Applied DNA Sciences, Inc.
25 Health Sciences Drive, Suite 113
Stony Brook, New York 11790
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January 17, 2006
VIA EDGAR AND FEDERAL EXPRESS
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Attn: Jeffrey Riedler, Assistant Director
Division of Corporation Finance
Albert Lee, Esq.
Re: Applied DNA Sciences, Inc.
Amendment No. 4 to Registration Statement on Form SB-2
File No. 333-122848
Amended Registration Statement filed October 28, 2005
Ladies and Gentlemen:
The following responses address the comments of the reviewing Staff of the
Commission as set forth in a comment letter dated November 8, 2005 (the "Comment
Letter") relating to Amendment No. 4 to the Registration Statement on Form SB-2
(the "Registration Statement") of Applied DNA Sciences, Inc. (the "Company").
The answers set forth herein refer to each of the Staffs' comments by number.
We are filing herewith Amendment No. 5 to the Company's Registration
Statement.
FORM SB-2
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General
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1. Prior to requesting acceleration for effectiveness, please amend your
Form 10-KSB for the year ended September 30, 2004 and your Forms
10-QSB for the quarters ended December 31, 2004, March 31, 2005 and
June 30, 2005, as applicable, to comply with our comments on your Form
SB-2.
Securities and Exchange Commission
January 17, 2006
Page 2 of 15
Response
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Prior to requesting acceleration for effectiveness, we will amend our
Form 10-KSB for the year ended September 30, 2004 and our Forms 10-Q
for the quarters ended December 31, 2004, March 31, 2005 and June 30,
2005, as applicable, to comply with your comments on our Form SB-2.
2. Prior to requesting acceleration for effectiveness, please refer to
Item 310(g)(2) of Regulation S-B and file an amended registration
statement on Form SB-2 to include your most recent audited financial
statements for your fiscal year ended September 30, 2005. In doing so,
please also file as an exhibit an updated, signed consent report from
your independent accountants.
Response
--------
We have included our audited financial statements for the year ended
September 30, 2005 in this amendment, along with an updated, signed
consent from our independent registered public accounting firm.
3. We note your response to prior comment 1. Please confirm that the
reference to Korea in the chart on page 20 is to South Korea and that,
pursuant to your language regarding countries that the United States
has designated as state sponsors of terrorism, you do not have, or
intend to have, contacts with North Korea.
Response
--------
We hereby confirm that the reference to Korea in the chart previously
shown on page 20 was to South Korea. We have amended our disclosure to
state South Korea instead of simply Korea. In addition, we hereby
confirm that there are no past, current or intended, communications,
personal contacts or contracts, directly or indirectly, of any nature
whatsoever including through licensees or intermediaries, with North
Korea, and/or with entities in North Korea.
Liquidity and Capital Resources, pages 17-18
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4. Please update the information regarding the beneficial conversion
feature recorded and the penalties incurred to date due to failure to
have a registration statement effective by July 15, 2005.
Securities and Exchange Commission
January 17, 2006
Page 3 of 15
Response
--------
We have revised our disclosure to update the information regarding the
beneficial conversion feature and penalities incurred to date due to
our failure to have a registration statement effective by July 15,
2005.
Consolidated Financial Statements
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Statements of Losses, page F-3
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5. We acknowledge your response to comment 13 per our letter dated
September 12, 2005. We again request that you revise your statements
of operations for the year ended September 30, 2003 to separately
present the license fee paid to Biowell Technology as research and
development expense. Please also revise your statement of operations
for the year ended September 30, 2004, as well as your cumulative
statement of operations, to reflect the research and development
expense that you incurred during those periods, as represented to us
in your response.
Response
--------
We have revised our cumulative statement of operations and related
footnote disclosures for the years ending 2004 and 2005 to reflect the
research and development expense that we incurred during those periods
as well as to separately present the license fee paid to Biowell
Technology as a research and development expense.
Notes to Consolidated Financial Statements
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Note A - Summary of Accounting Policies, page F-17
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6. Per your response to comment 13, we note that you incurred research
and development expense during the period from September 16, 2002
through September 30, 2004. Please revise your disclosure accordingly.
Response
--------
We have revised our disclosure to reflect that we incurred research
and development expenses during the period from September 16, 2002
(date of inception) through September 30, 2004.
Securities and Exchange Commission
January 17, 2006
Page 4 of 15
Note D - Capital Stock - pages F-21 - F-27
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7. We acknowledge your response to comment 15 per our letter dated
September 12, 2005, as well as the information provided in "Exhibit A"
to your response. We again request the following:
o Please provide us with a detailed analysis that quantifies the
aggregate understatement/overstatement of compensation expense
that occurred in the third and fourth quarters of 2002 and the
first quarter of 2003. Your analysis should include: the
valuation date/period in which the service transaction occurred;
the valuation calculation, including your accounting basis for
ascribing value to the shares issued; and the trading price of
your common shares at the date the services were provided, if
applicable;
o With respect to Exhibit A, please clarify for us your basis for
the restated amounts. Specifically, please specify whether the
"price restated" column is based on the trading price or some
other value of your common shares. Additionally, please clarify
whether the "date" column relates to the date that the consulting
services were provided and correlate that to the period in which
you issued the shares.
Response
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Exhibit A, attached hereto, describes the material transactions
involving the issuance of our common stock in exchange for services
from September 16, 2002 (date of inception) to March 31, 2003. We
related the date of provided services to the market price of the
shares on the same date and reflected the market price in Exhibit A.
The aggregate understatement of expense based on the closing price of
our common stock during this period represents approximately $12,000
or 0.02% of the cumulative loss of $54.6 million as of June 30, 2005.
Given the immaterial effect on our financial statements, we
respectfully request the adjustment arising from this comment be
waived.
In the "price restated" used in Exhibit A in the October 28, 2005
response, we should have indicated "Market price" instead. The date
column corresponds to both the service provided date as well as the
issuance date.
Unaudited Condenses Consolidated Statements of Cash Flows, page F-49
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8. We acknowledge your response to comment 17 per our letter dated
September 12, 2005. Please provide us with additional information
about or reconcile for us the following items for the nine months
ended June 30, 2005:
Securities and Exchange Commission
January 17, 2006
Page 5 of 15
o The "proceeds from loans" of $843,971;
o The "common stock canceled previously issued for services
rendered" of $(642,098) as it relates to the corresponding
statements of stockholders' deficit;
o The "common stock issued in exchange for consulting services
rendered" of $13,037,773 as it relates to the corresponding
statements of stockholders' deficit;
o The "amortization of beneficial conversion feature - convertible
notes" of $8,836,000 as it relates to the corresponding
statements of stockholders' deficit;
o The "proceeds from sale of common stock, net of cost" of
$8,141,055 and the "proceeds from subscription of common stock"
of $2,340,000 as each relates to the corresponding statements of
stockholders' deficit.
Response
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In reviewing the June 30, 2005 transactions, we misclassified some
cash flow items. In the attached Exhibit B, we present the revised
condensed consolidated statement of cash flows. We reclassified $2.9
million from financing to operations to more properly reflect sources
and uses of cash.
For the items not affected by the reclassification, the ($642,098)
cancelled service shares consist of 1,069,600 shares returned on
October 2004 and agrees the Shareholder Equity Statement as well as
Footnote B - Capital Stock detail for that period.
The $8,836,000 of beneficial conversion feature amortization consists
of the $1,465,000 recorded in December 2004 and the $4,179,554 and
$3,191,446 recorded in March 2005. These amounts agree to the
disclosures in the Statement of Shareholder Equity for each applicable
time period.
Notes to Unaudited Condensed Consolidated Financial Information
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Note G - Subsequent Events, page F-68
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9. We acknowledge your response to comment 19 per our letter dated
September 12, 2005 and request the following.
o Please refer to Note 2 of Item 310 of Regulation S-B and to the
interpretive guidance on the distinction between a "business" and
an "asset" provided in Item 11-01(d) of Regulation S-X. Please
then provide us with the relevant information about your
acquisition of Rixflex Holdings that supports your conclusion
that you have not acquired a business.
Securities and Exchange Commission
January 17, 2006
Page 6 of 15
o Please also provide us with your analysis under EIRF 98-3 that
supports your determination that you will not account for the
Rixflex Holdings acquisition as that of a business.
o Please discuss the purchase price for your acquisition of Rixflex
Holdings and provide a preliminary purchase price allocation
according to the applicable provisions of SFAS No. 141. Please
also provide us with information that outlines your specific
analysis of the substance of the transaction pursuant to
paragraph 17 of SFAS No. 141.
Response
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Acquiring Entity
On July 12, 2005, we acquired certain intangible assets held by
Rixflex Holdings, Inc. ,a wholly owned subsidiary of Biowell
Technology, Inc. in exchange for 36,000,000 shares of our restricted
common stock, or approximately 35% of our issued and outstanding
common shares. The shares were disbursed to approximately ____ Biowell
shareholders of record subsequent to the exchange.
In connection with the acquisition of the intangible assets from
Biowell, we were the acquiring entity based upon the following facts
and circumstances:
Our owners, prior to the acquisition, retained majority control of our
company, subsequent to the acquisition.
The absence of a single owner or organized group of owners that hold a
large minority interest in our company.
While one Biowell manager joined our Board of Directors subsequent to
the sale of assets, the Board of Directors is controlled by our owners
prior to the acquisition of the Biowell assets.
Subsequent to the acquisition of the assets and issuance of our
shares, we appointed Dr. Shu, formerly of Biowell, as our Chairman of
the Board and Dr. Ben Liang, formerly of Biowell as well, as our
Secretary. The rest of our senior management positions (Chief Chief
Executive Officer, Chief Financial Officer and President) had no
relationship with Biowell.
Based upon the above, we concluded the we were the acquiring entity.
Securities and Exchange Commission
January 17, 2006
Page 7 of 15
Acquisition of Business vs. Acquisition of Assets
We have accounted for the transaction as an asset acquired based upon
the following facts and circumstances.
The acquisition included the set of inputs:
o Long-lived intangible assets comprised exclusively of
intellectual property
o Two (2) senior managers of Biowell
The set acquired did not include:
o Operational employees of Biowell
o Ability to access customers of Biowell
o Customer contracts
o Access to customers through continuity of location
o Processes (including a systems to take customer orders, order
fulfillment, billing and collecting, administration of personnel,
and operations analysis)
Based upon the above facts and circumstances, we have concluded the
missing elements taken as a whole are more than minor, and the set is
not able, on a stand-alone basis, to continue normal operations and
sustain its revenue stream and, therefore, is not a business.
In addition, the intangible assets acquisition had none of the
following attributes defining a business (as defined in Regulation
S-X, Rule 11-01(d)):
o Physical facilities
o Employee base
o Market distribution system
o Sales force
o Customer base
o Operating rights
o Production techniques
o Trade names
Accordingly, we believe the acquisition of Rixflex Holdings is
required to be accounted for an an asset acquisition, not the
acquisition of a business.
Purchase Price Allocation
We have valued the acquisition of the intangible assets acquired from
Biowell and included the valuation in accordance with SFAS No. 141.
The results of the valuation are included in our Annual Report on Form
10-KSB for the year ended September 30, 2005.
Securities and Exchange Commission
January 17, 2006
Page 8 of 15
10. We note that you entered into a transaction with Trilogy Capital
Partners, Inc. in June 2005, pursuant to which you issued a warrant to
purchase 7.5 million shares of your common stock. We also note that
the warrant contains a cashless exercise provision. Please provide us
with your analysis as to whether this warrant qualifies as a
derivative instrument within the scope of SFAS No. 133, which would
necessitate that you account for the warrant at fair market value and
record changes in that fair market value within earnings.
Additionally, please provide us with an analysis under EITF No. 00-19
that supports your classification of the warrant as an equity
instrument. Please provide all significant terms of your other
warrants outstanding and your analysis under SFAS 133 and EITF No.
00-19. Specifically state if the agreement includes any requirement to
register, any requirements for net cash settlement (such as a cashless
exercise feature), and any liquidating damages or penalties that could
be incurred. Address whether or not you have sufficient authorized
shares for all warrants and convertible instruments outstanding.
Response
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Per EITF 00-19, and due to the cashless exercise provision, the $0.55
warrant should be classified as a derivative instrument. For the year
ended September 30, 2005, we recorded mark to market expense of
$180,000 ($0.57 September market price less the $0.55 exercise price
times the 7.5 million warrants). Other than the 3 million $0.60
identified as Directors and Advisor warrants granted in June 2005, no
other warrants have cashless features, registration rights,
liquidating damages or penalties. In addition, all other warrant terms
regarding exercise price, remaining term in years and exercise price
has been disclosed in past and current filings.
Following the effective date of this SB-2, we are obligated to
register the $0.55 warrants upon the filing of any subsequent
registration statement. On a fully diluted basis, with our 250 million
authorized shares, we have a sufficient quantity to encompass all
existing warrant and convertible instruments.
11. Additionally, please revise your financial statement disclosures to
appropriately reflect the fact that both transaction outlined above
occurred during the nine months ended June 30, 2005. Your
characterization of each within "subsequent events" is misleading to
investors.
Response
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Per EITF 00-19, the mark to market requirement for the 9 million
warrants results in a $450,000 June 30, 2005 impact to operations
($0.60 June 30, 2005 market price less the $0.55 exercise price times
the 9 million warrants). Offsetting this item are the 3 million
Securities and Exchange Commission
January 17, 2006
Page 9 of 15
cashless Directors and Advisors warrants. In September 2005 we
reversed the previously recorded $794,642 in intrinsic value recorded
in the quarter ended June 30, 2005. The net $344,642 benefit to June
2005 operations represents only 0.6% of cumulative loss through June
30, 2005.
Given the immaterial effect on our financial statements, we
respectfully request the adjustment arising from this comment be
waived.
Form 10-QSB/A#2 for the Fiscal Quarter Ended March 31, 2005
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General
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12. We acknowledge your response to comment 20 per our letter dated
September 12, 2005, as well as the information provided in Note E to
your unaudited condensed consolidated financial statements for the
period ended June 30, 2005. Please amend your March 31, 2005 Form
10-QSB to appropriately present the financial statements as "restated"
and to provide the footnote which outlines the circumstances
surrounding the restatement and its impact on your results of
operations, inclusive of the disclosures required by APB No. 20.
Additionally, we note that the net loss per share amounts reflected on
page F-66 appear to be incorrect; please revise your disclosures to
reflect the corrected net loss per share amounts or tell us why you
believe your net loss per share amounts are correct.
Response
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We will revise the March 31, 2005 10-QSB to indicate that the
financials are "restated" and to provide the footnote that outlines
the circumstances surrounding the restatement and its impact on our
results of operations. In addition, we have revised the the loss per
share on page F-66.
Notes to Unaudited Condensed Consolidated Financial Information
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Note B - Capital Stock, page 25
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13. We acknowledge your response to comment 18 per our letter dated
September 12, 2005, as well as the information provided in "Exhibit B"
to your response. We again request that you provide us with additional
information that correlates the $2.9 million restatement amount to the
individual transactions outlined in Note B to your unaudited condensed
consolidated financial statements. Based on the information in Note B,
it appears that only $1.4 million of the 3/31/05 restatements relates
to the valuation of common stock issued to non-employee consultants,
while $1.5 million relates to your retirement of convertible debt via
the issuance of common stock.
Securities and Exchange Commission
January 17, 2006
Page 10 of 15
Response
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After reviewing our disclosure, we determined that we overcharged
$1,365,000 in the quarter ended March 31, 2005. The debt exchanged for
shares transaction was incorrectly valued using market price. As a
result, cumulative loss from of operations was overstated by
$1,365,000 or 2.8% through March 31, 2005 and 1.8% through September
30, 2005. We reduced cumulative loss by $1,365,000 in the September
30, 2005 10-KSB.
Given the immaterial effect on our financial statements, we
respectfully request the adjustment arising from this comment be
waived.
We trust that the foregoing appropriately addresses the issues raised by
your recent Letter of Comment. Thank you in advance for your prompt review and
assistance.
Very truly yours,
/s/ JAMES HAYWARD
------------------------
James Hayward
Chief Executive Officer
Securities and Exchange Commission
January 17, 2006
Page 11 of 15
EXHIBIT A
Applied DNA Sciences, Inc.
Amendment No. 5 to Registration Statement on Form SB-2
File No. 333-122848
Amended Registration Statement Filed November 8, 2005
Exhibit A per Item 7 of SEC Review Comments
Aggregate Compensation Expense Net Understatement
(Over)/
Under
Statement
Fiscal Fiscal Original Revised Share Price Shares Share Value Dollar
Year Qtr Date Date Purpose Used Market Issued Used Market Difference
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2002 Q-4 09/16/02 Founders Compensation 0.0100 A 100,000 1,000 A A
----------------------------------------
Q-4 Total 100,000 1,000
2003 Q-1 10/21/02 Prohealth Merger 0.0001 A 10,178,352 1,018 A A
10/21/02 Cancellation of
Prohealth shares 0.0100 A (100,000) (1,000) A A
Oct '02 Services 0.0650 0.065 602,000 39,130 39,130 -
Nov/Dec '02 Shares Subscribed 0.0650 B 876,000 56,940 B B
----------------------------------------
Q-1 Total 11,556,352 96,088
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Q-2 Jan '03 Cancellation of
Services shares 0.0650 0.065 (836,000) C C C
Jan '03 Oct '02 Licensing Shares 0.0650 0.065 1,500,000 97,500 97,500 - (D)
Securities and Exchange Commission
January 17, 2006
Page 12 of 15
Jan '03 Oct '02 Services 0.1300 0.065 586,250 76,213 38,106 (38,107)(E)
Feb '03 Services 0.0650 2.558 9,000 585 23,022 22,437
Mar '03 Founders Compensation 0.0001 A 10,140,000 1,014 A A
Mar '03 Services 2.5328 2.665 91,060 230,634 242,675 12,041
Mar '03 Services 0.0650 2.665 6,000 390 15,990 15,600
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Q-2 Total 11,496,310 406,336 417,293 11,971
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Cumulative Total 23,152,662 11,971
(A) Founders compensation and Proheath merger shares have no market value
(B) Third party shares sold for cash were issued for $0.065
(C) Cancelled shares were originally issued for $0.065
(D) While the stock was not issued until January 2003, the terms of the Biowell
shares and related licensing agreement were consummated in October 2002. See
Footnote H, page F-24 of the 2002 10-K
(E) Service shares were originally issued for $0.065 but used the wrong date
For (D) and (E), the Company will amend the Statement of Shareholder Equity and
related footnote disclosure to correct these two dates
Due to the lack of publicly available trading price history in 2002 and 2003, we
obtained the weekly closing price from a Charles Schwab customer service rep.
Their source was their direct Reuters service. In addition, using custom dates,
we prepared the chart from bigcharts.com to corroborate the Reuters information
- - see the attached tabs
Securities and Exchange Commission
January 17, 2006
Page 13 of 15
The market price used is the average weekly close price for the indicated month
per Reuters for ther period December 2002 through March 2003. For thr period
Sept 2002 thru November 2002, we used the bigcharts.com information
Securities and Exchange Commission
January 17, 2006
Page 14 of 15
EXHIBIT B
Applied DNA Sciences, Inc.
Amendment No. 5 to Registration Statement on Form SB-2
File No. 333-122848
Amended Registration Statement Filed November 8, 2005
Exhibit A per Item 8 of SEC Review Comments
Revised June 30, 30 2005 Condensed Consolidated Statement of Cash Flows
Revised As Submitted
For the Six Months Ended
June 30, 2005
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Cash flows from operating activities:
Net loss from operating activities (31,819,266) (31,819,266)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation 15,187 15,187
Warrants issued to consultants 1,243,744 1,243,744
Amortization of beneficial conversion feature 8,836,000 8,836,000
Common stock issued in exchange for consultant services rendered 15,414,260 12,471,727 (A)
Common stock canceled-previously issued for services rendered (681,298) (642,098)
Changes in Assets and Liabilities:
Payments for security deposits (33,291) (33,291)
Increase (decrease) in due related parties (20,631) (20,631)
Accounts payable and accrued liabilities (909,475) (983,197)
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Net cash provided by (used in) operating activities (7,954,770) (10,931,825)
Cash flows from investing activities:
Payments for Patent Filing (4,347) (4,347)
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Net cash provided by (used in) investing activities (4,347) (4,347)
Cash flows from financing activities:
Proceeds from sale of common stock, net of costs - 8,141,055 (B)
Proceeds from subscription of common stock 9,079,000 2,340,000 (B)
Securities and Exchange Commission
January 17, 2006
Page 15 of 15
Proceeds from notes converted to stock - 1,575,000
Proceeds from sale of options & warrants 70,750 70,750
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Net cash provided by (used in) financing activities 9,149,750 12,126,805 (A)
Net increase (decrease) in cash and cash equivalents 1,190,633 1,190,633
Cash and cash equivalents at beginning of period 1,832 1,832
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Cash and cash equivalents at end of period 1,192,465 1,192,465
(A) Approximately $2.9 million was reclassified from financing to operations
(B) We condensed the sale of common stock and subscription of common into one
line - proceeds from subscription of common stock