As filed with the Securities and Exchange Commission on October 2, 2014
Registration No.       
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM S-1
registration statement under
the securities act of 1933
 
Applied DNA Sciences, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
7380
59-2262718
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
 
50 Health Sciences Drive
Stony Brook, New York 11790
(631) 240-8800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
James A. Hayward, Ph.D., Sc.D.
Chairman, Chief Executive Officer and President
Applied DNA Sciences, Inc.
50 Health Sciences Drive
Stony Brook, New York 11790
(631) 240-8801
(Name, address, including zip code, and telephone number, including area code, of agent for service)
With copies to:
 
Merrill M. Kraines, Esq.
Fulbright & Jaworski LLP
(a Member Firm of Norton Rose Fulbright)
666 Fifth Avenue
New York, New York 10103
Telephone: 212-318-3261
Facsimile: 212-318-3400
James M. Jenkins, Esq.
Alexander R. McClean, Esq.
Harter Secrest & Emery LLP
1600 Bausch & Lomb Place
Rochester, New York 14604
Telephone: 585-232-6500
Facsimile: 585-232-2152
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer 
Accelerated filer 
Non-accelerated filer 
Smaller reporting company 

 
 
Title of Each Class of Securities to be Registered
Proposed Maximum Aggregate
Offering Price(1)(2)
Amount of
Registration Fee
Common Stock(3)
$
13,800,000
$
1,603.56
Warrants to purchase Common Stock
(4)
(5)
Common Stock issuable upon exercise of Warrants(3)(6)
$
17,250,000
$
2,004.45
Total Registration Fee
$
31,050,000
$
3,608.01
 
(1)
  • Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”), on the basis of the maximum aggregate offering price of all of the securities to be registered.
(2)
  • Includes shares of common stock and warrants to purchase shares of common stock that may be sold pursuant to the exercise of a 45-day option granted to the underwriters to cover over-allotments, if any.
(3)
  • Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.
(4)
  • The warrants to be issued to investors hereunder are included in the price of the common stock above.
(5)
  • No separate registration fee is required pursuant to Rule 457(g) promulgated under the Securities Act.
(6)
  • Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act. The warrants are exercisable at a per share exercise price equal to 125% of the public offering price. The proposed maximum aggregate public offering price of the warrants is $17,250,000, which is equal to 125% of $13,800,000.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
 

The information in this Prospectus is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER 2, 2014
PROSPECTUS
APPLIED DNA SCIENCES, INC.
$12,000,000 OF SHARES OF COMMON STOCK AND
WARRANTS TO PURCHASE SHARES OF COMMON STOCK
We are offering $12,000,000 of shares of common stock and warrants to purchase shares of common stock in a firm commitment underwritten public offering. One share of common stock is being sold together with a warrant, with each warrant being immediately exercisable for        share of common stock at an exercise price of $       per share and expiring 5 years after the issuance date.
Our shares of common stock are currently quoted on the OTCQB marketplace, operated by OTC Markets Group, under the symbol “APDN”. We have applied to have our common stock listed on either The NASDAQ Capital Market or the NYSE MKT under the symbol “APDN”. In addition, we intend to apply to list our warrants on either The NASDAQ Capital Market or the NYSE MKT under the symbol “APDNW.No assurance can be given that our applications will be approved. On October 1, 2014, the last reported sale price of our common stock on the OTCQB was $0.09 per share.
On August 28, 2014, our stockholders approved a reverse split of our common stock, in a ratio to be determined by our Board of Directors, of not less than 1-for-40 nor more than 1-for-60. We intend to effectuate the reverse split of our common stock in a ratio to be determined by our Board of Directors prior to consummation of this offering.
The purchase of the securities offered through this prospectus involves a high degree of risk. You should consider carefully the risk factors beginning on page 8 of this prospectus before purchasing any of the shares offered by this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
Per Share
Per Warrant
Total
Public offering price
$
               
$
               
$
               
Underwriting discounts and commissions(1)
$
$
$
Proceeds, before expenses, to us(3)
$
$
$
 
(1)
  • We have agreed to issue warrants to the underwriter and to reimburse the underwriter for expenses incurred by it in an amount not to exceed $100,000. We refer you to “Underwriting” beginning on page 77 of this prospectus for additional information regarding total underwriter compensation.
(2)
  • We estimate the total expenses of this offering will be approximately $     . We refer you to “Underwriting” for additional information.
The underwriter expects to deliver the securities against payment in New York, New York on            , 2014. We have granted the underwriter the option for a period of 45 days to sell up to an additional $1,800,000 shares of common stock and/or additional warrants to purchase shares of common stock at the public offering price, less underwriting discounts and commission, to cover overallotments, if any.
Maxim Group LLC
The date of this prospectus is            , 2014.

 
You should rely only on the information contained in this prospectus and any applicable prospectus supplement. We have not authorized anyone to provide you with different or additional information. If anyone provides you with different or inconsistent information, you should not rely on it. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of securities described in this prospectus. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or any prospectus supplement, as well as information we have previously filed with the Securities and Exchange Commission, is accurate as of the date on the front of those documents only. Our business, financial condition, results of operations and prospects may have changed since those dates.
Until [           ], 2014 (___ days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


ABOUT THIS PROSPECTUS
The following summary highlights selected information contained in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our securities. Before making an investment decision, you should read the entire prospectus carefully, including the “risk factors” section, the financial statements and other information included in this prospectus. In this prospectus “Applied DNA,” “we,” “us” and “our” refer to Applied DNA Sciences, Inc. and its subsidiaries.
Our Company
Using biotechnology as a forensic foundation, we create unique security solutions addressing the challenges of modern commerce. Whether working in supply chain security, brand protection or law enforcement applications, it is our goal to help establish secure and flourishing environments that foster quality, integrity and success. With secure taggants, high-resolution DNA authentication, and comprehensive reporting, our botanical DNA-based technologies are designed to deliver what we believe to be the greatest levels of security, deterrence and legal recourse strength.
SigNature® DNA.   SigNature DNA is our platform ingredient, at the core of all of our security solutions. From application to application the vehicle which carries SigNature DNA is custom designed to suit the application. Exhaustive development efforts have yielded a flexible and durable marker with all the accuracy provided by nature. SigNature DNA is based on full, double stranded plant DNA, and provides forensic power and protection for a wide array of applications. Highly secure, robust and durable, SigNature DNA markers are an ingredient that can be used to fortify brand protection efforts; mark, track and convict criminals; and strengthen supply chain security. Custom DNA sequences can be embedded into a wide range of host carriers including ink, varnish, thread, laminates and metal coatings. These items can then be tested for the presence of SigNature DNA Markers through optical screening or a forensic level authentication. Hundreds of millions of SigNature DNA marks now exist in the public domain on items ranging from consumer product packaging to microcircuits to guitars. We believe that no marks have ever been copied.
SigNature DNA, SigNature® T DNA, fiberTyping®, DNANet® and digitalDNA®, our principal anti-counterfeiting and product authentication solutions and our Counterfeit Prevention Authentication Program can be used in numerous industries, including microcircuits and other electronics, cash-in-transit (transport and storage of banknotes), homeland security, textiles and apparel, identity cards and other secure documents, law enforcement, industrial materials, pharmaceuticals, wine, and luxury consumer goods.
SigNature T DNA and fiberTyping.   There is one common thread that runs through the global textile industry: success breeds counterfeiting and diversion. SigNature T botanical DNA markers are used for brand protection efforts and raw material source compliance programs. In situations where natural fibers like cotton or wool are utilized, we can isolate and type inherent DNA, making it possible to verify the presence of specified materials. This fiberTyping process provides DNA verification to help manufacturers, retailers and brand owners ensure quality, safety and compliance of their products.
DNANet.   Recognizing that DNA-based evidence is the cornerstone of the modern era of law enforcement, we have created what we believe to be an effective crime fighting tool: DNANet, a botanical DNA marker that can be used to definitively link evidence and offenders to specific crime scenes. Whether deployed as a residential asset marker, an offender spray or fog in a retail location or a degradation dye in cash handling boxes, DNA markers facilitate conviction, and establish a heightened level of deterrence. DNANet, which includes our SmartDNA product line, is a unique and patented security system and effective crime protection system for stores, warehouses, banks, pharmacies, ATMs and the protection of valuables. The system contains a water-based, non-toxic spray which may be triggered during a crime, marking the perpetrator and remaining on their person for weeks after the crime. Each unit is designed to be unique to each store, warehouse or sting operation, allowing the police and prosecutors to link criminals to the crimes. Assets acquired from RedWeb Technologies including Sentry 500 Intruder Spray Systems and Advanced Molecular Taggant Technology and our SmartDNA product line are now included in the DNANet family of products.


digitalDNA.   digitalDNA is a security solution that utilizes the flexibility of mobile communications, the instant accessibility of secure, cloud-based data, and the certainty of DNA to make item tracking and authentication fast, easy and definitive, while providing the opportunity to create a new customer interface. digitalDNA begins with a DNA-secured form of the QR (“quick read”) code or other two dimensional code. A unique identification code is created for each article, and represented in an easy-to-read QR style barcode. The product uses forensic authentication of a botanical DNA marker, embedded within a secure QR code, and physically included within the ink used to digitally print the code. Should there ever be a question about the validity of a digitalDNA code; a laboratory-based analysis can be conducted to determine authenticity.
Counterfeit Prevention Authentication Program.   Our turnkey program for electronics, military, commercial, and aerospace contractors called the Counterfeit Prevention Authentication Program (“CPA” Program) empowers end-users to verify the originality or provenance of parts which have been marked by their suppliers with our SigNature DNA Markers.
Summary Risks
Before you invest in our stock, you should carefully consider all the information in this prospectus, including matters set forth in the “Risk Factors” section beginning on page 8 of this prospectus. We believe that the following are some of the major risks and uncertainties that may affect us:
  • We have a short operating history, a relatively new business model, and have not produced significant revenues, which makes it difficult to evaluate our future prospects and increases the risk that we will not be successful;
  • We have a history of operating losses which may continue, and which may harm our ability to obtain financing and continue our operations;
  • We will require additional financing which may require the issuance of additional shares which would dilute the ownership held by our stockholders;
  • Our operating results could be adversely affected by a reduction in business with our customers that supply parts to the Defense Logistics Agency;
  • If we are unable to obtain additional financing our business operations may be harmed or discontinued, and if we do obtain additional financing our stockholders may suffer substantial dilution;
  • General economic conditions may adversely affect our business, operating results and financial condition;
  • If our existing products and services are not accepted by potential customers or we fail to introduce new products and services, our business, results of operations and financial condition will be harmed;
  • The expenses or losses associated with the continued lack of market acceptance of our solutions will harm our business, operating results and financial condition;
  • If we are unable to retain the services of Dr. Hayward or Dr. Liang, we may not be able to continue our operations;
  • The markets for our anti-counterfeiting and product authentication solutions are very competitive, and we may be unable to continue to compete effectively in these industries in the future;
  • We need to expand our sales, marketing and support organizations and our distribution arrangements to increase market acceptance of our products and services;
  • If we need to replace manufacturers, our expenses could increase, resulting in smaller profit margins;


  • Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand;
  • Intellectual property litigation could harm our business; and
  • We may be subject to claims for damages in connection with certain sales of shares of our common stock in the open market.
Corporate Information
Our principal offices are located at 50 Health Sciences Drive, Stony Brook, New York 11790, and our telephone number is (631) 240-8800. We are a Delaware corporation, which was initially formed in 1983 under the laws of the State of Florida as Datalink Systems, Inc. In 1998, we reincorporated in Nevada, and in 2002, we changed our name to our current name, Applied DNA Sciences, Inc. In December 2008, we completed our reincorporation from Nevada to the State of Delaware. We maintain a website at www.adnas.com. The information contained on that website is not deemed to be a part of this prospectus.
Our corporate headquarters are located at the Long Island High Technology Incubator at Stony Brook University in Stony Brook, New York, where we established laboratories for the manufacture of DNA markers and product prototypes, and DNA authentication. To date, we have had a limited operating history, and as a result, our operations have produced limited recurring revenues from our services and products; we have incurred expenses and have sustained losses.


SUMMARY OF THE OFFERING
Securities offered:
$12,000,000 of shares of our common stock, together with warrants to purchase           shares of our common stock at the exercise price of $          per share. The warrants will be immediately exercisable and will expire 5 years after the issuance date.
Common stock outstanding before the offering(1):
836,157,272 shares
Common stock to be outstanding after the offering(1)(2):
_________ shares (_________ shares if the warrants being offered hereby are exercised in full).
Underwriter’s Over-Allotment Option:
The Underwriting Agreement provides that we will grant to the underwriter an option, exercisable within 45 days after the closing of this offering, to purchase up to an additional 15% of the total number of common stock and warrants to be offered by us pursuant to this offering, solely for the purpose of covering over-allotments, if any.
Underwriter’s Warrants:
The Underwriting Agreement provides that we will issue to the underwriter share purchase warrants covering a number of shares of common stock equal to 4% of the total number of shares being sold in the offering, including the over-allotments, if any.
Use of Proceeds:
We intend to use a portion of the net proceeds from this offering for the following purposes:
 
Proceeds:
Gross Proceeds
$
12,000,000
Fees and Expenses
(1,360,500
)
Net Proceeds
$
10,639,500
Uses:
Working Capital and Repurchase of Warrants
$
8,100,000
Business Development
1,539,500
Research and Development
1,000,000
Total Uses
$
10,639,500
OTCQB Symbol:
APDN
Listing and Proposed Symbol:
We have applied to list our common stock on the NASDAQ Capital Market or NYSE MKT under the symbol “APDN.” We intend to apply to list our warrants on The NASDAQ Capital Market or NYSE MKT under the symbol “APDNW.”
Risk Factors:
Investing in our securities involves substantial risks. You should carefully review and consider the “Risk Factors” section of this prospectus beginning on page 8 and the other information in this prospectus for a discussion of the factors you should consider before you decide to invest in this offering.


Reverse Split:
On August 28, 2014, our stockholders approved a reverse split of our common stock, in a ratio to be determined by our Board of Directors, of not less than 1-for-40 nor more than 1-for-60. We intend to effectuate the reverse split of our common stock in a ratio to be determined by our Board of Directors prior to consummation of this offering. All option, share and per share information in this prospectus does not give effect to the proposed reverse stock split.
 
(1)
  • The number of shares of our common stock outstanding excludes the following:
  • 230,749,013 shares of common stock issuable upon exercise of outstanding stock options and warrants, at a weighted average exercise price of $0.0997 per share;
  • Assuming the over-allotment option is fully exercised,             shares of common stock issuable upon exercise of the underwriter warrants.
  • the effect of the proposed reverse stock split described above.
(2)
  • The total number of shares of our common stock outstanding after this offering is based on 836,157,272 shares outstanding as of September 30, 2014. Except as otherwise indicated herein, all information in this prospectus assumes the underwriter does not exercise the over-allotment option.


SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes that are included elsewhere in this prospectus. We have derived the summary consolidated financial data for the nine month periods ended June 30, 2014 and 2013, and as of June 30, 2014, from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. We have derived the summary consolidated financial data for the years ended September 30, 2013, 2012 and 2011, and as of September 30, 2013, 2012 and 2011, from our audited consolidated financial statements that are included elsewhere in this prospectus. The summary consolidated statements of operations data for the years ended September 30, 2010 and 2009 and the summary consolidated balance sheet data as of September 30, 2010 and 2009 were derived from our audited consolidated financial statements which are not included in this prospectus. The results of operations for the nine months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year ending September 30, 2014.
Consolidated Statements of Operations Data
 
Years Ended September 30,
Nine Months Ended June 30,
2013
2012
2011
2010
2009
2014
2013
Revenues:
$
2,036,222
$
1,854,694
$
968,848
$
519,844
$
295,162
$
2,075,698
$
1,307,117
Operating expenses:
Selling, general and administrative
11,198,505
7,615,734
8,388,873
7,189,020
6,637,672
10,093,631
8,516,390
Research and development
692,480
432,669
268,876
75,961
135,405
1,085,416
509,132
Depreciation and amortization
321,074
313,940
367,556
371,914
418,128
325,448
105,105
Total operating expenses
12,212,059
8,362,343
9,025,305
7,636,895
7,191,205
11,504,495
9,130,627
LOSS FROM OPERATIONS
(10,175,837
)
(6,507,649
)
(8,056,457
)
(7,117,051
)
(6,896,043
)
(9,428,797
)
(7,823,510
)
Other income (expense):
Interest income (expense), net
1,272
(643,063
)
(2,458,667
)
(792,549
)
(1,182,695
)
784
738
Other (expense) income, net
(3,761
)
12,023,888
130,186
Loss on change in fair value of warrant liability
(7,508,146
)
(1,663,316
)
(6,145,229
)
(Loss) income before provision for income taxes
(17,686,472
)
(7,150,712
)
(10,515,124
)
(7,909,600
)
3,945,150
(10,961,143
)
(13,968,001
)
Income taxes (benefit)
572
NET (LOSS) INCOME
$
(17,686,472
)
$
(7,150,712
)
$
(10,515,124
)
$
(7,909,600
)
$
3,944,578
$
(10,961,143
)
$
(13,968,001
)
Net (loss) income per share:
Basic
$
(0.03
)
$
(0.01
)
$
(0.03
)
$
(0.03
)
$
0.02
$
(0.01
)
$
(0.02
)
Diluted
$
(0.03
)
$
(0.01
)
$
(0.03
)
$
(0.03
)
$
0.01
$
(0.01
)
$
(0.02
)
Weighted average common shares outstanding:
Basic
703,852,716
576,091,498
376,833,809
300,352,913
251,520,538
804,032,409
683,709,950
Diluted
703,852,716
576,091,498
376,833,809
300,352,913
308,912,411
804,032,409
683,709,950


Consolidated Balance Sheet Data
 
As of September 30,
As of June 30,
2014
2013
2012
2011
2010
2009
Current assets:
Cash and cash equivalents
$
6,360,301
$
724,782
$
2,747,294
$
17,618
$
213,307
$
2,025,716
Accounts receivable, net of allowance
672,638
296,994
208,587
63,029
47,302
518,274
Prepaid expenses
174,096
80,037
76,290
161,456
79,436
170,792
Total current assets
7,207,035
1,101,813
3,032,171
242,103
340,045
2,714,782
Noncurrent assets
1,267,931
247,121
471,385
1,171,211
1,167,025
1,056,233
Total assets
$
8,374,966
$
1,348,934
3,503,556
$
1,413,314
$
1,507,070
$
3,771,015
Current liabilities:
Accounts payable and accrued liabilities
$
966,977
$
592,009
$
768,061
$
967,550
$
843,491
$
1,259,439
Advances from Officers
50,000
Convertible notes payable, net
3,730,880
1,774,080
2,410,411
Deferred revenue
148,503
348,624
Total current liabilities
1,115,480
592,009
4,498,941
2,791,630
3,253,902
1,608,063
Convertible note payable-related party, net
219,714
Warrant liability
2,643,449
1,851,723
Total liabilities
3,758,929
592,009
4,498,941
3,011,344
3,253,902
3,459,786
Preferred stock
Common stock
786,527
646,183
473,326
346,366
275,204
827,332
Additional paid in capital
190,523,121
169,117,881
160,387,716
149,396,907
141,409,667
197,138,651
Accumulated deficit
(186,693,611
)
(169,007,139
)
(161,856,427
)
(151,341,303
)
(143,431,703
)
(197,654,754
)
Total stockholders’ equity
(deficit)
4,616,037
756,925
(995,385
)
(1,598,030
)
(1,746,832
)
311,229
Total Liabilities and Stockholders’ Equity (Deficit)
$
8,374,966
$
1,348,934
$
3,503,556
$
1,413,314
$
1,507,070
$
3,771,015

RISK FACTORS
Investment in our common stock involves a number of risks. You should be able to bear the complete loss of your investment. In addition to the risks and investment considerations discussed elsewhere in this prospectus, the following factors should be carefully considered by anyone purchasing the securities offered by this prospectus. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline and investors could lose all or a part of their investment.
Risks Relating to Our Business:
We have a short operating history, a relatively new business model, and have not produced significant revenues. This makes it difficult to evaluate our future prospects and increases the risk that we will not be successful.
We have a short operating history with our current business model, which involves the marketing, sale and distribution of anti-counterfeiting and product authentication solutions. Our operations since inception have produced limited revenues, and may not produce significant revenues in the near term, or at all, which may harm our ability to obtain additional financing and may require us to reduce or discontinue our operations. If we create significant revenues in the future, we expect to derive most of such revenues from the sale of anti-counterfeiting and product authentication solutions, which are immature industries. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage operating company in a new and rapidly evolving industry. We may not be able to successfully address these risks and difficulties, which could significantly harm our business, operating results, and financial condition.
We have a history of losses from operations which may continue, and which may harm our ability to obtain financing and continue our operations.
We incurred operating losses of $9.4 million for the nine months ended June 30, 2014 and $10.2 million for the year ended September 30, 2013. These operating losses have principally been the result of the various costs associated with our selling, general and administrative expenses as we expanded operations, acquired, developed and validated technologies, expanded marketing activities, incurred interest expense on notes we issued to obtain financing and issued warrants with “reset” provisions. Our operations are subject to the risks and competition inherent in a company that moved from the development stage to an operating company. We may not generate sufficient revenues from operations to achieve or sustain profitability on a quarterly, annual or any other basis in the future. Our revenues and profits, if any, will depend upon various factors, including whether our existing products and services or any new products and services we develop will achieve any level of market acceptance. If we continue to incur losses, our accumulated deficit will continue to increase which might significantly impair our ability to obtain additional financing. As a result, our business, results of operations and financial condition would be significantly harmed, and we may be required to reduce or terminate our operations.
We will require additional financing which may require the issuance of additional shares which would dilute the ownership held by our stockholders.
We will need to raise funds through either debt or the sale of our shares in order to achieve our business goals. Any shares issued would further dilute the percentage ownership held by the stockholders. Furthermore, if we raise funds in equity transactions through the issuance of convertible securities which are convertible at the time of conversion at a discount to the prevailing market price, substantial dilution is likely to occur resulting in a material decline in the price of your shares. In addition, there are currently warrants outstanding which have cashless exercise features tied to the then market price of our common stock which could result in the issuance of substantial additional shares of common stock upon a cashless exercise. This offering as well as future offerings could result in further dilution to investors as a result of price adjustment provisions in the warrants. We are seeking to use a portion of the proceeds of this offering to repurchase such warrants; however, we cannot assure you that such repurchase will be effected.
Our operating results could be adversely affected by a reduction in business with our customers that supply parts to the United States Defense Logistics Agency (“DLA”).
We derive a significant amount of revenues from a group of customers that supply FSC 5962 parts to DLA. Taken as a group, these customers were responsible for approximately 54% and 46% of our revenues

for the years ended September 30, 2013 and 2012, respectively, and 48% for the nine months ended June 30, 2014. As of December 15, 2014, DLA will DNA mark all FSC 5962 microcircuits at its Electronic Test Laboratory in Columbus, Ohio and will no longer issue solicitations requiring suppliers to provide DNA marked FSC 5962 microcircuits. APDN is working with DLA to develop an appropriate transition plan to this new approach. Over time, this change could result in lower revenues and could adversely impact our business, financial condition or results of operations.
Our operating results could be adversely affected by a reduction in business with our significant customers.
Although no customer represented greater than 10% of our total revenues for the nine months ended June 30, 2014 or fiscal 2013, in the past we have derived a significant amount of revenues from a few customers. An aggregate of 54% of our total revenues for fiscal 2012 was attributable to two customers. An aggregate of 53% of our total revenues for fiscal 2011 were attributable to three customers. Generally our customers do not have an obligation to make purchases from us and may stop ordering our products and services or may terminate existing orders or contracts at any time with little or no financial penalty. The loss of any of our significant customers, any substantial decline in sales to these customers or any significant change in the timing or volume of purchases by our customers could result in lower revenues and could harm our business, financial condition or results of operations.
If we are unable to obtain additional financing our business operations may be harmed or discontinued.
Our continuation as a going concern is dependent upon our future revenues and our ability to commercialize more products, obtain additional capital and attain profitable operations. We will require additional funds to complete the continued development and commercialization of our products, product manufacturing, and to fund expected additional losses from operations, until revenues are sufficient to cover our operating expenses. If we are unsuccessful in obtaining the necessary additional financing, we will most likely be forced to reduce or terminate our operations.
General economic conditions may adversely affect our business, operating results and financial condition.
A general weakening or decline in the global economy or a period of economic slowdown may have serious negative consequences for our business and operating results. Since our customers incorporate our products into a variety of consumer goods, the demand for our products is subject to worldwide economic conditions and their impact on levels of consumer spending. Some of the factors affecting consumer spending include general economic conditions, unemployment, consumer debt, reductions in net worth, residential real estate and mortgage markets, taxation, energy prices, interest rates, consumer confidence and other macroeconomic factors. During a period of economic weakness or uncertainty, demand for consumer goods incorporating our products may weaken, and current or potential customers may defer purchases of our products. Although global economic conditions have improved somewhat since the extreme economic contraction in fiscal years 2008 and 2009, there is still significant uncertainty in the global economy, and there is no guarantee that the global economy will remain in this improved state.
While credit and financial markets seemed to have stabilized from their period of extreme distress, there can be no assurance that our liquidity will not be affected by changes in the financial markets and the global economy. Moreover, the recent crisis has had a significant material adverse impact on a number of financial institutions and has limited access to capital and credit for many companies. This could, among other things, make it more difficult for us to obtain, or increase our cost of obtaining, capital and financing for our operations. Our access to additional capital may not be available on terms acceptable to us or at all.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.
Our operations could be subject to earthquakes, power shortages, telecommunications failures, cyber-attacks or other vulnerabilities in our computer systems, terrorism, water shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, political or economic instability, and other natural or manmade disasters or business interruptions. The occurrence of any of these business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses.

If our existing products and services are not accepted by potential customers or we fail to introduce new products and services, our business, results of operations and financial condition will be harmed.
There has been limited market acceptance of our botanical DNA encryption, encapsulation, embedment and authentication products and services to date. Some of the factors that will affect whether we achieve market acceptance of our solutions include:
  • availability, quality and price relative to competitive solutions;
  • customers’ opinions of the solutions’ utility;
  • ease of use;
  • consistency with prior practices;
  • scientists’ opinions of the solutions’ usefulness; and
  • general trends in anti-counterfeit and security solutions’ research.
The expenses or losses associated with the continued lack of market acceptance of our solutions will harm our business, operating results and financial condition.
Rapid technological changes and frequent new product introductions are typical for the markets we serve. Our future success may depend in part on continuous, timely development and introduction of new products that address evolving market requirements. We believe successful new product introductions may provide a significant competitive advantage because customers invest their time in selecting and learning to use new products, and are often reluctant to switch products. To the extent we fail to introduce new and innovative products, we may lose any market share we then have to our competitors, which will be difficult or impossible to regain. Any inability, for technological or other reasons, to successfully develop and introduce new products could reduce our growth rate or damage our business. We may experience delays in the development and introduction of products. We may not keep pace with the rapid rate of change in anti-counterfeiting and security products’ research, and any new products acquired or developed by us may not meet the requirements of the marketplace or achieve market acceptance.
If we are unable to retain the services of Dr. Hayward or Dr. Liang, we may not be able to continue our operations.
Our success depends to a significant extent upon the continued service of Dr. James A. Hayward, our Chairman, Chief Executive Officer and President, and Dr. Benjamin Liang, our Secretary and Strategic Technology Development Officer. We entered into an employment agreement with Dr. Hayward dated July 11, 2011. We do not have an employment agreement with Dr. Liang. Loss of the services of Drs. Hayward or Liang could significantly harm our business, results of operations and financial condition. We do not maintain key-man insurance on the lives of Drs. Hayward or Liang.
The markets for our anti-counterfeiting and product authentication solutions are very competitive, and we may be unable to continue to compete effectively in these industries in the future.
The principal markets for our anti-counterfeiting and product authentication solutions are intensely competitive. Many of our competitors, both in the United States and elsewhere, are major pharmaceutical, chemical and biotechnology companies, or have strategic alliances with such companies, and many of them have substantially greater capital resources, marketing experience, research and development staff, and facilities than we do. Any of these companies could succeed in developing products that are more effective than the products that we have or may develop and may be more successful than us in producing and marketing their existing products. Some of our competitors that operate in the anti-counterfeiting and fraud prevention markets include: American Bank Note Holographics, Inc., Applied Optical Technologies, Authentix, Collectors Universe Inc., Brandwatch, Collotype, Data Dot Technology, De La Rue Plc., Digimarc Corp., DNA Technologies, Inc., ID Global, Informium AG, Inksure Technologies, Kodak, L-1 Identity Solutions, Media Sec Technologies, opSec Security Group plc., SelectaDNA, SmartWater Technology, Inc., Sun Chemical Corp, Tracetag, Prooftag SAS and Yottamark.

We expect this competition to continue and intensify in the future. Competition in our markets is primarily driven by:
  • product performance, features and liability;
  • price;
  • timing of product introductions;
  • ability to develop, maintain and protect proprietary products and technologies;
  • sales and distribution capabilities;
  • technical support and service;
  • brand loyalty;
  • applications support; and
  • breadth of product line.
If a competitor develops superior technology or cost-effective alternatives to our products, our business, financial condition and results of operations could be significantly harmed.
We need to expand our sales, marketing and support organizations and our distribution arrangements to increase market acceptance of our products and services.
We currently have a limited number of sales, marketing, customer service and support personnel and will need to increase our staff to generate a greater volume of sales and to support any new customers or the expanding needs of existing customers. The employment market for sales, marketing, customer service and support personnel in our industry is very competitive, and we may not be able to hire the kind and number of sales, marketing, customer service and support personnel we are targeting. Our inability to hire qualified sales, marketing, customer service and support personnel may harm our business, operating results and financial condition. While we have entered into a limited number of agreements with distributors, we may not be able to sufficiently build out a distribution network or enter into arrangements with qualified distributors on acceptable terms or at all. If we are not able to develop greater distribution capacity, we may not be able to generate sufficient revenue to support our operations.
If we need to replace manufacturers, our expenses could increase, resulting in smaller profit margins.
We compete with other companies for the production capacity of our manufacturers and import quota capacity. Some of these competitors have greater financial and other resources than we have, and thus may have an advantage in the competition for production and import quota capacity. If we experience a significant increase in demand, or if our existing manufacturers must be replaced, we will need to establish new relationships with another or multiple manufacturers. We cannot assure you that this additional third party manufacturing capacity will be available when required on terms that are acceptable to us or terms similar to those we have with our existing manufacturers, either from a production standpoint or a financial standpoint. We do not have long-term contracts with our manufacturers, and our manufacturers do not produce our products exclusively. Should we be forced to replace our manufacturers, we may experience an adverse financial impact, or an adverse operational impact, such as being forced to pay increased costs for such replacement manufacturing or delays upon distribution and delivery of our products to our customers, which could cause us to lose customers or lose revenues because of late shipments.
If a manufacturer fails to use acceptable labor practices, we might have delays in shipments or face joint liability for violations, resulting in decreased revenue and increased expenses.
While we require our independent manufacturers to operate in compliance with applicable laws and regulations, we have no control over their ultimate actions. While our internal and vendor operating guidelines promote ethical business practices and our staff and buying agents periodically visit and monitor the operations of our independent manufacturers, we do not control these manufacturers or their labor practices. The violation of labor or other laws by our independent manufacturers, or by one of our licensing partners, or the divergence of an independent manufacturer’s or licensing partner’s labor practices from

those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations, such as the loss of potential revenue and incurring additional expenses.
Our research and development effort for new products may be unsuccessful.
We incur research and development expenses to develop new products and technologies in an effort to maintain our competitive position in a market characterized by rapid rates of technological advancement. Our research and development efforts are subject to unanticipated delays, expenses and technical problems. There can be no assurance that any of these products or technologies will be successfully developed or that, if developed, 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 technologies. Any failure to translate research and development expenditures into successful new product introduction could have an adverse effect on our business.
Failure to license new technologies could impair sales of our existing products or any new product development we undertake in the future.
To generate broad product lines, it is advantageous to sometimes license technologies from third parties rather than depend exclusively on the development efforts of our own employees. As a result, we believe our ability to license new technologies from third parties may be important to our ability to offer new products. In addition, from time to time we are notified or become aware of patents held by third parties that are related to technologies we are selling or may sell in the future. After a review of these patents, we may decide to seek a license for these technologies from these third parties. There can be no assurance that we will be able to successfully identify new technologies developed by others. Even if we are able to identify new technologies of interest, we may not be able to negotiate a license on favorable terms, or at all.
Our failure to manage our growth in operations and acquisitions of new product lines and new businesses could harm our business.
The recent growth in our operations could place a significant strain on our current management resources. To manage such growth, we may need to improve our:
  • operations and financial systems;
  • procedures and controls; and
  • training and management of our employees.
Our future growth, if any, may be attributable to acquisitions of new product lines and new businesses. For example, during fiscal 2013, we completed the purchase of certain assets and technology from RedWeb Technologies Limited relating to its forensic tagging security system. Future acquisitions, if successfully consummated, would likely create increased working capital requirements, which would likely precede by several months any material contribution of an acquisition to our net income. Our failure to manage growth or future acquisitions successfully could seriously harm our operating results. Also, acquisition costs could cause our quarterly operating results to vary significantly. Furthermore, our stockholders would be diluted if we financed the acquisitions by incurring convertible debt or issuing securities.
A percentage of our sales occur outside of the U.S. As a result, we are subject to the economic, political, regulatory and other risks of international operations.
For fiscal 2013, 38% of our revenue was from customers located outside of the U.S. We believe that the revenue from the sale of our products outside the U.S. will continue to grow in the near future. We intend to expand our international operations to the extent that suitable opportunities become available. Our foreign operations and sales could be adversely affected as a result of:
  • nationalization of private enterprises and assets;
  • political or economic instability in certain countries and regions;

  • differences in foreign laws, including increased difficulties in protecting intellectual property and uncertainty in enforcement of contract rights;
  • the possibility that foreign governments may adopt regulations or take other actions that could directly or indirectly harm our business and growth strategy;
  • credit risks;
  • currency fluctuations;
  • tariff and tax increases;
  • export and import restrictions and restrictive regulations of foreign governments;
  • shipping products during times of crisis or wars; and
  • Other risks inherent in foreign operations.
We are subject to numerous regulatory, legal, operational, and other risks as a result of our international operations which could adversely impact our businesses in many ways.
As a U.S. company, we are required to comply with the economic sanctions and embargo programs administered by Office of Foreign Assets Control and similar multi-national bodies and governmental agencies worldwide, and the Foreign Corrupt Practices Act (“FCPA”). A violation of a sanction or embargo program or of the FCPA or similar laws prohibiting certain payments to governmental officials, such as the U.K. Bribery Act, could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties which could adversely impact our business and operations.
Failure to attract and retain qualified scientific, production and managerial personnel could harm our business.
Recruiting and retaining qualified scientific and production personnel to perform and manage prototype, sample, and product manufacturing and business development personnel to conduct business development are critical to our success. In addition, our desired growth and expansion into areas and activities requiring additional expertise, such as clinical testing, government approvals, production, sales and marketing will require the addition of new management personnel and the development of additional expertise by existing management personnel. Because the industry in which we compete is very competitive, we face significant challenges attracting and retaining a qualified personnel base. Although we believe we have been and will be able to attract and retain these personnel, we may not be able to continue to successfully attract qualified personnel. The failure to attract and retain these personnel or, alternatively, to develop this expertise internally would harm our business since our ability to conduct business development and manufacturing will be reduced or eliminated, resulting in lower revenues. We generally do not enter into employment agreements requiring our employees to continue in our employment for any period of time.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand.
Our patents, trademarks, trade secrets, copyrights and all of our other intellectual property rights are important assets for us. There are events that are outside of our control that pose a threat to our intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Protecting our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and harm our operating results. Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations. Given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. There is always the possibility that the scope of the protection gained from one of our issued patents will be insufficient or deemed invalid or

unenforceable. We also seek to maintain certain intellectual property as trade secrets. The secrecy could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from these trade secrets.
Intellectual property litigation could harm our business.
Litigation regarding patents and other intellectual property rights is extensive in the biotechnology industry. In the event of an intellectual property dispute, we may be forced to litigate. This litigation could involve proceedings instituted by the U.S. Patent and Trademark Office or the International Trade Commission, as well as proceedings brought directly by affected third parties. Intellectual property litigation can be extremely expensive, and these expenses, as well as the consequences should we not prevail, could seriously harm our business.
If a third party claims an intellectual property right to technology we use, we might need to discontinue an important product or product line, alter our products and processes, pay license fees or cease our affected business activities. Although we might under these circumstances attempt to obtain a license to this intellectual property, we may not be able to do so on favorable terms, or at all. Furthermore, a third party may claim that we are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and technical personnel. A court may decide that we are infringing the third party’s patents and would order us to stop the activities covered by the patents. In addition, a court may order us to pay the other party damages for having violated the other party’s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.
Because some patent applications in the United States may be maintained in secrecy until the patents are issued, because patent applications in the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and because publications in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications for technology covered by our or our licensor’s issued patents or pending applications or that we or our licensors were the first to invent the technology. During the ordinary course of our business, we do not conduct “prior art” searches before filing a patent application. Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our or our licensors’ patent applications and could further require us to obtain rights to issued patents covering such technologies. If another party has filed a United States patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the United States Patent and Trademark Office to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of our United States patent position with respect to such inventions.
Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resul