ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

APPLIED DNA SCIENCES, INC.
(A Development stage company)
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
		March 31,
		2007
ASSETS
Current assets:
Cash		$	89,232
Prepaid expenses			26,667
Total current assets			115,899
Property, plant and equipment-net of accumulated depreciation of $51,800			136,561
Other assets:
Deposits			13,822
Capitalized finance costs-net of accumulated amortization of $1,413,563			271,537
Intangible assets:
Patients, net of accumulated amortization of $22,019 (Note B)			12,238
Intellectual property, net of accumulated amortization and write off of $7,520,996 (Note B)			1,909,904
Total Assets		$	2,459,961
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	7,926,210
Convertible notes payable, net of unamortized discount (Note D)			4,930,894
Total current liabilities			12,857,104
Debt derivative and warrant liability			8,820,085
Commitments and contingencies (Note J)
Deficiency in Stockholders' Equity- (Note F)
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; 60,000 issued and outstanding			6
Common stock, par value $0.001 per share; 410,000,000 shares authorized; 121,162,385 issued and outstanding (see Note J)			121,162
Additional paid in capital			83,037,855
Accumulated deficit			(102,376,251	)
Total deficiency in stockholders' equity			(19,217,228	)
Total liabilities and Deficiency in Stockholders' Equity		$	2,459,961
See the accompanying notes to the consolidated financial statements

1

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APPLIED DNA SCIENCES, INC.

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF LOSSES

(unaudited)

														From September 16, 2002
		For the three months Ended March 31,						For the six months Ended March 31,						(Date of Inception)
		2007			2006			2007			2006			Through March 31, 2007
					RESTATED						RESTATED
Sales		$	-		$	-		$	-		$	-		$	18,900
Cost of sales			-			-			-			-			15,639
Gross Profit			-			-			-			-			3,261
Operating expenses:
Selling, general and administrative			1,988,931			949,634			4,043,386			2,794,311			84,109,344
Research and development			39,479			75,033			68,785			91,303			1,099,384
Impairment of intangible asset(s)			-			-			-			-			5,655,011
Depreciation and amortization			108,358			341,676			216,237			684,375			1,945,963
Total operating expenses			2,136,768			1,366,343			4,328,408			3,569,989			92,809,702
NET LOSS FROM OPERATIONS			(2,136,768	)		(1,366,343	)		(4,328,408	)		(3,569,989	)		(92,806,441	)
Net gain (loss) in revaluation of debt derivative and warrant liabilities			(6,387,761	)		3,967,870			(4,289,290	)		10,756,660			29,256,537
Other income			-			3,520			977			9,493			111,807
Interest expense			(845,709	)		(571,696	)		(1,424,739	)		(2,350,402	)		(38,938,153	)
Net income (loss) before provision for income taxes			(9,370,238	)		2,033,351			(10,041,460	)		4,845,762			(102,376,251	)
Income taxes (benefit)			-			-			-			-			-
NET INCOME (LOSS)		$	(9,370,238	)	$	2,033,351		$	(10,041,460	)	$	4,845,762		$	(102,376,251	)
Net income (loss) per share-basic		$	(0.08	)	$	0.02		$	(0.08	)	$	0.04
Net loss per share-assuming fully diluted-Note A					$	(0.02	)				$	(0.03	)
Weighted average shares outstanding-
Basic			121,162,385			116,483,044			121,091,176			114,487,589
Fully diluted						119,483,044						117,487,589

 

See the accompanying notes to the consolidated financial statements

 

2

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APPLIED DNA SCIENCES, INC
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)
FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)
																							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
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			1,015			-			-			-			-			1,015
Cancellation of common stock
in connection with merger with
Prohealth Medical
Technologies, Inc on October
21, 2002			-			-			(100,000	)		(10	)		(1,000	)		-			-			-			(1,010	)
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			-			(8	)
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 in exchange for
services valued at $0.0001 per
share in March 2003			-			-			10,140,000			1,014			-			-			-			-			1,014

 

3

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APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

																							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
Issuance of common stock in
exchange for consulting
services valued at $2.50 per
share in March 2003			-			-			91,060			10			230,624			-			-			-			230,634
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 a private
placement on June 27, 2003			-			-			-			-			-			24,000			-			-			24,000
Common stock retired in
exchange for note payable
at $0.0118 per share,
in 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 a private
placement on June 30, 2003			-			-			-			-			-			10,000			-			-			10,000

 

4

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APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

																							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 subscribed in
exchange for cash at $2.50 per
share pursuant to a 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			428,798			-			-			-			428,819
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 per share in July 2003			-			-			20,000			2			19,998			-			-			-			20,000
Common stock issued in
exchange for exercise of
options previously subscribed at
$1.00 per share in July 2003			-			-			10,000			1			9,999			(10,000	)		-			-			-
Common stock issued in
exchange for consulting services
at approximately $2.38 per
Share in August 2003			-			-			172,500			17			410,915			-			-			-			410,932
Common stock issued in
exchange for options exercised
at $1.00 per share in August 2003			-			-			29,000			3			28,997			-			-			-			29,000
Common stock issued in
exchange for consulting services
at approximately $2.42 per
share in September 2003			-			-			395,260			40			952,957			-			-			-			952,997
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable in September 2003			-			-			19,200			2			47,998			(48,000	)		-			-			-
Common stock issued in
exchange for cash at $2.50 per
share pursuant to a private
placement in September 2003			-			-			6,400			1			15,999			-			-			-			16,000
Common stock issued in
exchange for options exercised
at $1.00 per share in September 2003			-			-			95,000			10			94,991			-			-			-			95,001
Common stock subscription
receivable reclassification
adjustment			-			-			-			-			-			-			2,600			-			2,600
Common Stock subscribed to
at $2.50 per share in September
2003			-			-			-			-			-			300,000			-			-			300,000

 

5

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APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

																							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
Net Loss for the year
ended September 30, 2003			-			-			-			-			-			-			-			(3,445,164	)		(3,445,164	)
Balance at September 30, 2003			-		$	-			17,811,082		$	1,781		$	2,577,568		$	300,000		$	-		$	(3,456,776	)	$	(577,427	)
Preferred shares issued in
exchange for services at $25.00
per share in October 2003			15,000			15			-			-			-			-			-			-			15
Common stock issued in
exchange for consulting services
at approximately $2.85 per
Share in October 2003			-			-			287,439			29			820,389			-			-			-			820,418
Common stock issued in
exchange for cash at $2.50 per
share-subscription
payable in 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 in
November 2003			-			-			100,000			10			299,990			-			-			-			300,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to a private
placement in November, 2003			-			-			100,000			10			249,990			-			-			-			250,000
Common stock subscribed in
exchange for cash at $2.50 per
share pursuant to a private
placement in December, 2003			-			-			6,400			1			15,999			-			-			-			16,000
Common stock issued in
exchange for consulting services
at approximately $2.59 per
share in 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
in December 2004			-			-			-			10,223,166			(10,223,166	)		-			-			-			-

 

6

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APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			Common			Stock			Capital			Stock			Subscription			Development
		Shares			Amount			Shares			Amount			Amount			Subscribed			Receivable			Stage			Total
Common Stock issued pursuant
to subscription at $2.50 share
in January 2004			-			-			41,600			20,800			83,200			(104,000	)		-			-			-
Common stock issued in
exchange for consulting services
at $2.95 per share in January 2004			-			-			13,040			6,520			31,948			-			-			-			38,468
Common stock issued in
exchange for consulting services
at $2.60 per share in January 2004			-			-			123,000			61,500			258,300			-			-			-			319,800
Common stock issued in
exchange for consulting services
at $3.05 per share in January 2004			-			-			1,000			500			2,550			-			-			-			3,050
Common stock issued in
exchange for employee services
at $3.07 per share in February 2004			-			-			6,283			3,142			16,147			-			-			-			19,289
Common stock issued in
exchange for consulting services
at $3.04 per share in March 2004			-			-			44,740			22,370			113,640			-			-			-			136,010
Common Stock issued for
options exercised at $1.00 per
share in March 2004			-			-			55,000			27,500			27,500			-			-			-			55,000
Common stock issued in
exchange for employee services
at $3.00 per share in March 2004			-			-			5,443			2,722			13,623			-			-			-			16,345
Common stock issued in
exchange for employee services
at $3.15 per share in March 2004			-			-			5,769			2,885			15,292			-			-			-			18,177
Preferred shared converted to
common shares for consulting
services at $3.00 per share in March
2004			(5,000	)		(5	)		125,000			62,500			312,500			-			-			-			374,995
Common stock issued in
exchange for employee services
at $3.03 per share in March 2004			-			-			8,806			4,400			22,238			-			-			-			26,638
Common Stock issued pursuant
to subscription at $2.50 per
share in March 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 in April 2004			-			-			9,860			4,930			20,511			-			-			-			25,441

 

7

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APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			Common			Stock			Capital			Stock			Subscription			Development
		Shares			Amount			Shares			Amount			Amount			Subscribed			Receivable			Stage			Total
Common stock issued in
exchange for consulting services
at $2.35 per share in April 2004			-			-			11,712			5,856			21,667			-			-			-			27,523
Common stock issued in
exchange for consulting services
at $1.50 per share in April 2004			-			-			367,500			183,750			367,500			-			-			-			551,250
Common stock returned to
treasury at $0.065 per share in
April 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			(4,000	)		(4	)		100,000			50,000			51,250			-			-			-			101,246
Common stock issued per
subscription in 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			50,730			-			-			-			119,230
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 in June 2004			-			-			(5,000	)		(2,500	)		2,175			-			-			-			(325	)
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 a 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

 

8

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APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			Common			Stock			Capital			Stock			Subscription			Development
		Shares			Amount			Shares			Amount			Amount			Subscribed			Receivable			Stage			Total
Common stock issued in
exchange for consulting services
at $0.47 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			(2,000	)		(2	)		50,000			25,000			(5,500	)		-			-			-			19,498
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			(8,605	)		-			-			-			37,645
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			(4,000	)		(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
Fair value of 2,841,000 warrants
issued to non-employees and
consultants for services rendered
at approximately $0.71 per warrant
in September 2004			-			-			-			-			2,019,862			-			-			-			2,019,862
Net Loss			-			-			-			-			-			-			-			(19,358,258	)		(19,358,258	)
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	)

 

9

---

 

APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			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
in October 2004			-			-			(1,069,600	)		(534,800	)		(107,297	)		-			-			-			(642,097	)
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 per share in
October 2004			-			-			500,000			250,000			50,000			(300,000	)		-			-			-
Common stock issued in
exchange for consulting services
at $0.50 per share in October 2004			-			-			532,500			266,250			-			-			-			-			266,250
Common Stock issued in
exchange for debt at $0.50 per share in
in October 2004			-			-			500,000			250,000			-			-			-			-			250,000
Common Stock issued pursuant
to subscription at $0.45 per share
in October 2004			-			-			1,000,000			500,000			(50,000	)		(450,000	)		-			-			-
Common stock issued in
exchange for consulting services
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 per share
in November 2004			-			-			100,000			50,000			(3,000	)		-			-			-			47,000
Common Stock issued in
exchange for consulting
services at $0.8 0 per share
in November 2004			-			-			300,000			150,000			90,000			-			-			-			240,000
Common Stock issued in
exchange for consulting
services at $1.44 per share
in November 2004			-			-			115,000			57,500			108,100			-			-			-			165,600
Common Stock issued in
exchange for employee
services at $1.44 per share
in November 2004			-			-			5,000			2,500			4,700			-			-			-			7,200
Warrants exercised
at $0.60 per share
in November 2004			-			-			60,000			30,000			6,000			(4,000	)		-			-			32,000
Beneficial Conversion discount
relating to Notes Payable			-			-			-			-			1,465,000			-			-			-			1,465,000

 

10

---

 

APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			Common			Stock			Capital			Stock			Subscription			Development
		Shares			Amount			Shares			Amount			Amount			Subscribed			Receivable			Stage			Total
Common stock issued at $0.016
per share in exchange for note
payable in December 2004			-			-			5,500,000			2,750,000			(2,661,500	)		-			-			-			88,500
Common stock issued in
settlement of debt at $0.50 per
share in December 2004			-			-			2,930,000			1,465,000			-			(125,000	)		-			-			1,340,000
Fair value of 6,063,500 warrants
issued to non employees and
consultants for services rendered
at $0.52 per warrant in October
and December 2004			-			-			-			-			3,169,052			-			-			-			3,169,052
Warrants exercised at $0.10 per
share in January 2005			-			-			25,000			12,500			(10,000	)		-			-			-			2,500
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005			-			-			1,628,789			814,395			(276,895	)		-			-			-			537,500
Warrants exercised at $0.10 per
share in January 2005			-			-			17,500			8,750			(7,000	)		-			-			-			1,750
Common Stock issued in
settlement of debt at $0.33 per
share in January 2005			-			-			2,399,012			1,199,504			(407,830	)		-			-			-			791,674
Common Stock issued in
exchange for consulting
services at $1.30 per share			-			-			315,636			157,818			252,508			-			-			-			410,326
in January 2005
Fair value of warrant liability
reclassed due to registration rights
granted in February 2005			-			-			-			-			(3,108,851	)		-			-			-			(3,108,851	)
Common Stock issued in
exchange for consulting
services at $1.44 per share
in February 2005			-			-			5,796,785			2,898,393			5,418,814			-			-			-			8,317,207
Fair value of 55,000 warrants issued
to consultants for services at $1.31
per warrant in February 2005			-			-			-			-			72,017			-			-			-			72,017
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005			-			-			75,757			37,879			(12,879	)		-			-			-			25,000
Warrants exercised at $0.10 per
share in February 2005			-			-			20,000			10,000			(8,000	)		-			-			-			2,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005			-			-			606,060			303,030			(103,030	)		-			-			-			200,000
Warrants exercised at $0.10 per
share in February 2005			-			-			45,000			22,500			(18,000	)		-			-			-			4,500

 

11

---

 

APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			Common			Stock			Capital			Stock			Subscription			Development
		Shares			Amount			Shares			Amount			Amount			Subscribed			Receivable			Stage			Total
Common Stock issued in
exchange for related party debt
at $1.31 per share in February
2005			-			-			1,500,000			750,000			1,215,000			-			-			-			1,965,000
Common Stock issued in
settlement of debt at $0.33 per
share in February 2005			-			-			278,433			139,217			(47,334	)		-			-			-			91,883
Common Stock issued in
exchange for consulting services
at $1.17 per share in February
2005			-			-			17,236			8,618			11,548			-			-			-			20,166
Common stock issued in
exchange for debt at $0.50 per
share in February 2005			-			-			300,000			150,000			-			-			-			-			150,000
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005			-			-			716,500			358,250			322,425			-			-			-			680,675
Common Stock issued in
exchange for consulting
services at $0.95 per share
in February 2005			-			-			10,500			5,250			4,725			-			-			-			9,975
Common stock issued in
exchange for debt at $0.50 per
share in March 2005			-			-			13,202,000			6,601,000			-			-			-			-			6,601,000
Common Stock issued in
exchange for consulting
services at $1.19 per share
in March 2005			-			-			185,000			92,500			127,650			-			-			-			220,150
Options exercised at $0.60 per
share in March 2005			-			-			100,000			50,000			10,000			-			-			-			60,000
Common Stock issued in
exchange for consulting
services at $0.98 per share
in March 2005			-			-			1,675,272			837,636			804,131			-			-			-			1,641,767
Common Stock issued in
exchange for consulting
services at $0.92 per share
in March 2005			-			-			24,333			12,167			10,219			-			-			-			22,386
Common Stock issued in
exchange for consulting
services at $0.99 per share
in March 2005			-			-			15,000			7,500			7,350			-			-			-			14,850
Common stock issued in exchange
for debt at $0.50 per share
in March 2005			-			-			1,240,000			620,000			-			-			-			-			620,000

 

12

---

 

APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			Common			Stock			Capital			Stock			Subscription			Development
		Shares			Amount			Shares			Amount			Amount			Subscribed			Receivable			Stage			Total
Common stock canceled for
shares issued in exchange of
debt in March 2005			-			-			(500,000	)		(250,000	)		-			-			-			-			(250,000	)
Common stock subscribed
canceled in March 2005			-			-			-			-			-			750,000			-			-			750,000
Common Stock issued in
exchange for consulting
services at $0.89 per share
in March 2005			-			-			10,000			5,000			3,900			-			-			-			8,900
Adjust common stock par value
from $0.50 to $0.001 per share,
per amendment of Articles of
Incorporation in March-05			-			-			-			(32,312,879	)		32,312,879			-			-			-			-
Beneficial Conversion discount
relating to Notes Payable in
March 2005			-			-			-			-			7,371,000			-			-			-			7,371,000
Stock options granted to
employees in exchange for
services rendered, at exercise
price below fair value of common
stock in March 2005			-			-			-			-			180,000			-			-			-			180,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005			-			-			160,000			160			127,840			-			-			-			128,000
Common Stock issued in
exchange for consulting services
at $0.80 per share in April 2005			-			-			40,000			40			31,960			-			-			-			32,000
Common Stock issued in
exchange for consulting services
at $0.75 per share in April 2005			-			-			850,000			850			636,650			-			-			-			637,500
Common Stock issued in
exchange for consulting services
at $0.33 per share in April 2005			-			-			500,000			500			164,500			-			-			-			165,000
Common Stock canceled during
April 2005, previously issued for
services rendered at $3.42 per
share			-			-			(10,000	)		(10	)		(34,190	)		-			-			-			(34,200	)
Common Stock issued in
settlement of debt at $0.33 per
share in April 2005			-			-			75,758			77			24,923			(25,000	)		-			-			-
Common Stock issued in
exchange for consulting services
at $0.68 per share in April 2005			-			-			50,000			50			33,950			-			-			-			34,000
Proceeds received against
subscription payable in June
2005			-			-			-			-			-			118,000			-			-			118,000

 

13

---

 

APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			Common			Stock			Capital			Stock			Subscription			Development
		Shares			Amount			Shares			Amount			Amount			Subscribed			Receivable			Stage			Total
Common Stock canceled in
June 2005, previously issued for
services rendered at $0.50 per
share			-			-			(10,000	)		(10	)		(4,990	)		-			-			-			(5,000	)
Cancellation of previously
granted stock options granted
to employees for services
rendered, at exercise price
below fair value of common stock			-			-			-			-			(180,000	)		-			-			-			(180,000	)
Common Stock issued in
exchange for consulting services
at $0.60 per share in July 2005			-			-			157,000			157			94,043			-			-			-			94,200
Common Stock issued in
exchange for intellectual property
at $0.67 per share in July 2005			-			-			36,000,000			36,000			24,084,000			-			-			-			24,120,000
Common Stock issued in
exchange for consulting
services at $0.60 per share
in July 2005			-			-			640,000			640			383,360			-			-			-			384,000
Common Stock issued in
exchange for employee services
at $0.48 per share in July 2005			-			-			8,000,000			8,000			3,832,000			-			-			-			3,840,000
Common Stock issued in
exchange for consulting
services at $0.94 per share
in July 2005			-			-			121,985			121			168,217			-			-			-			168,338
Common Stock issued in
exchange for consulting
services at $0.48 per share
in August 2005			-			-			250,000			250			119,750			-			-			-			120,000
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.62 per share in
September 2005			-			-			814,158			814			501,858			-			-			-			502,672
Common Stock penalty shares
issued pursuant to pending SB-2
registration at $0.70 per share in
September 2005			-			-			391,224			391			273,466			-			-			-			273,857
Common Stock issued in
exchange for consulting
services at $0.94 per share
in September 2005			-			-			185,000			185			173,715			-			-			-			173,900
Common Stock returned in
September 2005, previously
issued for services rendered at
$0.40 per share			-			-			(740,000	)		(740	)		(453,232	)		56,000			1,000			-			(396,972	)

 

14

---

 

APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			Common			Stock			Capital			Stock			Subscription			Development
		Shares			Amount			Shares			Amount			Amount			Subscribed			Receivable			Stage			Total
Net Loss			-			-			-			-			-			-			-			(67,109,519	)		(67,109,519	)
Balance as of September
30, 2005			60,000		$	6			112,230,392		$	112,230		$	82,320,715		$	20,000		$	-		$	(89,924,553	)	$	(7,471,602	)
Common stock issued in
exchange for services
at $0.50 per share
in October 2005			-			-			400,000			400			199,600			-			-			-			200,000
Common Stock issued in
exchange for consulting
services at $0.75 per share
in October 2005			-			-			100,000			100			74,900			-			-			-			75,000
Common Stock returned in
October 2005, previously
issued for services
rendered at $0.60 per share			-			-			(350,000	)		(350	)		(209,650	)		-			-			-			(210,000	)
Common stock issued pursuant
to subscription at $0.50 per
share in December 2005			-			-			40,000			40			19,960			(20,000	)		-			-			-
Common Stock issued to investors
pursuant to registration rights
agreement at $0.51 per share in
December 2005			-			-			505,854			506			257,480			-			-			-			257,986
Common Stock returned in
January 2006, previously issued
for services rendered at $0.60
per share			-			-			(250,000	)		(250	)		(149,750	)		-			-			-			(150,000	)
Common Stock issued to investors
pursuant to registration rights
agreement at $0.32 per share
in January 2006			-			-			806,212			806			257,182			-			-			-			257,988
Common Stock issued to investors
pursuant to registration rights
agreement at $0.20 per share
in January 2006			-			-			1,289,927			1,290			256,695			-			-			-			257,985
Fair value of 200,000 warrants issued
to consultants for services at $0.22
per warrant in January 2006			-			-			-			-			43,098			-			-			-			43,098
Common Stock issued in
exchange for consulting services
at $0.17 per share in February 2006			-			-			160,000			160			27,040			-			-			-			27,200
Common Stock issued in
exchange for consulting services
at $0.16 per share in February 2006			-			-			3,800,000			3,800			604,200			-			-			-			608,000
Common Stock returned in
March 2006, previously issued
for services rendered at $0.80
per share			-			-			(150,000	)		(150	)		(119,850	)		-			-			-			(120,000	)

 

15

---

 

APPLIED DNA SCIENCES, INC

(A development stage company)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY, (DEFICIENCY)

FOR THE PERIOD SEPTEMBER 16, 2002 (DATE OF INCEPTION) THROUGH MARCH 31, 2007 (unaudited)

 

														Additional									Deficit
					Preferred						Common			Paid in			Common			Stock			Accumulated
		Preferred			Shares			Common			Stock			Capital			Stock			Subscription			Development
		Shares			Amount			Shares			Amount			Amount			Subscribed			Receivable			Stage			Total
Previously issued warrants reclassed
to warrant liability			-			-			-			-			(1,584,614	)		-			-			-			(1,584,614	)
Common Stock issued in exchange
for consulting services at $0.20 per
share in July 2006			-			-			2,400,000			2,400			477,600			-			-			-			480,000
Fair value of stock options granted
to employees in exchange for
services rendered in September 2006			-			-			-			-			153,000			-			-			-			153,000
Net loss			-			-			-			-			-			-			-			(2,410,237	)		(2,410,237	)
Balance as of September 30, 2006			60,000		$	6		$	120,982,385		$	120,982		$	82,627,606		$	-		$	-		$	(92,334,791	)	$	(9,586,197	)
Common stock issued in Dec 2006
in settlement of related party debt
at $2.28 per share			-			-			180,000			180			410,249			-			-			-			410,429
Net loss			-			-			-			-			-			-			-			(10,041,460	)		(10,041,460	)
Balance as of March 31, 2007			60,000		$	6			121,162,385		$	121,162		$	83,037,855		$	-		$	-		$	(102,376,251	)	$	(19,217,228	)

 

 

See accompanying notes to consolidated financial statements

16

---

 

APPLIED DNA SCIENCES, INC

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

 

								For the Period
								September 16, 2002
								(Date of Inception)
		For the six months ended March 31,						through
		2007			2006			March 31, 2007
Cash flows from operating activities:						RESTATED
Net income (loss)		$	(10,041,460	)	$	4,845,762		$	(102,376,251	)
Adjustments to reconcile net loss to net used in operating activities:
Depreciation and amortization			216,237			684,375			1,945,963
Organization expenses			-			-			88,500
Impairment of intangible assets			-			-			5,655,011
Preferred shares issued in exchange for services			-			-			1,500,000
Options and warrants issued in exchange for services rendered			-			43,100			11,001,255
Income attributable to repricing of warrants and debt derivatives			4,289,290			(10,756,660	)		(29,256,538	)
Financing costs attributable to issuance of warrants			-			2,271,000			25,419,214
Amortization of beneficial conversion feature-convertible notes			-			-			10,461,000
Amortization of capitalized financing costs			777,550			-			1,413,563
Amortization of debt discount attributable to convertible debentures			1,169,123			35,390			1,900,613
Debt in exchange for common stock at fair market price			-			-			1,365,000
Common stock issued in exchange for services rendered			-			710,200			31,964,573
Common stock exchanged for intellectual property in connection with costs of acquiring intangible assets			-			-			14,689,100
Common stock issued in connection with penalties pursuant to registration			-			773,958			1,550,487
Common stock canceled-previously issued for services rendered			-			(480,000	)		(1,343,845	)
Change in assets and liabilities:
Decrease (increase) in accounts receivable			18,050			9,301			-
Decrease (increase) in prepaid expenses and deposits			80,000			-			(40,929	)
Decrease (increase) in other assets			-			(9,120	)		(13,450	)
Increase in due related parties			-			2,496			40,753
Increase (decrease) in accounts payable and accrued liabilities			2,366,177			742,575			7,291,787
Net cash used in operating activities			(1,125,033	)		(1,127,623	)		(16,744,194	)
Cash flows from investing activities:
Payments for patent filing			-			-			(25,698	)
Acquisition (disposal) of property and equipment, net			(11,039	)		(35,852	)		(188,360	)
Net cash provided by (used in) investing activities			(11,039	)		(35,852	)		(214,058	)
Cash flows from financing activities:
Proceeds from sale of common stock, net of cost			-			-			432,000
Proceeds from issuance of convertible notes			-			1,210,000			13,446,500
Proceeds from sale of options			-			-			343,750
Repayment of debt			-			-			(24,854	)
Proceeds from loans			-			-			2,750,000
Advances from shareholders			-			-			100,088
Net cash provided by financing activities			-			1,210,000			17,047,484
Net increase in cash and cash equivalents			(1,136,072	)		46,525			89,232
Cash and cash equivalents at beginning of period			1,225,304			31,190			-
Cash and cash equivalents at end of period		$	89,232		$	77,715		$	89,232

17

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APPLIED DNA SCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
								For the Period
								September 16, 2002
								(Date of Inception)
		For the six months ended March 31,						through
		2007			2006			March 31, 2007
Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest			-			-			-
Cash paid during period for taxes			-			-			-
Non-cash transactions:
Common stock issued for services			-			710,200			31,964,573
Common stock issued in exchange for intellectual property			-			-
Common stock issued in exchange for previously incurred debt			16,200			-			2,313,500
Common stock canceled-previously issued for services rendered			-			(480,000	)		(1,343,845	)
Common stock issued for ESOP shares			-			-
Common stock penalty shares issued pursuant to Pending SB-2 registration			-			773,958
Amortization of beneficial conversion feature			-			-			10,461,000
Preferred shares in exchange for service at $25 per share in September 2004			-			-			1,500,000
Fair value of options and warrants issued to consultants for services			-			43,100			11,001,255
Acquisition:
Common stock retained			-			-			1,015
Assets acquired			-			-			(135	)
Total consideration paid			-			-			880
Organizational expenses-note issued in exchange for shares retired									88,500
Common stock issued in exchange for note payable									88,500
See the accompanying notes to the consolidated financial statements

 

18

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APPLIED DNA SCIENCES, INC

(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(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 and six month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2007. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated September 30, 2006 financial statements and footnotes thereto included in the Company's SEC Form 10-KSB, as amended.

 

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 March 31, 2007, the Company has accumulated losses of $102,376,251.

 

In March 2007, the Company purchased all the outstanding shares of Applied DNA Sciences Europe Limited, an English limited company , as a wholly owned subsidiary, for a purchase price of $10,000. In conjunction with the acquisition, the Company acquired the rights to sell products and services in the United Kingdom. Included as part of the acquisition agreement, the Company is obligated to pay a 2% fee of any United Kingdom sales to the former shareholder of Applied DNA Sciences Europe Limited for one year commencing with the first product/services sales. The cost of acquisition was charged to current period operating expenses.

 

The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, Applied DNA Operations Management, Inc., APDN (B.V.I.) Inc. and Applied DNA Sciences Europe Limited. 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 March 31, 2007 property and equipment consist of:

 

Computer equipment		$	27,404
Lab equipment			54,973
Furniture			105,984
Accumulated depreciation			(51,800	)
Net		$	136,561

 

 

19

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APPLIED DNA SCIENCES, INC

(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

 

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, 2006 and for the subsequent periods. The Company did not issue employee options as stock-based compensation during the three or six months ended March 31, 2007 and therefore has no unrecognized stock compensation related liabilities ended March 31, 2007.

 

On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock Based Compensation, to account for compensation costs under our stock option plans. We previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (as amended) ("APB 25"). Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for our employee stock options because the option exercise price equaled the market price on the date of the grant. Prior to January 1, 2006 we only disclosed the pro forma effects on net income and earnings per share as if the fair value recognition provisions of SFAS 123(R) had been utilized.

 

In adopting SFAS No. 123(R), we elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method. Under modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of the grant. In the six months ended March 31, 2007; the Company did not grant any employee stock options.

 

Revenue Recognition

 

Revenues are recognized in the period that services are provided. For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which superseded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) 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. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. At March 31, 2007 the Company did not have any deferred revenue.

 

20

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APPLIED DNA SCIENCES, INC

(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

 

SAB 104 incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”), MULTIPLE DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing EITF 00-21 on the Company’s financial position and results of operations was not significant.

 

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 credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company periodically reviews its trade receivables in determining its allowance for doubtful accounts. At March 31, 2007, allowance for doubtful receivable was $0.

 

Net income (loss) per share

 

The following reconciliation of net income and share amounts used in the computation of income (loss) per share for the three and six months ended March 31, 2006:

 

		Three Months Ended March 31, 2006			Six Months Ended March 31, 2006
Net income used in computing basic net income per share		$	2,033,351		$	4,845,762
Impact of assumed assumptions:
Fair value of warrants relating to convertible debt charged to interest expense						1,758,900
Impact of equity classified as liability:
Gain on warrant liability marked to fair value			(3,967,870	)		(10,756,660	)
Net loss in computing diluted net loss per share:		$	(1,934,519	)	$	(4,151,998	)

21

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APPLIED DNA SCIENCES, INC

(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

 

The weighted average shares outstanding used in the basic net income per share computations for the three and six months ended March 31, 2006 was 116,483,044 and 114,487,589, respectively. In determining the number of shares used in computing diluted loss per share, the Company added approximately 3,000,000 potentially dilutive securities for the three and six months ended March 31, 2006. The potentially dilutive securities added were mostly attributable to the warrants, options and convertible debentures outstanding. As a result, the diluted loss per share for the three and six months ended March 31, 2006 was $0.02 and $0.03, respectively.

 

Derivative Financial Instruments

 

The Company's derivative financial instruments consist of embedded derivatives related to the 10% Secured Convertible Promissory Notes (the “Serial Notes") issued in 2006 (see Note D). These embedded derivatives include certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company recorded the derivatives and related warrants at their fair values as of the inception date of the Note Agreement (estimated at $2,419,719) and at fair value as of each subsequent balance sheet date. In addition, under the provisions of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," as a result of entering into the Notes, the Company is required to classify all other non-employee stock options and warrants as derivative liabilities and mark them to market at each reporting date. The fair value of such options and warrants that were reclassified as liabilities from additional paid-in capital in the six months ended March 31, 2007 totaled $1,584,614. Any change in fair value will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income. Conversion-related derivatives were valued using the Binomial Option Pricing Model with the following assumptions: dividend yield of 0%; annual volatility of 111 to 112%; and risk free interest rate of 4.96 to 5.15% as well as probability analysis related to trading volume restrictions. The remaining derivatives were valued using discounted cash flows and probability analysis. The derivatives are classified as long-term liabilities (see Note F).

 

New Accounting Pronouncements

 

In February 2006, the FASB issued SFAS No. 155. “Accounting for certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140,” or SFAS No. 155. SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We do not expect the adoption of SFAS 155 to have a material impact on our consolidated financial position, results of operations or cash flows.

 

22

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APPLIED DNA SCIENCES, INC

(a development stage company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

 

In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of Financial Assets - an amendment to FASB Statement No. 140. Statement 156 requires that an entity recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a service contract under certain situations. The new standard is effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No.156 did not have a material impact on the Company's financial position and results of operations.

 

In July 2006, the FASB issued Interpretation No. 48 (FIN 48). “Accounting for uncertainty in Income Taxes”. FIN 48 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, “Accounting for Contingencies”. FIN 48 is effective for fiscal years beginning after December 15, 2006. We have not yet evaluated the impact of adopting FIN 48 on our consolidated financial position, results of operations and cash flows.

 

In September 2006 the Financial Account Standards Board (the “FASB”) issued its Statement of Financial Accounting Standards 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. FAS 157 effective date is for fiscal years beginning after November 15, 2007. The Company does not expect adoption of this standard will have a material impact on its financial position, operations or cash flows.

 

In September 2006 the FASB issued its Statement of Financial Accounting Standards 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The effective date for an employer with publicly traded equity securities is as of the end of the fiscal year ending after December 15, 2006. The Company does not expect adoption of this standard will have a material impact on its financial position, operations or cash flows.