex1010.txt Exhibit 10.10 [GUILIANI PARTNERS LETTERHEAD] August 6, 2004 Peter Brocklesby President and Chief Executive Officer Applied DNA Sciences, Inc. 9229 W. Sunset Boulevard, Suite 830 Los Angeles, CA 90069 Dear Mr. Brocklesby: Engagement Agreement 1. Engagement (a) This letter (this "Letter Agreement") confirms our agreement pursuant to which you retained Giuliani Partner, LLC (together with its affiliates, employees and agents, "GP") to provide certain professional services described below (the "Engagement") to, and to enter into a strategic relationship with Applied DNA Sciences, Inc. ("ADNAS"). (b) Pursuant to the Engagement, GP shall make itself reasonably available to provide advise and assistance to ADNAS regarding issues associated with ADNAS's proprietary DNA-embedded security solutions business (the "ADNAS Business") in the following ways: (i) assisting ADNAS with strategic positioning and enhancement of the ADNAS Business and (ii) assisting ADNAS in the development domestic and international marketing strategies for the products and services of the ADNAS Business. (c) GP initially shall assign Eric Hatzimemos (the "Team Leader") to coordinate GP's obligations hereunder and shall make reasonably available personnel resources to perform the Engagement and to assist the Team Leader. GP shall reasonably accommodate ADNAS's requests for the services described herein consistent with GP's other commitments and obligations; provided, however, that in no event shall GP be required to perform any services that might reasonably be deemed to constitute "lobbying" (or any analogous regulated activity) under applicable law or regulations. 2. Term of the Engagement; Due Diligence; Termination (a) Term of Engagement. The Engagement shall commence on September 1, 2004 (the "Effective Date") and end of the first anniversary of the Effective Date, or such earlier date, if terminated by GP pursuant to Section 2(c) hereunder (the "Term"); provided, however, that the Term will be automatically extended without further action of either party for additional one-year periods (the "Renewal Term"), unless written notice of either party's intention not to extend has been given at least 60 days prior to expiration of the effective term. Except as expressly provided herein, the agreements, terms and understandings set forth in this Letter Agreement shall survive the termination of any and all work performed pursuant to the Engagement. (b) Due Diligence. ADNAS acknowledges that, as of the Effective Date, GP has not had the opportunity to conduct a complete due diligence review (the "Diligence Review") of ADNAS and Biowell Technology, Inc. ("Biowell"), a Taiwanese company that ADNAS has agreed to acquire the assets of in a pending transaction (the "Transaction"). Accordingly, ADNAS agrees to make available to GP on or immediately after the Effective Date, but in no event later than 5 business days thereafter, at a location and in matter as mutually agreed to by the parties, certain information concerning the business and affairs of ADNAS and, in connection with the Transaction, Biowell (the "Diligence Information") in order for GP to conduct the Diligence Review. (c) Termination. (i) ADNAS agrees that, for the 30-day period following the Effective Date (the "Option Period"), GP shall have the option, which it may exercise in its sole discretion, to terminate this Engagement as a result of GP's findings in connection with the Diligence Review; provided, however, that in the event that ADNAS does not make available to GP the Diligence Information within the time period specified in Section 2(b), the Option Period shall automatically be extended by the number of days that the Diligence Information was delinquent. (ii) In the event that GP exercises its option to terminate this Engagement pursuant to Section 2(c)(i), (A) GP shall return to ADNAS the full amount of any payments heretofore received by GP pursuant to this Letter Agreement and (B) following the payment of such aforementioned amount by GP, this Letter Agreement and the Warrant (as hereinafter defined) shall be null and void and shall have no force and effect. 3. Fees and Warrants As compensation for GP's performance of its obligations pursuant to Section 1 hereof: (a) Advisory Fee Payments. During the Term and the Renewal Term, if applicable, ADNAS agrees to pay GP an aggregate advisory fee of Two Million Dollars ($2,000,000) payable as follows: (i) for the Term, (A) a lump sum cash fee of Five Hundred Thousand Dollars ($500,000) on September 1, 2004, and (B) a monthly cash fee in the amount of One Hundred Twenty Five Thousand Dollars ($125,000) beginning on September 15, 2004 and continuing thereafter on the fifteenth day of each month occurring during the Term and (ii) for the Renewal Term, a monthly cash fee in the amount of One Hundred Sixty Six Thousand Six Hundred and Sixty-Six Dollars ($166,666) on the fifteenth day of each month occurring during the Renewal Term. (b) Issuance of Warrant. As additional consideration to GP, ADNAS shall issue, upon execution of, and as a condition to, signing this Letter Agreement, a net-exercisable warrant relating to 21,430,000 shares of common stock of ADNAS, par value, $0.50 per share (the "Common Stock"), at an exercise price of $0.15 per share (the "Warrant"). The Warrant shall be immediately exercisable with respect to all shares of the Common Stock subject thereto as of the date hereof. The form of Warrant is attached hereto as Exhibit A. If and to the extent that ADNAS issues any other person warrants, stock options or shares of capital stock with demand registration rights or any other liquidity rights, GP shall be entitled, with respect to the shares issued or issuable pursuant to the Warrant to such registration or other rights that are at least as favorable as those ADNAS grants to any other holders of warrants, stock options, or shares of capital stock ADNAS. 2 4. Expenses ADNAS agrees to promptly reimburse GP for all out-of-pocket expenses reasonably incurred by GP and its representatives in connections with the Engagement. 5. Confidentiality: Use of Mr. Giuliani's Name (a) GP shall (i) treat and maintain as confidential and/or privileged all information, documents, materials and work product, including, without limitation, the Diligence Information, that are, have been or shall be generated or created by or communicated or provided to GP by ADNAS relating to any activity undertaken as part of this Letter Agreement and shall not reveal any such information, document, material or work product to any person or utilize any affiliates, officers, directors and shareholders to maintain confidentiality of such information; provided, however, that GP may reveal such information, documents, materials or work product if required by law pursuant to subpoena or other government process after prior notice to ADNAS when possible and to the extent permitted under the circumstances to afford ADNAS an opportunity to challenge such process at ADNAS's sole discretion and expense. In the alternative, should ADNAS so direct, GP shall undertake to challenge such process at ADNAS's sole expense, provided, that such challenge is permitted by law under the circumstances. (b) The parties shall keep the terms of this Letter Agreement strictly confidential at all times and neither party shall make any statement regarding the Engagement or this Letter Agreement without the advance consent of the other. (c) The trade names and trademarks "Rudolph Giuliani," "Giuliani Partners LLC," or any similar mark on variations or derivations thereof (collectively, the "Giuliani Marks"), shall not be used by ADNAS without GP's prior written consent, and upon any termination of the Engagement, ADNAS shall have no further right to use or exploit the Giuliani Marks in any fashion. ADNAS shall not by act or omission use the Giuliani Marks or perform any services hereunder in any manner that tarnishes, degrades, disparages or reflects adversely on the Giuliani Marks, GP, its affiliates, or their business or reputation. Except as expressly provided herein, nothing in this Letter Agreement shall be deemed to give ADNAS any right, title or interest in or to any of GP's trade names, trademarks or service marks. 6. Promotional Materials ADNAS agrees that it shall submit to GP for its review, all advertising, written sales promotion, press releases, news clippings and other publicity matters relating to the Engagement and the strategic relationship created hereby or containing language from which the Engagement or such relationship may be inferred or implied ("Promotional Materials") and not publish, disseminate or use any such GP Promotional Materials without GP's prior written consent, which consent shall not be unreasonably withheld or delayed. 3 7. Indemnification and Related Matters (a) ADNAS agrees to indemnify GP, any controlling person of GP and each of their respective partners, shareholders, directors, officers, employees, agents, affiliates and representatives (each, an "Indemnified Party") and hold each of them harmless against any actions, judgments, claims, losses, damages, expenses, liabilities, joint or several, to which any Indemnified Party may become liable, directly or indirectly, arising out of, or relating to, this Letter Agreement or the Engagement, including but not limited to reimbursement for all GP fees, costs, attorney's fees and disbursements and defense or other costs associated with any such actions, judgments or claims, unless and until it were to be finally adjudicated that such liabilities resulted from the gross negligence or willful misconduct of any Indemnified Party. ADNAS further agrees to reimburse each Indemnified Party immediately upon request for all expenses (including reasonable attorneys' fees and expenses) as they are incurred in connection with the investigation of, preparation for, defense of, or providing evidence in, any action, claim, suit proceeding or investigation, directly or indirectly, arising out of, or relating to, this Letter Agreement or GP's services hereunder, whether or not pending or threatened and whether or not any Indemnified Party is a party to such proceeding. ADNAS also agrees that no Indemnified Party shall have any liability (whether direct or indirect, in contract or tort or otherwise) to ADNAS or any person asserting claims on behalf of or in right of ADNAS, directly or indirectly, arising out of, or relating to, this Letter Agreement or GP's services thereunder, unless it is finally judicially determined that such liability resulted from the gross negligence or willful misconduct of such Indemnified Party. Moreover, in no event, regardless of the legal theory advanced, shall any Indemnified Party be liable for any consequential, indirect, incidental or special damages of any nature. In no event shall the Indemnified Parties' liability (whether direct, indirect, contract or otherwise) directly or indirectly relating to or in connection with this Letter Agreement exceed the advisory fees received by GP during the months that any such liability of the Indemnified Parties arose. In the event that an indemnified Party is requested or required to appear as a witness in any action brought by or on behalf of or against ADNAS or any affiliate of ADNAS in which such Indemnified Party is not named as a defendant. ADNAS agrees to reimburse GP for all expenses incurred by it in connection with such Indemnified Party's appearing and preparing to appear as such a witness, including, without limitation, the reasonable fees and disbursements of its legal counsel. (b) ADNAS agrees that, without GP's prior written consent, it will not settle, compromise or consent to the entry of any judgment in or otherwise seek to terminate any claim, action, suit, proceeding or investigation in respect of which indemnification could be sought hereunder (whether or not GP or any other Indemnified Party is an actual or potential party to such claim, action, suite, proceeding or investigation), unless (i) such settlement, compromise, consent or termination includes an unconditional release of each Indemnified Party from any liabilities arising out of such claim action, suite, proceeding or investigation and (ii) the parties agree that the terms of such settlement shall remain confidential. (c) The rights of the Indemnified Parties referred to above shall be in addition to any rights that any Indemnified Party may otherwise have. (d) ADNAS shall be solely responsible for the performance and safety of any of the products and services of the ADNAS Business. Any representation or covenant, whether express or implied, given by ADNAS to any customer or third party regarding the products and services of the ADNAS Business shall be the sole responsibility of ADNAS, and GP shall not be liable for, and shall be indemnified against in accordance with Section 7(a), (i) any failure to comply with such representation or covenant and (ii) any product liability, tort or other claims relating to the ADNAS Business. 4 (e) Each of the parties hereto represents and warrants that its execution of, and performance of its obligations under, this Letter Agreement shall not constitute or result in a breach or event of default under any agreement to which it is a party, or contravene any applicable law, regulation or fiduciary obligation. 8. Non-Exclusivity Nothing in this Letter Agreement shall prevent GP from entering into consulting agreements or arrangements with other parties for any purpose; provided that GP shall not enter into such consulting agreements or arrangements with any other party in which the majority of such party's business is related to DNA-embedded technologies. 9. Modification of Agreement; Non-Assignability; Entire Agreement (a) This Letter Agreement may not be changed or altered except in a writing duly executed by an authorized agent of both parties hereto. (b) Neither party may assign any of its rights or obligations under this Letter Agreement without the prior written consent of the other party. (c) There have been no representations, inducements, promises or agreements of any kind that have been made by either party, or by any person acting on behalf of wither party, which are not embodied within this Letter Agreement. This letter Agreement constitutes the entire understanding and agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, between the parties with respect to the subject matter hereof. 10. Independent Contractor Status; Governing Law In connection with the Engagement, GP is acting as an independent contractor and not in any other capacity, and does not have any authority to act as an agent for, or otherwise bind ADNAS. All aspects of the relationship created by this Letter Agreement shall be governed by and construed in accordance with the laws of the State of New York, United States of America, applicable to contracts made and to be performed therein. 11. Arbitration (a) Any dispute, controversy or claim arising out of or relating to this Letter Agreement or the breach, termination, enforceability or validity hereof shall be heard and determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). The number of arbitrators shall be three. Each party shall select an arbitrator from 5 the list of names submitted to the parties by the AAA, and such two arbitrators shall be appoint the third arbitrator. The place of arbitration shall be the City of New York. (b) No provision of or the exercise of any rights under this Section 11 shall limit the right of any party to request and obtain from a court of competent jurisdiction in the City of New York (which shall have exclusive jurisdiction for purposes of this Section 11 (b)) provisional remedies and relief. Each of the parties hereby submits unconditionally to the exclusive jurisdiction of the state and federal courts located in the City of New York for purposes of this provision, waives and agrees not to assert objection to the venue of any proceeding in any such court or that any such court provides an inconvenient forum and consents to the service of the process upon it in connection with any proceeding instituted under this Section 11 (b) in the same manner as provided for the giving of notice hereunder. 12. Execution of the Letter Agreement and Signatures Your signature below on the indicated enclosed copy of this Letter Agreement is your representation that you are authorized to enter into the Engagement and to agree to the terms of this Letter Agreement on behalf of ADNAS. This Letter Agreement shall be binding on all parties and their respective heirs, successors and permitted assigns. Please execute and return the indicated copy of this Letter Agreement to GP. 6 * * * * If the foregoing correctly reflects our mutual understanding and agreement with respect to the terms of the Engagement set forth herein, please so confirm by executing and delivering the enclosed copy of this Letter Agreement to the undersigned, and upon the Effective Date, this Letter Agreement shall become a binding agreement upon ADNAS and GP in accordance with its terms. Very truly yours, GIULIANI PARTNERS LLC By:/s/ ERIC HATZIMEMOS ---------------------- Eric Hatzimemos Managing Director The above sets forth the terms of the Engagement and is agreed to on behalf of ADNAS, as indicated below: APPLIED DNA SCIENCES, INC. Dated: August 6, 2004 By:/s/ PETER BROCKELSBY -------------------- Peter Brockelsby President 7 EX-10 12 feb142005ex1012.txt Exhibit 10.12 INVESTMENT ADVISORY AGREEMENT This Investment Advisory Agreement made this 14th day of February 2005 is between Applied DNA Sciences, Inc., a Nevada corporation located at 9229 West Sunset Blvd., Suite 830, Los Angeles, CA 9009 ("APDNAS"), and First London Finance, Ltd. ("FLF"), located at The Akara Building, 24 De Castro St., Wickhams Cay I, Road Town, Tortola, British Virgin Islands and supersedes the previous Investment Advisory Agreement between APDNAS and FLF of 8th December 2004. APDNAS and FLF agree as follows: I. ENGAGEMENT APDNAS hereby engages and retains FLF as its non-exclusive Investment Adviser to perform the services (as that term is defined in III. Below, hereafter referred to as the "Services") and FLF accepts such appointment on the terms and subject to the conditions hereinafter set forth and agrees to use its best efforts in providing such Services. II. INDEPENDENT CONTRACTOR A. FLF shall be, and in all respects be deemed to be, an independent contractor in the performance of its duties hereunder, any law of any jurisdiction to the contrary. B. FLF shall not, by reason of this Agreement or the performance of the Services, be or be deemed to be, an employee, agent, partner, co-venture or controlling person of APDNAS, and FLF shall not have any power to enter into any agreement on behalf of or otherwise bind APDNAS. C. FLF shall not have or be deemed to have fiduciary obligations or duties to APDNAS and shall be free to pursue for their own account (or for the account of others) such activities, employments, ventures, businesses and other pursuits as they at their sole discretion, may elect. D. Notwithstanding the above provision, FLF shall not pursue for its own account (or for the account of others) such activities, employments, ventures, businesses, financing, debt/equity funding, investment advisory and/or brokerage services that are or may be perceived to be a conflict with FLF's obligations under this Agreement or be adverse to APDNAS' interests or the proposed business plans of APDNAS. 1 III. SERVICES A. Advise and assist APDNAS to raise up to Twenty-Seven Million U.S. dollars ($27,000,000.00) through the sale of units ("Units") and exercise of warrants. B. Assist APDNAS in efforts to seek additional business/business relationships that will be of benefit to APDNAS. C. Advise APDNAS and/or any of its affiliates in its negotiations with one or more individuals, broker-dealers, placement agents, firms or entities (the "Candidate(s)") who may have an interest in providing capital or in pursuing a "Business Combination" with APDNAS. As used in this Agreement, the term "Business Combination" shall be deemed to mean any form of merger, acquisition (of assets or Intellectual Property), joint venture, licensing agreement, product sales and/or marketing, distribution, combination and/or consolidation, etc. involving APDNAS and/or any of its affiliates and any other entity. As used herein, the term "investment" shall include the contribution of anything of value by a candidate introduced by FLF to APDNAS its subsidiaries or affiliates. D. Devote such time and best effort to the affairs of APDNAS as is reasonable and adequate to render the consulting services contemplated by this agreement as well as may reasonably be requested by APDNAS. FLF is not responsible for the performance of any services, which may be rendered hereunder without APDNAS providing the necessary information in writing prior thereto, nor shall FLF include any services that constitute the rendering of any legal opinions or performance of work that is in the ordinary purview of the Certified Public Accountant. FLF cannot guarantee results on behalf of APDNAS but shall pursue all reasonable avenues available through its network of contacts that FLF hereby represents it has established and that are capable of providing the funding levels and types contemplated by this agreement. At such time as an interest is expressed by a third party in APDNAS' needs, FLF shall notify APDNAS and advise it as to the source of such interest and any terms and conditions of such interest. The acceptance and consumption of any transaction is subject to acceptance of the terms and conditions by APDNAS. It is understood that a portion of the compensation paid hereunder is being paid by APDNAS to retain FLF to remain available to advise it on transactions on an as-needed basis. Further FLF shall advise APDNAS prior to making any and all contacts it intends to make in performance of this agreement in order to assure full coordination with APDNAS and approval by APDNAS of such potential funding source. E. APDNAS and FLF hereby confirm their express written intent that FLF shall only be required to devote such time to the performance of the Services as is reasonable to properly discharge its responsibilities under this Agreement. 2 F. FLF will advise APDNAS in structuring, seeking and issuing the documents related to the financing. G. FLF shall act as a non-exclusive Investor Relations Advisor to APDNAS for as long as this Agreement remains in force H. In conjunction with the Services, FLF agrees to: 1. Be available to the officers of APDNAS at such mutually agreed upon place during normal business hours for reasonable periods of time, subject to reasonable advance notice and mutually convenient scheduling, for the purpose of advising and assisting APDNAS in the preparation of such reports, summaries, corporate and/or transaction profiles, due diligence packages and/or other material and documentation as shall be necessary, in the opinion of FLF, to properly present APDNAS to other entities and individuals that could be of benefit to APDNAS; 2. Make itself available for telephone conferences with the principal financial sales and/or operating officer(s) of APDNAS during normal business hours; 3. Advise APDNAS' management in corporate finance, structuring the nature, extent and other parameters of any private or other offer(s) to be made to Candidate(s); 4. Advise APDNAS' management in evaluating proposals and participating in negotiations with Candidate(s); 5. Advise APDNAS regarding company operations, staffing, strategy, and other issues related to building shareholder value as APDNAS may reasonably request, consistent with the provisions of this Agreement; 6. Introduce APDNAS to banking and investment firms qualified, capable and interested in finding funding for the APDNAS; 7. Introduce APDNAS to investor relations firms that may assist APDNAS in communicating with its shareholders, the media and other interested parties. 8. Introduce the APDNAS to firms qualified, capable and interested in converting the APDNAS' SEC filings and proxy statements into an Edgar(R) format for submission. IV. EXPENSES It is expressly agreed and understood that FLF's compensation as provided in this Agreement does include normal and reasonable out-of-pocket expenses. FLF will be entitled to reimbursement of its business expenses, as described herein APDNAS shall reimburse the pre-approved expenses of FLF and such amounts shall not be deducted from any fees described in Section V below titled, "COMPENSATION." 3 A. The disbursements of expense money to FLF, and its affiliates will be paid by APDNAS for the prior approved expenses. It is agreed that APDNAS will pay all out-of-pocket pre-approved expenses incurred in connection with this engagement. B. FLF shall not incur any expense exceeding Five Hundred US Dollars (US $500.00) without prior written consent from APDNAS. C. APDNAS hereby agrees to compensate FLF promptly upon receipt of an approved expense invoice from FLF. Whenever feasible, FLF will request advance payment of previously approved expenses. D. APDNAS hereby agrees that FLF's employees may: 1. Travel in business class on all international flights and either business class or first class on U.S. domestic flights of more than two hours duration; 2. Stay at Hyatt, Marriott, Sheraton, Hilton or equivalent hotel for overnight stays. V. COMPENSATION In consideration for Financial Consulting and Investor relations services provided to the APDNAS (the " Services"), as set forth at Section III A through H, above), APDNAS agrees that FLF shall be entitled to compensation as follows: A. A monthly Investment Advisory Fee of Ten Thousand US Dollars (US $10,000.00) USD ("Investment Advisory Fee") shall be paid for a period of one (1) year to FLF for the SERVICES described in III. above. The period may be extended in annual increments, as mutually agreed in writing by the parties. The Investment Advisory Fee shall be paid on the first of each month, commencing 1 December, 2004. The fee shall continue to be paid monthly in advance until this Agreement expires. . 4 B. In addition, APDNAS agrees to issue to FLF Eight Hundred and Fifty Thousand (850,000) shares of APDNAS' common stock to be issued on or about 1st February 2005 and Four Hundred Thousand shares of APDNAS' common stock to be issued on 31st December 2005 (hereinafter referred to as the "Company Shares"). APDNAS hereby agrees to review the Services performed by FLF every six (6) months for the duration of this contract and may issue additional shares to FLF, as may be deemed appropriate by the parities to this Agreement. C. The Company Shares issued shall be Registered in the SB-2 Registration to be filed by APDNAS on 15th February, 2005. FLF agrees to a "Lock-up Agreement" under which the registered Company Shares shall not be eligible for sale until 31st December, 2005. VI. REPRESENTATIONS, WARRANTIES AND COVENANTS The parties hereby represent, warrant and covenant that: A. The execution, delivery and performance of this Agreement, in the time and manner herein specified, will not conflict with, result in a breach of, or constitute a default under any existing agreement, indenture, or other instrument to which either APDNAS or FLF is a party or by which either entity may be bound or affected. B. APDNAS hereby irrevocably agrees not to circumvent, directly or indirectly, the intent of this Agreement, to avoid payment of fees in any transaction with any corporation, partnership, entity, or individual, introduced by FLF to APDNAS, in connection with any project, any loans or collateral, or other transaction involving any products, transfers or services, or addition, renewal extension, rollover, amendment, renegotiations, new contracts, parallel contracts/agreements, or third party assignments thereof. C. FLF agrees to adhere to an understanding of Confidentiality, Non-Circumvention and Non-Competition and be bound thereby as expressed in a separate written agreement delivered concurrently herewith. D. APDNAS and FLF have full legal authority to enter into this Agreement and to perform the same in the time and manner contemplated. E. The individuals whose signatures appear below are authorized to sign this Agreement on behalf of their respective organizations. F. APDNAS will co-operate with FLF, and will promptly provide FLF with all reasonably requested information in order for FLF to perform its Services pursuant to this Agreement. 5 VII TERM AND TERMINATION A. The term of this Agreement shall expire on 7th December 2006, unless extended in writing by both APDNAS and FLF. VIII CONFIDENTIAL DATA A. FLF shall not divulge to others, any trade secret or confidential information, knowledge, or data concerning or pertaining to the business and affairs of APDNAS, obtained by FLF as a result of its engagement hereunder, unless authorized, in writing by APDNAS. Upon termination of this Agreement for any reason FLF agrees to return all information to APDNAS. B. APDNAS shall not divulge to others, any trade secret or confidential information, knowledge, or data concerning or pertaining to the business and affairs of FLF, obtained by APDNAS as a result of its engagement hereunder, unless authorized, in writing, by FLF. C. FLF shall be required in the performance of its duties to divulge to APDNAS or any officer, director, agent or employee of APDNAS, any secret or confidential information, knowledge, or data concerning any other person, firm or entity (including, but not limited to, any such persons, firm or entity which may be a competitor or potential competitor of APDNAS), which FLF may have or be able to obtain otherwise than as a result of the relationship established by this Agreement. 6 IX OTHER MATERIAL TERMS AND CONDITIONS D. Piggy-Back Registration Rights. If, at any time commencing after the date hereof, the APDNAS proposes to register any shares of common stock of the APDNAS under the Securities Act of 1933, as amended, (other than pursuant to a Form S-4, Form S-8 or any other successor form of limited purpose), the APDNAS shall include the FLF Shares under such registration statement and pay for all such registration costs and expenses of FLF. E. Provisions. Neither termination nor completion of the assignment shall affect the provisions of this Agreement, and the Indemnification Provisions, attached at Schedule "A" and hereby made part of this Agreement, which shall remain operative and in full force and effect. F. Additional Instruments. Each of the parties shall from time to time, at the request of others, execute, acknowledge and deliver to the other party any and all further instruments that may be reasonably required to give full effect and force to the provisions of this Agreement. G. Entire Agreement. Each of the parties hereby covenants that this Agreement is intended to and does contain and embody herein all of the understandings and Agreements, both written or oral, of the parties with respect to the subject matter of this Agreement, and that there exists no oral agreement or understanding expressed or implied liability, where the absolute, final and unconditional character and nature of this Agreement shall be in any way invalidated, empowered or affected. There are no representations, warranties or covenants other than those set forth herein. H. Laws of Nevada. This Agreement shall be deemed to be made in, governed by and interpreted under and construed in all respects in accordance with the laws of Nevada, irrespective of the country or place of domicile or residence of either party. The FLF and APDNAS hereby agree that any legal proceedings, suits or arbitrations filed by either party must be filed and adjudicated in Nevada, USA. I. Assignments. The benefits of the Agreement shall inure to the respective successors and assigns of the parties hereto and of the indemnified parties hereunder and their successors and assigns and representatives, and the obligations and liabilities assumed in this Agreement by the parties hereto shall be binding upon their respective successors and assigns; provided that the rights and obligations of APDNAS and FLF under this Agreement may not be assigned or delegated without the prior written consent of APDNAS or FLF, as the case may be, and any such purported assignment shall be null and void. J. Originals. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed an original and constitute one and the same agreement. Facsimile copies with signatures shall be given the same legal effect as an original. K. Addresses of Parties. Each party shall at all times keep the other informed of its principal place of business if different from that stated herein, and shall promptly notify the other of any change, giving the address of the new place of business or residence. L. Notices. All notices that are required to be or may be sent pursuant to the provision of this Agreement shall be sent by certified mail, return receipt requested, by facsimile or by overnight package delivery service to each of the parties at the address appearing herein, and shall count from the date of receipt of the delivery service or confirmation of facsimile receipt or by a validated air bill. Addresses for facsimile are as follows: For FLF: attention Jack Wright, Agent, 941-346-9230. For APDNAS : attention Peter Brocklesby, President and Karin Klemm, COO, 310-860-1303. M. Modification and Waiver. A modification or waiver of any of the provisions of this Agreement shall be effective only if made in writing and executed with the same formality as this Agreement. The failure of any party to insist upon strict performance of any of the 7 provisions of this Agreement shall not be construed as a waiver of any subsequent default of the same or similar nature or of any other nature. X. Attorney's Fees If any arbitration, litigation, action, suit, or other proceeding is instituted to remedy, prevent or obtain relief from a breach of this Agreement, in relation to a breach of this Agreement or pertaining to a declaration of rights under this Agreement, the prevailing party will recover all such party's reasonable attorneys' fees incurred in each and every such action, suit or other proceeding, including any and all appeals or petitions there from. As used in this Agreement, attorneys' fees will be deemed to be the reasonable legal fees and services performed in connection with the matters involved, including those related to any appeal or the enforcement of any judgment calculated on the basis of the reasonable fee charged by attorneys performing such services. WHEREOF, on the dates of their respective signatures, each party has executed this Agreement. APPROVED AND AGREED: APPROVED AND AGREED: First London Finance, Ltd. Applied DNA Sciences, Inc. /s/ M. MARECHAL /s/ PETER BROCKLESBY - --------------- --------------------- By: M. Marechal By: Peter Brocklesby President /s/ C. BRASEY - ------------- By: C. Brasey 14th February, 2005 General Attorneys Date of execution 14th February, 2005 Date of execution 8 EX-23 13 feb152005sb2ex231.txt CONSENT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS TO: Applied DNA Sciences, Inc. As independent registered certified public accountants, we hereby consent to the incorporation by reference in this Registration Statement on Form SB-2, of our report, which includes an explanatory paragraph regarding the substantial doubt about the Company's ability to continue as a going concern, dated January 11, 2005 relating to the financial statements of Applied DNA Sciences, Inc. and to the reference to our Firm under the caption "Experts" appearing in the Prospectus. /s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP -------------------------------------------- Russell Bedford Stefanou Mirchandani LLP New York, New York February 15, 2005 -----END PRIVACY-ENHANCED MESSAGE-----