UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                   to
 
Commission File Number: 33-17387
 
Applied DNA Sciences, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
59-2262718
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S.  Employer
Identification No.)
 
25 Health Sciences Drive, Suite 215
Stony Brook, New York
 
11790
(Address of principal executive offices)
 
(Zip Code)
631-444-8090
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
   x   Yes     o   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    x   Yes     o   No
 
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.  (Check one):
 
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o   Yes     x   No
 
As of May 14, 2012, the registrant had 591,413,316 shares of common stock outstanding.
 
 
 
 
 
Applied DNA Sciences, Inc.
 
Form 10-Q for the Quarter Ended March 31, 2012
 
Table of Contents
 
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
 1
 
 
 
 
  20
 
 
 
 
  28
 
 
 
 
  28
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
28
 
 
 
 
28
 
 
 
 
  29
   
 
 
 
 
 Part I  
 
 
APPLIED DNA SCIENCES, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
   
March 31,
   
September 30,
 
   
2012
   
2011
 
   
(unaudited)
       
ASSETS
 
Current assets:
           
Cash
  $ 856,574     $ 2,747,294  
Accounts receivable
    323,643       208,587  
Prepaid expenses
    23,518       76,290  
Total current assets
    1,203,735       3,032,171  
                 
Property, plant and equipment-net of accumulated depreciation of $226,047 and $210,862 respectively
    121,056       89,108  
                 
Other assets:
               
Deposits
    36,276       23,458  
Capitalized finance costs-net of accumulated amortization of $1,892,236 and $1,806,261, respectively
    —       85,975  
                 
Intangible assets:
               
Patents, net of accumulated amortization of $34,257 (Note B)
    —       —  
Intellectual property, net of accumulated amortization and write off of $9,339,952 and $9,158,056, respectively  (Note B)
    90,948       272,844  
                 
Total Assets
  $ 1,452,015     $ 3,503,556  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
                 
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 388,232     $ 768,061  
Convertible notes payable, net of unamortized discount of $-0- and $541,120, (Note D)
    250,000       3,730,880  
Total current liabilities
    638,232       4,498,941  
                 
Commitments and contingencies (Note H)
    —       —  
                 
Stockholders’ Equity (Deficit) (Note F)
               
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of March 31, 2012 and September 30, 2011
    —       —  
Common stock, par value $0.001 per share; 1,350,000,000 shares authorized; 591,413,316 and 473,325,859 issued and outstanding as of March 31, 2012 and September 30, 2011, respectively
    591,413       473,326  
Additional paid in capital
    166,032,584       160,387,716  
Accumulated deficit
    (165,810,214 )     (161,856,427 )
Total stockholders’ equity (deficit)
    813,783       (995,385 )
                 
Total Liabilities and Stockholders’ Equity (Deficit)
  $ 1,452,015     $ 3,503,556  
                 
See the accompanying notes to the unaudited condensed consolidated financial statements
 
 
1
 
 
APPLIED DNA SCIENCES, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
 
                         
   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenue
  $ 518,402     $ 140,443     $ 1,035,306     $ 458,260  
                                 
Operating expenses:
                               
Selling, general and administrative
    1,824,646       1,619,355       3,977,074       2,948,564  
Research and development
    96,097       92,951       174,570       113,657  
Depreciation and amortization
    98,708       91,893       197,081       184,716  
                                 
Total operating expenses
    2,019,451       1,804,199       4,348,725       3,246,937  
                                 
NET LOSS FROM OPERATIONS
    (1,501,049 )     (1,663,756 )     (3,313,419 )     (2,788,677 )
                                 
Other income (expense):
                               
Interest expense, net
    (42,833 )     (934,913 )     (640,368 )     (1,154,088 )
                                 
Net loss before provision for income taxes
    (1,543,882 )     (2,598,669 )     (3,953,787 )     (3,942,765 )
                                 
Income taxes (benefit)
    —       —       —       —  
                                 
NET LOSS
  $ (1,543,882 )   $ (2,598,669 )   $ (3,953,787 )   $ (3,942,765 )
                                 
Net loss per share-basic and fully diluted
  $ (0.00 )   $ (0.01 )   $ (0.01 )   $ (0.01 )
                                 
Weighted average shares outstanding-
                               
    Basic and fully diluted
    583,619,169       351,395,559       536,695,691       350,262,319  
                                 
See the accompanying notes to the unaudited condensed consolidated financial statements
 
 
2
 
 
APPLIED DNA SCIENCES, INC
 
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
Unaudited)
 
       
   
Six months ended March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (3,953,787 )   $ (3,942,765 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    197,081       184,716  
Fair value of vested options issued to officers, directors and employees
    1,174,778       305,769  
Amortization of capitalized financing costs
    85,975       460,363  
Amortization of debt discount attributable to convertible debentures
    541,120       986,387  
Equity based compensation
    58,238       454,582  
Common stock issued in settlement of interest
    507,939       32,000  
Changes in operating assets and liabilities:
               
Increase  in accounts receivable
    (115,056 )     (36,209 )
Decrease in prepaid expenses and deposits
    39,954       93,839  
Decrease in accounts payable and accrued liabilities
    (379,829 )     (29,047 )
Net cash used in operating activities
    (1,843,587 )     (1,490,365 )
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (47,133 )     —  
Net cash used in investing activities
    (47,133 )     —  
                 
Cash flows from financing activities:
               
Net proceeds from (payments of) related party advances
    —       (50,000 )
Net proceeds from issuance of convertible notes
    —       1,645,500  
Net cash provided by financing activities
    —       1,595,500  
                 
Net increase (decrease) in cash and cash equivalents
    (1,890,720 )     105,135  
Cash and cash equivalents at beginning of period
    2,747,294       17,618  
Cash and cash equivalents at end of period
  $ 856,574     $ 122,753  
                 
Supplemental Disclosures of Cash Flow Information:
               
Cash paid during period for interest
  $ —     $ —  
Cash paid during period for taxes
  $ —     $ —  
                 
Non-cash transactions:
               
Fair value of warrants issued for financing costs
  $ —     $ 217,971  
Common stock issued in exchange for previously incurred debt
  $ 4,022,000     $ 352,000  
                 
See the accompanying notes to the unaudited condensed consolidated financial statements
 
 
3
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES
 
General
 
The accompanying condensed consolidated financial statements as of March 31, 2012 and for the three and six months ended March 31, 2012 and 2011 are unaudited. These financial statements have been prepared in accordance with Rule S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.
 
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2012. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated September 30, 2011 financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC.
 
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. Effective December 17, 2008, the Company reincorporated from the State of Nevada to the State of Delaware.  The Company is principally devoted to developing DNA embedded biotechnology security solutions in the United States and Europe. To date, the Company has generated minimum sales revenues from its services and products; it 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, 2012, the Company has accumulated losses of $165,810,214.
 
The unaudited condensed 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.
 
Estimates
 
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.
 
Revenue Recognition
 
Revenues are derived from research, development, qualification and production testing for certain commercial products. Revenue from fixed price testing contracts is generally recorded upon completion of the contracts, which are generally short-term, or upon completion of identifiable contractual tasks. At the time the Company enters into a contract that includes multiple tasks, the Company estimates the amount of actual labor and other costs that will be required to complete each task based on historical experience. Revenues are recognized which provide for a profit margin relative to the testing performed. Revenue relative to each task and from contracts which are time and materials based is recorded as effort is expended. Billings in excess of amounts earned are deferred. Any anticipated losses on contracts are charged to income when identified. To the extent management does not accurately forecast the level of effort required to complete a contract, or individual tasks within a contract, and the Company is unable to negotiate additional billings with a customer for cost over-runs, the Company may incur losses on individual contracts. All selling, general and administrative costs are treated as period costs and expensed as incurred.
 
 
4
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
 
For revenue from product sales, the Company recognizes revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”). ASC 605-10 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for 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, 2012 and September 30, 2011, the Company did not record any deferred revenue for the respective periods.
 
Cash Equivalents
 
For the purpose of the accompanying unaudited condensed consolidated financial statements, all highly liquid investments with a maturity of three months or less are considered to be cash equivalents.
 
Accounts Receivable
 
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. At March 31, 2012 and September 30, 2011, the Company has deemed that no allowance for doubtful accounts was necessary.
 
Income Taxes
 
The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
 
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, 2012 and September 30, 2011, property and equipment consist of:
 
   
March 31,
2012
(unaudited)
   
September 30,
2011
 
Computer equipment
 
$
33,464
   
$
33,464
 
Lab equipment
   
181,204
     
146,101
 
Furniture
   
132,435
     
120,405
 
  Total
   
347,103
     
299,970
 
Accumulated depreciation
   
226,047
     
210,862
 
Net
 
$
121,056
   
$
89,108
 
 
 
5
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
 
Impairment of Long-Lived Assets
 
The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
 
Comprehensive Income (loss)
 
The Company does not have any items of comprehensive income (loss) in any of the periods presented.
 
Segment Information
 
The Company adopted Accounting Standards Codification subtopic Segment Reporting 280-10 (“ASC 280-10”). ASC 280-10 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders.  ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision- making group, in making decisions how to allocate resources and assess performance.  The information disclosed herein, materially represents all of the financial information related to the Company’s single principal operating segment.
 
Net Loss Per Share
 
The Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) which specifies the computation, presentation and disclosure requirements of earnings per share information.  Basic earnings per share have been calculated based upon the weighted average number of common shares outstanding. Dilutive common stock equivalents consist of shares issuable upon conversion of convertible notes and the exercise of the Company’s stock options and warrants. For the three and six months ended March 31, 2012, common stock equivalent shares are excluded from the computation of the diluted loss per share as their effect would be anti-dilutive.
 
Fully diluted shares outstanding were 669,297,954 and 622,374,476 for the three and six months ended March 31, 2012, respectively. Fully diluted shares outstanding were 466,659,356 and 503,382,600 for the three and six months ended March 31, 2011, respectively.
 
Stock Based Compensation
 
The Company has adopted Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”) which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro-forma disclosure is no longer an alternative. This statement does not change the accounting guidance for share based payment transactions with parties other than employees provided in ASC 718-10.  Stock-based compensation expense recognized under ASC 718-10 for the six months ended March 31, 2012 and 2011 were $1,174,778 and $305,769, respectively.
 
 
6
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
 
As of March 31, 2012, 127,208,825 employee stock options were outstanding with 71,133,825 shares vested and exercisable.
 
Concentrations
 
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables.  The Company places its cash and temporary cash investments with high credit quality institutions.  At times, such investments may be in excess of the FDIC insurance limit.
 
The Company’s revenues earned from sale of products and services for the three and six months ended March 31, 2012 included an aggregate of 67% and 70% from one and three customers of the Company’s total revenues, respectively.
 
Four and three customers accounted for 81% and 66% of the Company’s revenues earned from sale of products and services for the three and six months ended March 31, 2011, respectively.
 
One and four customers accounted for 73% and 77% of the Company’s total accounts receivable at March 31, 2012 and September 30, 2011, respectively.
 
Research and Development
 
The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”).  Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred.  Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred.  The Company incurred research and development expenses of $96,097 and $92,951 for the three month periods ended March 31, 2012 and 2011, respectively, and $174,570 and $113,657 for the six month periods ended March 31, 2012 and 2011, respectively.
 
Advertising
 
The Company follows the policy of charging the costs of advertising to expense as incurred.  The Company charged to operations $35,296 and $54,904 as advertising costs for the three and six month periods ended March 31, 2012 and $26,142 and  $50,482  for the three and six month periods ended March 31, 2011, respectively.
 
Intangible Assets
 
The Company amortizes its intangible assets using the straight-line method over their estimated period of benefit.  The estimated useful life for patents is five years while other intellectual property uses a seven year useful life. The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.  All of the Company’s intangible assets are subject to amortization.
 
Fair Value of Financial Instruments
 
In the first quarter of fiscal year 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”).  ASC 820-10 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure. ASC 820-10 delayed, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of ASC 820-10 did not have a material impact on the Company’s financial position or operations.
 
 
7
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
 
Effective October 1, 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on the Company’s consolidated financial position, results of operations or cash flows. The carrying value of cash and cash equivalents, accounts payable and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments.
 
Recent Accounting Pronouncements
 
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
Reclassification
 
The Company consolidated prior year cost of sales  to operating expenses on the Condensed Consolidated Statements of Operations for presentation purposes to conform to the current period’s presentation. These reclassifications had no effect on reported income or losses.
 
NOTE B - INTANGIBLE ASSETS
 
Intangible assets acquired and their carrying values at March 31, 2012 and September 30, 2011 are as follows:
 
   
March 31,
2012
(unaudited)
   
September 30,
2011
 
Trade secrets and developed technologies (Weighted average life of 7 years)
 
$
9,430,900
   
$
9,430,900
 
Patents (Weighted average life of 5 years)
   
34,257
     
34,257
 
       Total Amortized identifiable intangible assets-Gross carrying value:
   
9,465,157
     
9,465,157
 
Less:
               
Accumulated amortization
   
(3,719,198
)
   
(3,537,302
)
Impairment (2006)
   
(5,655,011
)
   
(5,655,011
)
Net:
 
$
90,948
   
$
272,844
 
Residual value:
 
$
0
   
$
0
 
 
Total amortization expense charged to operations for the three and six month periods ended March 31, 2012 was $90,948 and $181,896, respectively. Total amortization expense charged to operations for the three and six months ended March 31, 2011 was $90,948 and $181,896, respectively.
 
NOTE C – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities at March 31, 2012 and September 30, 2011 are as follows:
 
 
March 31,
     
 
2012
 
September 30,
 
 
(unaudited)
 
2011
 
Accounts payable
  $ 256,804     $ 165,465  
Accrued consulting fees
    102,500       102,500  
Accrued interest payable
    7,233       415,096  
Accrued salaries payable
    21,695       85,000  
Total
  $ 388,232     $ 768,061  
 
 
8
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE D – CONVERTIBLE NOTES
 
Convertible notes payable as of March 31, 2012 and September 30, 2011 are as follows:
 
   
March 31,
       
   
2012
   
September 30,
 
   
(unaudited)
   
2011
 
        Secured Convertible Note Payable dated June 4, 2010, net of unamortized debt discount of $1,332 (see below)
 
$
—
   
$
223,668
 
        Secured Convertible Notes Payable dated July 15, 2010, net of unamortized debt discount of  $26,091 (see below)
   
—
     
423,909
 
        Secured Convertible Notes Payable dated November 19, 2010, net of unamortized debt discount of $10,479 (see below)
   
—
     
339,521
 
        Secured Convertible Note Payable dated November 30, 2010, net of unamortized debt discount of $45,136 (see below)
   
—
     
704,864
 
        Secured Convertible Note Payable dated January 7, 2011, net of unamortized debt discount of $65,159 (see below)
   
—
     
684,841
 
        Secured Convertible Notes Payable, dated July 15, 2010, modified January 7, 2011, net of unamortized debt discount of $392,923 (see below)
   
—
     
 1,104,077
 
        Secured Convertible Note Payable, dated July 11, 2011
   
250,000
     
  250,000
 
Total
   
250,000
     
3,730,880
 
            Less: current portion
   
(250,000
)
   
(3,730,880
)
Long-term debt- net
 
$
—
   
$
—
 
 
10% Secured Convertible Promissory Note dated  June 4, 2010
 
On June 4, 2010, the Company issued a $675,000 related party convertible promissory note due January 31, 2012 with interest at 10% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of the Company’s common stock, par value $.001 per share (“Common Stock”), at a price equal to the greater of (i) 50% of the average price of the Common Stock for the ten trading days prior to the date of the notice of conversion or (ii) at $0.038866151 per share, which is equal to a 20% discount to the average volume, weighted average price of the Common Stock for the ten trading days prior to issuance. At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.038866151 per share. The Company has granted the noteholder a security interest in all the Company’s assets.
 
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $19,692 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period as interest expense.
 
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($19,692) to debt discount which will be amortized to interest expense over the term of the note.  Amortization of $336 and $1,332 was recorded for the three and six months ended March 31, 2012, respectively; and $975 and $1,971 was recorded for the three and six months ended March 31, 2011, respectively.
 
In January 2012, the Company issued an aggregate of 6,750,248 shares of Common Stock in settlement of the convertible notes and related accrued interest.
 
 
9
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE D – CONVERTIBLE NOTES (continued)
 
On July 15, 2010, $450,000 of the $675,000 related party convertible promissory note was converted to the same terms and conditions as described in the 10% Secured Convertible Promissory Notes dated July 15, 2010 below.
 
10% Senior Secured Convertible Promissory Notes dated July 15, 2010
 
On July 15, 2010, the Company issued an aggregate of $2,000,000 senior secured convertible promissory notes due July 15, 2011 with interest at 10% per annum due upon maturity to “accredited investors,” as defined in regulations promulgated under the Securities Act of 1933, as amended (“Securities Act”). The notes are convertible at any time prior to maturity, at the holders’ option, into shares of Common Stock (i) prior to the occurrence of Subsequent Financing at a rate of $0.04405, or (ii) after Subsequent Financing in the event the holder elects to receive shares of Common Stock (and not securities issued in a Subsequent Financing (“Subsequent Financing Securities”) or securities issued in a Qualified Financing (the “Qualified Financing Securities”)), at a rate of $0.04405, or as of any conversion date that occurs after the closing of a Subsequent Financing at a rate of 80% of the purchase price paid by investors in the Subsequent Financing. The notes automatically convert at the earlier occurrence of (i) maturity or (ii) Qualified Financing including any accrued and unpaid interest, at a rate as described above. The Company has granted the note holders a security interest in all the Company’s assets and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary.
 
A “Subsequent Financing” is defined for purposes of this Note D as the issuance and sale by the Company or its affiliates during the term of the promissory note of securities that do not qualify as Qualified Financing.  A “Qualified Financing” is defined for purposes of this Note D as the issuance and sale by the Company or an affiliate thereof of equity or debt securities in a single transaction that results in gross proceeds of at least $10,000,000 (before transaction fees and expenses).
 
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $678,774 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense.
 
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($678,774) to debt discount which will be amortized to interest expense over the term of the notes.
 
On January 7, 2011, upon the completion of a Subsequent Financing, the above described conversion rate changed from $0.04405 to $0.037104 with an extended due date from July 15, 2011 to January 7, 2012 on $1,550,000 of the $2,000,000 issued senior convertible promissory notes.  All other terms are remaining the same.  Although the conversion rate of the remaining $450,000 senior secured convertible promissory notes remained the same, the due date was extended also to January 7, 2012.  In conjunction with the conversion rate and term modifications of the $1,550,000 senior secured convertible promissory notes, the Company wrote off the remaining unamortized debt discount of $331,332 to operations.  See below discussion of the restructured senior secured convertible promissory notes.
 
Amortization of $1,845 and $26,091 was recorded for the three and six months ended March 31, 2012; and $362,865 and $470,920 was recorded for the three and six months ended March 31, 2011, respectively.
 
In January 2012, the Company issued an aggregate of 11,729,821 shares of Common Stock in settlement of the convertible notes and related accrued interest.
 
 
10
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE D – CONVERTIBLE NOTES (continued)
 
10% Senior Secured Convertible Promissory Notes dated November 19, 2010
 
On November 19, 2010, the Company issued an aggregate of $350,000 in principal amount of senior secured convertible notes bearing interest at a rate of 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act.  The notes are convertible, in whole or in part, at any time, at the option of the noteholders, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of each note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price of $ 0.032825817 (equal to a 20% discount to the average volume, weighted average price of the Common Stock for the ten trading days prior to issuance, which is referred to as the “Common Conversion Price” for purposes of this Note D) or (B) Subsequent Financing Securities at a conversion price equal to 80% of the price per Subsequent Security paid by investors for Subsequent Financing Securities in a Subsequent Financing (which is referred to as the “Subsequent Financing Price” for purposes of this Note D).  A noteholder may convert its notes in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings. The notes shall be automatically converted upon the earlier of (I) November 19, 2011 and (II) the completion of a Qualified Financing at the election of each noteholder into either (A) shares of Common Stock at the applicable Common Conversion Price, (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) Qualified Financing Securities at a conversion price equal to 80% of the price per Qualified Financing Security paid by investors for the Qualified Financing Securities (which is referred to as the “Qualified Financing Price” for purposes of this Note D).
 
The notes bear interest at the rate of 10% per annum and are due and payable in full on November 19, 2011.
 
Until the principal and accrued but unpaid interest under the notes are paid in full, or converted into Common Stock, Subsequent Financing Securities or Qualified Financing Securities (collectively, “Conversion Shares”) pursuant to their terms, the Company’s obligations under the notes will be secured by a lien on all assets of the Company and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary.
 
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $76,494 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense.
 
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($76,494) to debt discount which will be amortized to interest expense over the term of the notes. Amortization of $10,479 was recorded for the six months ended March 31, 2012; and $18,861 and $27,663 was recorded for the three and six months ended March 31, 2011, respectively.
 
In November 2011, the Company issued an aggregate of 11,693,102 shares of Common Stock in settlement of the convertible notes and related accrued interest.
 
 
11
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE D – CONVERTIBLE NOTES (continued)
 
10% Senior Secured Convertible Promissory Note dated November 30, 2010
 
On November 30, 2010, the Company issued  a $750,000 principal amount senior secured convertible note bearing interest at a rate of 10% per annum to an “accredited investor,” as defined in regulations promulgated under the Securities Act.  The note is convertible, in whole or in part, at any time, at the option of the noteholder, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of each note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price of $ 0.03088 (the applicable Common Conversion Price) or (B) Subsequent Financing Securities at the Subsequent Financing Price.   The noteholder may convert its note in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings. The note shall be automatically converted upon the earlier of (I) November 30, 2011 and (II) the completion of a Qualified Financing at the election of the noteholder into either (A) shares of Common Stock at the applicable Common Conversion Price, (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) Qualified Financing Securities at a conversion price equal to 80% of the Qualified Financing Price.
 
The note bears interest at the rate of 10% per annum and is due and payable in full on November 30, 2011.
 
Until the principal and accrued but unpaid interest under the note is paid in full, or converted into Conversion Shares pursuant to its terms, the Company’s obligations under the note will be secured by a lien on all assets of the Company and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary.
 
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $270,078 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense.
 
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($270,078) to debt discount which will be amortized to interest expense over the term of the note. Amortization of $45,136 was recorded for the six months ended March 31, 2012; and $66,595 and $89,533 was recorded for the three and six months ended March 31, 2011, respectively.
 
On November 30. 2011, the Company issued an aggregate of 26,716,321 shares of Common Stock in settlement of the convertible notes and related accrued interest.
 
 
12
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE D – CONVERTIBLE NOTES (continued)
 
10% Senior Secured Convertible Promissory Note dated January 7, 2011.
 
On January 7, 2011, the Company issued a $750,000 principal amount senior secured convertible note bearing interest at a rate of 10% per annum to an “accredited investor,” as defined in regulations promulgated under the Securities Act.
 
The Note is convertible, in whole or in part, at any time, at the option of the noteholder, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of the Note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price of $ 0.05529 (the applicable Common Conversion Price) or (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price.  The noteholder may convert its Notes in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings.
 
The Note shall be automatically converted upon the earlier of (I) January 7, 2012 and (II) the completion of a Qualified Financing at the election of the noteholder into either (A) shares of Common Stock at the applicable Common Conversion Price, (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) Qualified Financing Securities at a conversion price equal to 80% of the Qualified Financing Price.
 
Pursuant to a joinder agreement, the noteholder became party to the registration rights agreement, dated as of July 15, 2010 (the “Registration Rights Agreement”), with the Company, pursuant to which the Company has agreed to prepare and file a registration statement with the SEC to register under the Securities Act resales from time to time of the Conversion Shares issued or issuable upon conversion or redemption of the Note.  The Company is required to file a registration statement within 45 days of receiving a Demand Registration Request (as defined in the Registration Rights Agreement), and to cause the registration statement to be declared effective within 45 days (or 90 days if the registration statement is reviewed by the SEC).  The Company will be required to pay penalties to the noteholder in the event that these deadlines are not met.
 
The Note bears interest at the rate of 10% per annum and is due and payable in full on January 7, 2012.  Until the principal and accrued but unpaid interest under the Note is paid in full, or converted into Conversion Shares pursuant to its terms, the Company’s obligations under the Note will be secured by a lien on all assets of the Company and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary, in favor of Etico Capital, LLC, as Collateral Agent for the Purchasers named therein pursuant to security agreements dated as of July 15, 2010, to which the noteholder became party pursuant to joinder agreements.
 
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the note. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $240,233 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the note. The debt discount attributed to the beneficial conversion feature is amortized over the note’s maturity period (one year) as interest expense.
 
Amortization of $4,607 and $65,159 was recorded for the three and six months ended March 31, 2012; and $54,628 was recorded for the three and six months ended March 31, 2011, respectively.
 
In January 2012, the Company issued an aggregate of 14,921,324 shares of Common Stock in settlement of the convertible notes and related accrued interest.
 
 
13
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)

NOTE D – CONVERTIBLE NOTES (continued)
 
10% Senior Secured Convertible Promissory Notes issued on July 15, 2010, modified on January 7, 2011
 
On January 7, 2011, the Company modified previously issued senior secured promissory notes initially dated July 15, 2010 totaling  $1,550,000 in principal amount bearing interest at a rate of 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act.  The notes are convertible, in whole or in part, at any time, at the option of the noteholders, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of each note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price of $ 0.037104 (the applicable Common Conversion Price) or (B) Subsequent Financing Securities at a conversion price equal to 80% of Subsequent Financing Price.  A noteholder may convert its note in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings. The notes shall be automatically converted upon the earlier of (I) January 7, 2012 and (II) the completion of a Qualified Financing at the election of the noteholder into either (A) shares of Common Stock at the applicable Common Conversion Price, (B) Subsequent Financing Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) Qualified Financing Securities at a conversion price equal to 80% of the Qualified Financing Price. The effect of this refinancing was recognized as “debt modification” in the financial statements.
 
The notes bear interest at the rate of 10% per annum and are due and payable in full on January 7, 2012.
 
Until the principal and accrued but unpaid interest under the notes are paid in full, or converted into Conversion Shares pursuant to their terms, the Company’s obligations under the notes will be secured by a lien on all assets of the Company and the assets of APDN (B.V.I.) Inc., the Company’s wholly-owned subsidiary.
 
In accordance with ASC 470-20, the Company recognized an embedded beneficial conversion feature present in the notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $1,499,536 of the proceeds, which is equal to the intrinsic value of the embedded beneficial conversion feature, to additional paid-in capital and a discount against the notes. The debt discount attributed to the beneficial conversion feature is amortized over the notes’ maturity period (one year) as interest expense.
 
The Company recorded the intrinsic value of the embedded beneficial conversion feature ($1,499,536) to debt discount which will be amortized to interest expense over the term of the notes. Amortization of $26,854 and $392,923 was recorded for the three and six months ended March 31, 2012 and $340,990 was recorded for the three and six month periods ended March 31, 2011.
 
On October 26, 2011, the Company issued 1,497,826 shares of Common Stock in settlement of $50,000 of convertible notes and related accrued interest.
 
In January 2012, the Company issued an aggregate of 44,778,815 shares of Common Stock in settlement of the remaining convertible notes and related accrued interest.
 
 
14
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
NOTE D – CONVERTIBLE NOTES (continued)
 
Adjustment of Conversion Price of Certain 10 % Senior Secured Convertible Promissory Notes dated July 15, 2010.
 
In February 2011, the Company adjusted the conversion price of $1,550,000 of the $2,000,000 in principal amount of senior secured convertible promissory notes issued on July 15, 2010 (the “July 15 Notes”), from $0.04405 to $0.037104.  The remaining $450,000 aggregate principal amount of the July 15 Notes, held by James A. Hayward, the Company’s Chairman, President and Chief Executive Officer, will continue to have a conversion price of $0.04405.
 
4% Senior Secured Convertible Promissory Note issued on July 11, 2011
 
On June 11, 2011, the Company issued a $250,000 related party convertible promissory note due July 11, 2012 with interest at 4% per annum due upon maturity. The note is convertible at any time prior to maturity, at the holder’s option, into shares of Common Stock at $0.0585 per share.  At maturity, the note, including any accrued and unpaid interest, is automatically convertible at $0.0585 per share.  The Company has granted the note holder a security interest in all the Company’s assets.
 
The embedded conversion feature present in the note equaled the fair value of the underlying Common Stock at the date of issuance, therefore the Company did not record a beneficial conversion feature.
 
NOTE E - RELATED PARTY TRANSACTIONS
 
The Company’s current and former officers and stockholders advance funds to the Company for travel related and working capital purposes.   As of March 31, 2012 and September 30, 2011, there were no advances outstanding.
 
NOTE F - CAPITAL STOCK
 
The Company is authorized to issue 1,350,000,000 shares of Common Stock as the result of a vote of stockholders conducted on January 27, 2012 which effected an increase in the authorized shares of Common Stock from 800,000,000 to 1,350,000,000.  In addition, the Company is authorized to issue 10,000,000 shares of preferred stock with a $0.001 par value per share. As of March 31, 2012 and September 30 2011, there were 591,413,316 and 473,325,859 shares of Common Stock issued and outstanding, respectively.
 
During the six month periods ended March 31, 2012 and 2011, the Company has expensed $58,238 and $454,582 related to stock based compensation, respectively.
 
 
15
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)

NOTE G - STOCK OPTIONS AND WARRANTS
 
Warrants
 
The following table summarizes the changes in warrants outstanding and the related prices for the shares of Common Stock issued to non-employees of the Company.  These warrants were granted in lieu of cash compensation for services performed or financing expenses in connection with the sale of Common Stock.
 
         
Warrants
                   
         
Outstanding
   
Weighted
         
Exercisable
 
         
Remaining
   
Average
   
Weighted
   
Weighted
 
 
Exercise
 
Number
 
Contractual
   
Exercise
   
Average
   
Average
 
 
Prices
 
Outstanding
 
Life (Years)
   
Price
   
Exercisable
   
Exercise Price
 
$
0.03088
 
2,428,756
 
5.67
   
$
0.03088
   
2,428,756
   
$
0.03088
 
$
0.03283
 
533,116
 
5.64
   
$
0.03283
   
533,116
   
$
0.03283
 
$
0.04
 
3,000,000
 
3.42
   
$
0.04
   
3,000,000
   
$
0.04
 
$
0.04405
 
3,007,946
 
5.29
   
$
0.04405
   
3,007,946
   
$
0.04405
 
$
0.04750
 
7,578,978
 
6.29
   
$
0.04750
   
7,578,978
   
$
0.04750
 
$
0.05529
 
1,356,484
 
5.78
   
$
0.05529
   
1,356,484
   
$
0.05529
 
$
0.06
 
12,000,000
 
2.88
   
$
0.06
   
12,000,000
   
$
0.06
 
$
0.07
 
75,000
 
2.58
   
$
0.07
   
75,000
   
$
0.07
 
$
0.071
 
1,000,000
 
2.82
   
$
0.071
   
-
   
$
0.071
 
$
0.09
 
9,900,000
 
4.42
   
$
0.09
   
9,900,000
   
$
0.09
 
$
0.10
 
1,500,000
 
099
   
$
0.10
   
1,500,000
   
$
0.10
 
$
0.50
 
10,700,000
 
0.74
   
$
0.50
   
10,700,000
   
$
0.50
 
     
53,080,280
               
52,080,280
         
 
Transactions involving warrants are summarized as follows:
 
   
Number of
Shares
   
Weighted Average
Price Per Share
 
Balance, September 30, 2010
   
69,207,946
   
$
0.237
 
Granted
   
11,897,334
     
0.044
 
Exercised
   
—
         
Cancelled or expired
   
(22,900,000
)
   
(0.384
)
Balance at September 30, 2011
   
58,205,280
   
$
0.140
 
Granted
   
1,075,000
     
0.071
 
Exercised
   
—
     
—
 
Cancelled or expired
   
(6,200,000
)
   
(0.041
)
Balance, March 31, 2012
   
53,080,280
   
$
0.15
 
 
Transactions involving warrants are summarized as follows:
 
On October 31, 2011, warrants totaling 75,000 were issued in connection with services.  The warrants are exercisable for three years from the date of issuance at an exercise price of $0.07 per share with vesting immediately.  The fair value of the warrants  of $1,363 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 157.69% and risk free rate from 0.41% and were charged to current period operations.
 
 
16
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
On January 25, 2012, warrants totaling 1,000,000 were issued in connection with services.  The warrants are exercisable for three years from the date of issuance at an exercise price of $0.071 per share and will vest in full on the first anniversary of the date of grant.  The fair value of the warrants  of $56,875 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 147.53% and risk free rate from 0.81% and were charged to current period operations.
 
Employee Stock Options
 
On January 26, 2005, the Board of Directors, and on February 15, 2005, the holders of a majority of the outstanding shares of Common Stock approved the 2005 Incentive Stock Plan and authorized the issuance of 16,000,000 shares of Common Stock as stock awards and stock options thereunder. On May 16, 2007, at the annual meeting of stockholders, the holders of a majority of the outstanding shares of Common Stock approved an increase in the number of shares subject to the 2005 Incentive Stock Plan to 20,000,000 shares of Common Stock.  On June 17, 2008, the Board of Directors unanimously adopted an amendment to the 2005 Incentive Stock Plan that increased the total number of shares of Common Stock issuable pursuant to the 2005 Incentive Stock Plan from a total of 20,000,000 shares to a total of 100,000,000 shares, which was approved by our stockholders at the 2008 annual meeting of stockholders held on December 16, 2008.  On November 30, 2011, the Board of Directors unanimously adopted an amendment to the 2005 Incentive Stock Plan that increased the total number of shares of Common Stock issuable thereunder to 350,000,000 and the number of shares of Common Stock that can be covered by awards made to any participant in any calendar year to 50,000,000, which was approved by our stockholders at the 2012 annual meeting of stockholders held on January 27, 2012.
 
The 2005 Incentive Stock Plan is designed to retain directors, executives, and selected employees and consultants by rewarding them for making contributions to our success with an award of options to purchase shares of Common Stock.  As of March 31, 2012, a total of 9,675,000 shares have been issued and options to purchase 127,208,825 shares have been granted under the 2005 Incentive Stock Plan.
 
The following table summarizes the changes in options outstanding and the related prices for the shares of Common Stock issued to employees of the Company under the 2005 Incentive Stock Plan:
 
Options Outstanding
   
Options Exercisable
 
Exercise
Prices
 
Number
Outstanding
 
Weighted Average
Remaining Contractual
Life (Years)
   
Weighted Average
Exercise Price
   
Number
Exercisable
   
Weighted Average Exercise Price
 
$
0.05
 
29,000,000
 
3.16
   
$
0.05
   
29,000,000
   
$
0.05
 
$
0.0585
 
50,000,000
 
6.29
   
$
0.0585
   
12,500,000
   
$
0.0585
 
$
0.06
 
30,100,000
 
3.25
   
$
0.06
   
15,000,000
   
$
0.06
 
$
0.065
 
634,825
 
4.68
   
$
0.065
   
634,825
   
$
0.065
 
$
0.068
 
5,724,000
 
4.67
   
$
0.068
   
5,724,000
   
$
0.068
 
$
0.07
 
2,850,000
 
3.11
   
$
0.07
   
1,125,000
   
$
0.07
 
$
0.08
 
2,000,000
 
3.76
   
$
0.08
   
500,000
   
$
0.08
 
$
0.09
 
1,500,000
 
4.42
   
$
0.09
   
1,500,000
   
$
0.09
 
$
0.11
 
5,400,000
 
1.21
   
$
0.11
   
5,400,000
   
$
0.11
 
     
127,208,825
       
$
0.06
   
71,383,825
   
$
0.06
 
 
 
17
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
Transactions involving stock options issued to employees are summarized as follows:
 
   
Number of
Shares
   
Weighted Average
Exercise Price Per Share
 
Outstanding at October 1, 2010
   
66,900,000
   
$
0.06
 
Granted
   
53,750,000
     
0.06
 
Exercised
   
—
         
Cancelled or expired
   
—
         
Outstanding at September 30, 2011
   
120,650,000
   
$
0.06
 
Granted
   
6,558,825
     
0.067
 
Exercised
   
—
         
Canceled or expired
   
—
         
Outstanding at March 31, 2012
   
127,208,825
   
$
0.06
 
 
Transactions involving stock options issued to employees are summarized as follows:
 
During the three months ended March 31, 2012, the Company granted an aggregate of 200,000 options to purchase Common Stock at exercise prices from $0.06 to $0.07 per share for five years to employees, vesting 25% per year on each anniversary of grant.  The fair values of options was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 149.81% to 152.56% and risk free rate from 0.82% to 1.13%.
 
The Company recorded $389,059 and $1,174,778 as stock compensation expense for the three and six month periods ended March 31, 2012, respectively, and $157,230 and $305,769 for the three and six month periods ended March 31, 2011, respectively, for the vesting portion of all employee options outstanding.
 
NOTE H- COMMITMENTS AND CONTINGENCIES
 
Operating leases
 
The Company leases office space under an operating lease in Stony Brook, New York for its corporate use renewable annually. Total lease rental expenses for the three and six month periods ended March 31, 2012 were $64,535 and $110,302, respectively.  Total lease rental expenses for the three and six month periods ended on March 31, 2011 were $36,036 and $71,998, respectively.
 
Employment and Consulting Agreements
 
The Company has consulting agreements with outside contractors, certain of whom are also Company stockholders. The agreements are generally month to month.
 
Litigation
 
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.  Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
 
 
18
 
 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(unaudited)
 
Demodulation, Inc. v. Applied DNA Sciences, Inc., et al. (Civil Action No. - 2:11-cv-00296-WJM-MF, District of New Jersey):
 
On May 18, 2011, the Company was served with a complaint in a lawsuit brought by Demodulation, Inc. against the Company, Corning Incorporated, Alfred University, and Alfred Technology Resources, Inc.  On July 8, 2011, the Company filed a motion to dismiss the complaint.  In response, on August 3, 2011, Demodulation, Inc. filed an amended complaint.  Demodulation, Inc. alleges that it was unable to bring its microwire technology to market due to the wrongful acts of defendants, who allegedly conspired to steal Demodulation, Inc.’s trade secrets and other intellectual property and to interfere in its business opportunities.  Of the 17 claims alleged in the amended complaint, five are asserted against the Company, including alleged misappropriation of trade secrets, antitrust violations, civil RICO, and patent infringement.  The Company believes these claims are without merit.  On September 10, 2011, Alfred University filed a motion to transfer the action from the District of New Jersey to the Western District of New York. On December 22, 2011, the Court denied the motion. On January 27, 2012, the Company filed a motion to dismiss the amended complaint for failure to state a claim and on other grounds.  The Company intends to vigorously defend the action.
 
NOTE I - GOING CONCERN
 
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed consolidated financial statements at March 31, 2012, the Company incurred a net loss for the six month period ended March 31, 2012 of approximately $4.0 million and has an accumulated deficit of $166 million. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
 
The Company’s existence is dependent upon management’s ability to develop profitable operations. Management is devoting substantially all of its efforts to developing DNA embedded biotechnology security solutions in the United States and Europe and there can be no assurance that the Company’s efforts will be successful and  that management’s actions will result in profitable operations or the resolution of its liquidity problems. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
 
 
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Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and Notes thereto, included elsewhere within this report.  The Quarterly Report contains forward-looking statements , including statements using terminology such as “can”, “may”, “believe”, “designated to”, “will”, “expect”, “plan”, “anticipate”, “estimate”, “potential” or “continue”, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. You should read statements that contain these words carefully because they:
 
●
discuss our future expectations;
●
contain projections of our future results of operations or of our financial condition; and
●
state other “forward-looking” information.
 
We believe it is important to communicate our expectations. However, forward looking statements involve risks and uncertainties and our actual results and the timing of certain events could differ materially from those discussed in forward-looking statements as a result of certain factors, including those set forth under “Risk Factors,” “Business” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011.  All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligations to update any forward-looking statement or risk factor, unless we are required to do so by law.
 
Introduction
 
We are a provider of botanical-DNA based security and authentication solutions that can help protect products, brands and intellectual property of companies, governments and consumers from theft, counterfeiting, fraud and diversion.  SigNature® DNA, SmartDNA, Cashield™, DNANet™ and BioMaterial™ Genotyping, our principal anti-counterfeiting and product authentication solutions, can be used in numerous industries, including cash-in-transit (transport and storage of banknotes), textiles and apparel, identity cards and other secure documents, pharmaceuticals, wine, and luxury consumer goods.
 
SigNature DNA . We use the DNA of plants to manufacture highly customized and encrypted botanical DNA markers, or SigNature DNA Markers, which we believe are virtually impossible to replicate. We have embedded SigNature DNA Markers into a range of our customers’ products, including various inks, dyes, textile treatments, thermal ribbon, thread, varnishes and adhesives. These items can then be tested for the presence of SigNature DNA Markers through an instant field detection or a forensic level authentication. Our SigNature DNA solution provides a secure, accurate and cost-effective means for users to incorporate our SigNature DNA Markers in, and then quickly and reliably authenticate and identify, a broad range of items, such as recovered banknotes, branded textiles and apparel products, pharmaceuticals and cosmetic products, identity cards and other secure documents, digital media, artwork and collectibles and fine wine. Having the ability to reliably authenticate and identify counterfeit versions of such items enables companies and governments to detect, deter, interdict and prosecute counterfeiting enterprises and individuals.
 
SmartDNA.   SmartDNA is a unique and patented security system based on botanical DNA, a new 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 SmartDNA product is designed to be unique to each store, warehouse or sting operation allowing the police and prosecutors to link criminals to the crimes.
 
Cashield . Cashield is a family of cash degradation inks that permanently stain banknotes stolen from cash-handling or ATM systems. Cashield extends our offering beyond our prior singular product, AzSure®, to a family of security inks that include Red, Violet, Green, Teal, Indigo, and the original AzSure® Blue. Current degradation dyes suffer from a critical technical weakness, as the dyes may be removed by the use of solvents. We initiated the development of Cashield in response to demand for a more effective carrier for our SigNature DNA markers.  Cashield has been certified for use in the EU by the Laboratoire National de Métrologie et d’Essais (LNE) and passed all 47 individual dye penetration and wash-out-resistance tests.  Additionally, a CViT study presented by the University of Leeds cited Cashield AzSure Blue ink as having improved performance versus staining inks from other suppliers. In this study, the AzSure blue ink was tested across a range of currencies, including British pounds, Euros, and U.S. dollars. The evaluation involved exposure to numerous industrial solvents. Final analysis of the results concluded that the AzSure blue ink was bound strongly in five seconds or less to a variety of banknotes, and could not be removed with any solvent.
 
 
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DNANet . In 2010, we developed DNANet tactical DNA products for law enforcement, in the form of DNA-marked fixative sprays and liquids as well as transferable grease. These products, being marketed to global police forces were created to help link criminals to crimes. DNANet is a tactical forensic system providing unique DNA codes for covert operations that require absolute proof of authentication.
 
BioMaterial GenoTyping . Our BioMaterial GenoTyping solution refers to the development of genetic assays to distinguish between varieties or strains of biomaterials, such as cotton, wool, tobacco, fermented beverages, natural drugs and foods, that contain their own source DNA. We have developed two proprietary genetic tests (FiberTyping™ and PimaTyping™) to track American Pima cotton from the field to finished garments. These genetic assays provide the cotton industry with what we believe to be the first authentication tools that can be applied throughout the U.S. and worldwide cotton industry from cotton growers, mills, wholesalers, distributors, manufacturers and retailers through trade groups and government agencies.
 
Recent Developments
 
digitalDNA .  We have launched a new product called digitalDNA™, which is a DNA-secured form of the QR (“quick read”) code.  digitalDNA is a new security tool that utilizes the flexibility of mobile communications, the instant accessibility of secure, cloud-based data, and the absolute certainty of DNA to make item tracking and authentication fast, easy and definitive, while providing the opportunity to create a new and exciting customer interface.  The product uses forensic authentication of a botanical DNA marker, sequence-encrypted within a secure QR code, and physically included within the ink used to digitally print the code. The resulting pattern or “rune” can be scanned via an Apple-approved app with an iPhone to assure originality.  These mobile scans can be performed anywhere along the supply chain without limit.  Tracking information is fed into “tunable algorithms” that use pattern recognition to automatically identify supply-chain risks, for counterfeits or product diversion.  Rapid-reading reporters, associated with the DNA marker, are also embedded in the ink, and prevent the secure code from being digitally copied.
 
The digitalDNA platform is designed to meet compliance specifications defined by the PCI (Payment Card Industry) Security Standards Council, the new and strict standards developed for handling credit card transactions, and HIPAA (Health Insurance Portability and Accountability Act), the stringent requirements for protecting personal health information.
 
We acquired rights to certain software and intellectual property pursuant to an agreement we entered into with DivineRune Inc., a secure cloud-computing specialist, in January this year.  DivineRune was issued a 3 year warrant to purchase one million shares of our common stock, par value $.001 per share (“Common Stock”) as compensation for a license to DivineRune’s patent portfolio.  We will also share revenues on any future sales of products generated as a result of this agreement.  We expect that the partnership will enhance and extend our core anti-counterfeiting, anti-diversion, and security systems into the digital track-and-trace sphere.  James A. Hayward, our President, Chairman and Chief Executive Officer, and Yacov Shamash, a member of our Board of Directors, were among the early investors in DivineRune where Mr. Sayan is the founder and CEO.  In addition, Dr. Hayward and Dr. Shamash both serve on the Board of Directors of Softheon, a document security company, where Mr. Sayan is the Founder, CEO and Chairman of the Board.
 
Plan of Operations
 
General
 
To date, the substantial portion of our revenues have been generated from sales of our SigNature DNA and BioMaterial Genotyping, our principal anti-counterfeiting and product authentication solutions (“authentication services”).  We have continued to incur expenses and have limited sources of liquidity.  We expect to generate revenues  from sales of our SigNature Program, Cashield, DNANet, SmartDNA, BioMaterial Genotyping and digitalDNA.  We have developed or are currently attempting to develop business in the following target markets: cash-in-transit, semiconductor authentication, textile and apparel authentication, secure documents, pharmaceuticals, consumer products, fine wine, art and collectibles, and digital and recording media.  Our developments in the cash-in-transit, semiconductor authentication and textile and apparel authentication markets have contributed to the increase in our revenues. We intend to pursue both domestic and international sales opportunities in each of these vertical markets.
 
Critical Accounting Policies
 
Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
 
 
21
 
 
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
 
The accounting policies identified as critical are as follows:
 
●            Revenue recognition;
●            Allowance for doubtful accounts; and
●            Fair value of intangible assets.
 
Revenue Recognition
 
Revenues are derived from research, development, qualification and production testing for certain commercial products.
 
Revenue from fixed price testing contracts is generally recorded upon completion of the contracts, which are generally short-term, or upon completion of identifiable contractual tasks. At the time we enter into a contract that includes multiple tasks, we estimate the amount of actual labor and other costs that will be required to complete each task based on historical experience. Revenues are recognized which provide for a profit margin relative to the testing performed. Revenue relative to each task and from contracts which are time and materials based is recorded as effort is expended. Billings in excess of amounts earned are deferred. Any anticipated losses on contracts are charged to income when identified. To the extent management does not accurately forecast the level of effort required to complete a contract, or individual tasks within a contract, and we are unable to negotiate additional billings with a customer for cost over-runs, we may incur losses on individual contracts. All selling, general and administrative costs are treated as period costs and expensed as incurred.
 
For revenue from product sales, we recognize revenue in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”). ASC 605-10 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. We defer any revenue for which the product has not been delivered or is subject to refund until such time that we and the customer jointly determine that the product has been delivered or no refund will be required.
 
ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arraignments (“ASC 605-25”). ASC 605-25 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 ASC05-25 on our financial position and results of operations are not significant.
 
Allowance for Uncollectible Receivables
 
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. We use a combination of write-off history, aging analysis and any specific known troubled accounts in determining the allowance. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.
 
Fair Value of Intangible Assets
 
We have adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”).  The Statement requires that long-lived assets and certain identifiable intangibles held and used by us be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period.
 
We evaluate the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.  ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
 
 
22
 
 
Use of Estimates
 
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
Comparison of Results of Operations for the Three Months Ended March 31, 2012 and 2011
 
Revenues
 
For the three months ended March 31, 2012, we generated $518,402 in revenues from operations principally from the sales of authentication services. For the three months ended March 31, 2011, we generated $140,443 in revenues from operations. The increase in sales for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily caused by our continued sales efforts in expanding our product usage in our target markets.
 
Costs and Expenses
 
Selling, General and Administrative
 
Selling, general and administrative expenses increased from $1,619,355 for the three months ended March 31, 2011 to $1,824,646 for the three months ended March 31, 2012. The increase of $205,291, or 13%, is primarily attributable to the cost of stock based compensation incurred in the current period compared to the same period last year.
 
Research and Development
 
Research and development expenses increased from $92,951 for the three months ended March 31, 2011 to $96,097 for the three months ended March 31, 2012. The increase of $3,146 is attributable to additional research and development activity needed with current operations.
 
Depreciation and Amortization
 
In the three months ended March 31, 2012, depreciation and amortization increased by $6,815 from $91,893 for the three months ended March 31, 2011 to $98,708 for the three months ended March 31, 2012.  The increase is attributable to acquisition of recent property and equipment.
 
Total Operating Expenses
 
Total operating expenses increased to $2,019,451 for the three months ended March 31, 2012 from $1,804,199 for the three months ended March 31, 2011, or an increase of $215,252 primarily attributable to an increase in equity based compensation and in R&D expenditures.
 
Interest Expenses
 
Interest expense for the three months ended March 31, 2012 decreased by $892,080 to $42,833 from $934,913 for the three months ended March 31, 2011. The decrease in interest expense was due to conversion of our debt and related reduction in our non cash amortization of debt discounts associated with our issued convertible notes.
 
Net Income (Loss)
 
Net loss for the three months ended March 31, 2012 decreased to $1,543,882 from a net loss of $2,598,669 for the three months ended March 31, 2011 primarily attributable to factors described above.
 
 
23
 
 
Comparison of Results of Operations for the Six Months Ended March 31, 2012 and 2011
 
Revenues
 
For the six months ended March 31, 2012, we generated $1,035,306 in revenues from operations principally from the sales of authentication services. For the six months ended March 31, 2011, we generated $458,260 in revenues from operations. The increase in sales for the six months ended March 31, 2012 compared to the six months ended March 31, 2011 was primarily caused by our continued sales efforts in expanding our product usage in our target markets.
 
Costs and Expenses
 
Selling, General and Administrative
 
Selling, general and administrative expenses increased from $2,948,564 for the six months ended March 31, 2011 to $3,977,074 for the six months ended March 31, 2012. The increase of $1,028,510, or 35%, is primarily attributable to the cost of stock based compensation and other operating costs incurred in the current period compared to the same period last year.
 
Research and Development
 
Research and development expenses increased from $113,657 for the six months ended March 31, 2011 to $174,570 for the six months ended March 31, 2012. The increase of $60,913 is attributable to additional research and development activity needed with current operations.
 
Depreciation and Amortization
 
In the six months ended March 31, 2012, depreciation and amortization increased by $12,365 from $184,716 for the six months ended March 31, 2011 to $197,081 for the three months ended March 31, 2012.  The increase is attributable to acquisition of recent property and equipment.
 
Total Operating Expenses
 
Total operating expenses increased to $4,348,725 for the six months ended March 31, 2012 from $3,246,937 for the six months ended March 31, 2011, or an increase of $1,101,788 primarily attributable to an increase in equity based compensation, other operating costs and in R&D expenditures.
 
Interest Expenses
 
Interest expense for the six months ended March 31, 2012 decreased by $513,720 to $640,368 from $1,154,088 for the six months ended March 31, 2011. The decrease in interest expense was due to conversion of our debt and related reduction in our non cash amortization of debt discounts associated with our issued convertible notes.
 
Net Income (Loss)
 
Net loss for the six months ended March 31, 2012 increased to $3,953,787 from a net loss of $3,942,765 for the six months ended March 31, 2011 primarily attributable to factors described above.
 
Liquidity and Capital Resources
 
Our liquidity needs consist of our working capital requirements, indebtedness payments and research and development expenditure funding.  Historically, we have financed our operations through the sale of equity and convertible debt as well as borrowings from various credit sources.  In fiscal 2010 and 2011 as well as in prior fiscal years, we have relied in part on cash infusions from our President, Chairman and Chief Executive Officer, James A. Hayward, in order to fund our operations.  During fiscal 2011, Dr. Hayward provided $750,000 in new loans. Dr. Hayward has not had to provide new loans during the six months ended March 31, 2012.  In the absence of third party investment, curtailment of cash investments by Dr. Hayward could harm our cash availability and our ability to fund our operations, including our ability to meet our payroll and accounts payable obligations.
 
 
24
 
 
As of March 31, 2012, we had working capital of $565,503.  For the six months ended March 31, 2012, we used net cash flow in operating activities of $1,843,587 consisting primarily of year to date loss of $3,953,787.  Non cash adjustments included $824,176 in depreciation and amortization charges, $1,233,016 for equity based compensation and $507,939 for settlement of accrued interest. Additionally, we had a net increase in operating assets of $75,102 and a net decrease in operating liabilities of $379,829.
 
Cash flows used in investing activities for the six months ended March 31, 2012 was $47,133 from the acquisition of equipment.  No cash was provided (or used) by financing activities for the six months ended March 31, 2012.
 
We expect capital expenditures to be less than $200,000 in fiscal 2012.  Our primary investments will be in laboratory equipment to support prototyping and our authentication services.
 
Exploitation of potential revenue sources is expected to be financed primarily through the sale of equity securities and convertible debt, exercise of outstanding warrants, issuance of notes payable and other debt or a combination thereof, depending upon the transaction size, market conditions and other factors. Any issuances of preferred stock will be on such terms and conditions as are approved by our board of directors, may have rights, preferences and privileges senior to those of our Common Stock and may dilute the rights of holders of our Common Stock.
 
While we have raised capital to meet our working capital and financing needs in the past, additional financing is required within the next three months in order to meet our current and projected cash flow deficits from operations and development. We have sufficient funds to conduct our operations until approximately July 2012.  There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.
 
To the extent our revenues continue to increase over comparable year periods, our liquidity will be enhanced. However, we expect to require additional financing to sustain our growth and operations, including an increase in the number of employees.
 
By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.
 
Our registered independent certified public accountants have stated in their report dated December 8, 2011, that we have incurred operating losses in the last two years, and that we are dependent upon management’s ability to develop profitable operations and raise additional capital. These factors among others may raise substantial doubt about our ability to continue as a going concern.
 
Recent Debt and Equity Financing Transactions
 
Fiscal 2010
 
During the year ended September 30, 2010, we issued and sold an aggregate principal amount of $2,545,000 in secured convertible promissory notes bearing interest at 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act.  On January 7, 2012, all principal and interest accrued on such promissory notes has been converted pursuant to their terms into shares of our Common Stock at a conversion price equal to a 20% discount to the average volume, weighted average price of our Common Stock for the ten trading days prior to issuance.
 
 
25
 
 
Fiscal 2011
 
During the year ended September 30, 2011, we issued and sold an aggregate of $1,850,000 in principal amount of senior secured convertible notes bearing interest at a rate of 10% per annum to “accredited investors,” as defined in regulations promulgated under the Securities Act.  The notes are convertible, in whole or in part, at any time, at the option of the noteholders, into either (A) such number of shares of Common Stock determined by dividing (i) the principal amount of each note, together with any and all accrued and unpaid interest and penalties, by (ii) a conversion price which is equal to a 20% discount to the average volume, weighted average price of our Common Stock for the ten trading days prior to issuance (the “Common Conversion Price”) or (B) securities issued in any Subsequent Financing (“Subsequent Financing Securities”) at a conversion price equal to 80% of the price per Subsequent Security paid by investors for Subsequent Securities in a Subsequent Financing (the “Subsequent Financing Price”).  The conversion prices of the notes range between $0.03088 and $0.05529.  A “Subsequent Financing” is the sale of our securities at any time after the date of issuance of the notes and prior to the earlier of (i) a Qualified Financing or (ii) the one-year anniversary of the issuance of the notes.  A noteholder may convert its notes in whole in connection with any one Subsequent Financing or in part in connection with one or more Subsequent Financings.  The notes shall be automatically converted upon the earlier of (I) the one year anniversary of their issuance and (II) the completion of a Qualified Financing at the election of each noteholder into either (A) shares of Common Stock at the Common Conversion Price, (B) Subsequent Securities at a conversion price equal to 80% of the Subsequent Financing Price, or (C) securities issued in a Qualified Financing (the “Qualified Financing Securities”) at a conversion price equal to 80% of the price per Qualified Financing Security paid by investors for the Qualified Financing Securities in the Qualified Financing.  A “Qualified Financing” is the sale of our securities in a single transaction resulting in gross proceeds of at least $10 million (before transaction fees and expenses).  The notes bear interest at the rate of 10% per annum and are due and payable in full on the one year anniversary of issuance of the notes.  Until the principal and accrued but unpaid interest under the notes are paid in full, or converted into, Subsequent Financing Securities or Qualified Financing Securities pursuant to their terms, our obligations under the notes will be secured by a lien on all our assets, including the assets of APDN (B.V.I.) Inc., our wholly-owned subsidiary.
 
In addition, on July 15, 2011, we closed a private placement of Common Stock.  We issued and sold 105,263,158 shares of Common Stock at a purchase price of $0.0475 per share to accredited investors for gross proceeds of $5,000,000.
 
A registered broker dealer firm acted as our placement agent with respect to the private placement.  In connection with the private placement, we paid placement agent commissions and discounts aggregating $265,000.  In addition, the placement agent or its designees were issued warrants with a seven-year term to purchase an aggregate of 7,578,948 shares of Common Stock with an exercise price of $0.0475 per share.
 
We presently do not have any available credit, bank financing or other external sources of liquidity.  Due to our brief history and historical operating losses, our operations have not been a material source of liquidity.  We will need to obtain additional capital in order to expand operations and become profitable.  We intend to pursue the building of a re-seller network outside the United States, and if successful, the re-seller agreements would constitute a source of liquidity and capital over time.  In order to obtain capital, we may need to sell additional shares of Common Stock or borrow funds from private lenders.  There can be no assurance that we will be successful in obtaining additional funding and execution of re-seller agreements outside the Unites States.
 
We need to seek additional capital to sustain or expand our prototype and sample manufacturing, and sales and marketing activities, and to otherwise continue our business operations beyond July 2012.  We have no commitments for any future funding, and may not be able to obtain additional financing or grants on terms acceptable to us, if at all, in the future.  If we are unable to obtain additional capital this would restrict our ability to grow and may require us to curtail or discontinue our business operations.  Additionally, while a reduction in our business operations may prolong our ability to operate, that reduction would harm our ability to implement our business strategy.  If we can obtain any equity financing, it may involve substantial dilution to our then existing stockholders.
 
 
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Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our Common Stock has made it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our Common Stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
 
Substantially all of the real property used in our business is leased under operating lease agreements.
 
Product Research and Development
 
We anticipate spending approximately $500,000 for product research and development activities during the next twelve months.
 
Acquisition of Plant and Equipment and Other Assets
 
We do not anticipate the sale of any material property, plant or equipment during the next 12 months.  We do anticipate spending approximately $50,000 on the acquisition of leasehold improvements during the next 12 months.  We believe our current leased space is adequate to manage our growth, if any, over the next 2 to 3 years.
 
Number of Employees
 
We currently have 22 full-time employees and three part-time employees, including two in management, 14 in operations, 8 in sales and marketing and 1 in investor relations.  We expect to increase our staffing dedicated to sales, product prototyping, manufacturing of DNA markers and forensic authentication services.  Expenses related to travel, marketing, salaries, and general overhead will be increased as necessary to support our growth in revenue.  In order for us to attract and retain quality personnel, we anticipate we will have to offer competitive salaries to future employees.  We anticipate that it may become desirable to add additional full and/ or part time employees to discharge certain critical functions during the next 12 months.  This projected increase in personnel is dependent upon our ability to generate revenues and obtain sources of financing.  There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees.  As we continue to expand, we will incur additional costs for personnel.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
Inflation
 
The effect of inflation on our revenue and operating results was not significant.
 
Going Concern
 
The accompanying unaudited condensed consolidated financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate our continuance as a going concern. Our auditors, in their report dated December 8, 2011, have expressed substantial doubt about our ability to continue as a going concern. Our cash position may be inadequate to pay all of the costs associated with the testing, production and marketing of our products. Management intends to use borrowings and the sale of equity or convertible debt to mitigate the effects of its cash position, however no assurance can be given that debt or equity financing will be available. The accompanying unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should we be unable to continue existence.
 
 
27
 
 
Item 3. - Quantitative and Qualitative Disclosures About Market Risk .
 
We are a smaller reporting company as defined by Rule 12b-2 under the Exchange Act of 1934, as amended (the “Exchange Act”) and are not required to provide the information required under this item.
 
Item 4. - Controls and Procedures .
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this Quarterly Report on Form 10-Q, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief  Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act).  Based on the evaluation of these disclosure controls and procedures,  the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2012, our disclosure controls and procedures were  effective to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
Changes in Internal Control over Financial Reporting
 
During the fiscal quarter ended March 31, 2012, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Part II - Other Information
 
Item 1. – Legal Proceedings
 
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
 
Demodulation, Inc. v. Applied DNA Sciences, Inc., et al. (Civil Action No. -2:11-cv-00296-WJM-MF, District of New Jersey):
 
As previously reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, on May 18, 2011, we were served with a complaint in a lawsuit brought by Demodulation, Inc. against us, Corning Incorporated, Alfred University, and Alfred Technology Resources, Inc.  On July 8, 2011, we filed a motion to dismiss the complaint.  In response, on August 3, 2011, Demodulation, Inc. filed an amended complaint. Demodulation, Inc. alleges that it was unable to bring its microwire technology to market due to the wrongful acts of defendants, who allegedly conspired to steal Demodulation, Inc.’s trade secrets and other intellectual property and to interfere in its business opportunities.  Of the 17 claims alleged in the amended complaint, five are asserted against us, including alleged misappropriation of trade secrets, antitrust violations, civil RICO, and patent infringement.  We believe these claims are without merit.  On September 10, 2011, Alfred University filed a motion to transfer the action from the District of New Jersey to the Western District of New York. On December 22, 2011, the Court denied the motion.  On January 27, 2012, we filed a motion to dismiss the amended complaint for failure to state a claim and on other grounds. We intend to vigorously defend the action.
 
Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds
 
As further described above under “Management’s Discussion and Analysis—Recent Developments,” we have an agreement with DivineRune, Inc., or DivineRune, whereby DivineRune agreed to license certain software and intellectual property to us.  Under the terms of this agreement, on January 25, 2012, we issued warrants to purchase 1,000,000 shares of our Common Stock to DivineRune.  The warrants are exercisable for three years from the date of issuance at an exercise price of $0.071 per share and will vest in full on the first anniversary of the date of grant.  These restricted securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended, because they were issued in a transaction not involving any public offering.
 
 
28
 
Item 6 – Exhibits
 
4.1*
 
Applied DNA Sciences, Inc. 2005 Stock Incentive Plan, as amended as of January 27, 2012, and form of employee stock option agreement thereunder
     
10.1*    Software Distribution Agreement, dated as of January 25, 2012, between Applied DNA Sciences, Inc and  DivineRune Inc.
     
31.1*
 
Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
31.2*
 
Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
32.1**
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
     
32.2**
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
 
 
 
101 INS***
 
XBRL Instance Document
     
101 SCH***
 
XBRL Taxonomy Extension Schema Document
     
101 CAL***
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101 LAB***
 
XBRL Extension Label Linkbase Document
     
101 PRE***
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
* Filed herewith.
** Furnished herewith.
*** In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
 
 
29
 
Signatures
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Applied DNA Sciences, Inc.
 
 
Dated: May 15, 2012
/s/ JAMES A. HAYWARD, PH. D.
 
James A. Hayward, Ph. D.
 
Chief Executive Officer
 (Duly authorized officer)
 
 
/s/ KURT H. JENSEN
 
Kurt H. Jensen
 
Chief Financial Officer
 (Duly authorized officer and
 principal financial officer)
 
 
30
EXHIBIT 4.1
 
APPLIED DNA SCIENCES, INC.
2005 INCENTIVE STOCK PLAN
(Amended and Restated as of January 27, 2012)
 
THIS APPLIED DNA SCIENCES, INC. 2005 INCENTIVE STOCK PLAN (the “ Plan ”) is designed to retain directors, executives and selected employees and consultants and reward them for making major contributions to the success of the Company. These objectives are accomplished by making long-term incentive awards under the Plan thereby providing Participants with a proprietary interest in the growth and performance of the Company.
 
1.
Definitions .
 
 
(a)
“ Board ” - The Board of Directors of the Company.
 
 
(b)
“ Code ” - The Internal Revenue Code of 1986, as amended from time to time.
 
 
(c)
“ Committee ” - The Compensation Committee of the Company’s Board, or such other committee of the Board that is designated by the Board to administer the Plan, composed of not less than two members of the Board whom are disinterested persons, as contemplated by Rule 16b-3 (“ Rule 16b-3 ”) promulgated under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”).
 
 
(d)
“ Company ” - APPLIED DNA SCIENCES, INC. and its subsidiaries including subsidiaries of subsidiaries.
 
 
(e)
“ Exchange Act ” - The Securities Exchange Act of 1934, as amended from time to time.
 
 
(f)
“ Fair Market Value ” - The fair market value of the Company’s issued and outstanding Stock as determined in good faith by the Board or Committee.
 
 
(g)
“ Grant ” - The grant of any form of stock option, stock award, or stock purchase offer, whether granted singly, in combination, or in tandem, to a Participant pursuant to such terms, conditions and limitations as the Committee may establish in order to fulfill the objectives of the Plan.
 
 
(h)
“ Grant Agreement ” - An agreement between the Company and a Participant that sets forth the terms, conditions and limitations applicable to a Grant.
 
 
(i)
“ Option ” - Either an Incentive Stock Option, in accordance with Section 422 of Code, or a Nonstatutory Option, to purchase the Company’s Stock, that may be awarded to a Participant under the Plan. A Participant who receives an award of an Option shall be referred to as an “Optionee.”
 
 
 
 
 
 
(j)
“ Participant ” - A director, officer, employee or consultant of the Company to whom an Award has been made under the Plan.
 
 
(k)
“ Restricted Stock Purchase Offer ” - A Grant of the right to purchase a specified number of shares of Stock pursuant to a written agreement issued under the Plan.
 
 
(l)
“ Securities Act ” - The Securities Act of 1933, as amended from time to time.
 
 
(m)
“ Stock ” - Authorized and issued or unissued shares of common stock of the Company.
 
 
(n)
“ Stock Award ” - A Grant made under the Plan in Stock or denominated in units of Stock for which the Participant is not obligated to pay additional consideration.
 
2.
Administration . The Plan shall be administered by the Board, provided however, that the Board may delegate such administration to the Committee. Subject to the provisions of the Plan, the Board and/or the Committee shall have authority to (a) grant, in its discretion, Incentive Stock Options in accordance with Section 422 of the Code, or Nonstatutory Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine in good faith the fair market value of the Stock covered by any Grant; (c) determine which eligible persons shall receive Grants and the number of shares, restrictions, terms and conditions to be included in such Grants; (d) construe and interpret the Plan; (e) promulgate, amend and rescind rules and regulations relating to its administration, and correct defects, omissions and inconsistencies in the Plan or any Grant; (f) consistent with the Plan and with the consent of the Participant, as appropriate, amend any outstanding Grant or amend the exercise date or dates thereof; (g) determine the duration and purpose of leaves of absence which may be granted to Participants without constituting termination of their employment for the purpose of the Plan or any Grant; and (h) make all other determinations necessary or advisable for the Plan’s administration. The interpretation and construction by the Board and/or the Committee of any provisions of the Plan or selection of Participants shall be conclusive and final. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Grant made thereunder.
 
3.
Eligibility .
 
 
(a)
General : The persons who shall be eligible to receive Grants shall be directors, officers,  employees or consultants to the Company. The term consultant shall mean any person, other than an employee or non-employee director, who is engaged by the Company to render services and is compensated for such services.  An Optionee may hold more than one Option. Any issuance of a Grant to an officer or director of the Company subsequent to the first registration of any of the securities of the Company under the Exchange Act shall comply with the requirements of Rule 16b-3.
 
 
(b)
Incentive Stock Options :  Incentive Stock Options may only be issued to employees of the Company. Incentive Stock Options may be granted to officers or directors, provided they are also employees of the Company. Payment of a director’s fee shall not be sufficient to constitute employment by the Company.
 
 
- 2 -
 
 
The Company shall not grant an Incentive Stock Option under the Plan to any employee if such Grant would result in such employee holding the right to exercise for the first time in any one calendar year, under all Incentive Stock Options granted under the Plan or any other plan maintained by the Company, with respect to shares of Stock having an aggregate fair market value,  determined as of the date of the Option is granted, in excess of $100,000.  Should it be determined that an Incentive Stock Option granted under the Plan exceeds such maximum for any reason other than a failure in good faith to value the Stock subject to such option, the excess portion of such option shall be considered a Nonstatutory Option. To the extent the employee holds two (2) or more such Options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such Option as Incentive Stock Options under the Federal tax laws shall be applied on the basis of the order in which such Options are granted. If, for any reason, an entire Option does not qualify as an Incentive Stock Option by reason of exceeding such maximum, such Option shall be considered a Nonstatutory Option.
 
 
(c)
Nonstatutory Option :  The provisions of the foregoing Section 3(b) shall not apply to any Option designated as a “Nonstatutory Option” or which sets forth the intention of the parties that the Option be a Nonstatutory Option.
 
 
(d)
Stock Awards and Restricted Stock Purchase Offers :  The provisions of this Section 3 shall not apply to any Stock Award or Restricted Stock Purchase Offer under the Plan.
 
4.
Stock .
 
 
(a)
Authorized Stock : Stock subject to Grants may be either unissued or reacquired Stock.
 
 
(b)
Number of Shares :  Subject to adjustment as provided in Section 5(i) of the Plan, the total number of shares of Stock which may be purchased or granted directly by Options, Stock Awards or Restricted Stock Purchase Offers, or purchased indirectly through exercise of Options granted under the Plan shall not exceed 350 million. If any Grant shall for any reason terminate or expire, any shares allocated thereto but remaining unpurchased upon such expiration or termination shall again be available for Grants with respect thereto under the Plan as though no Grant had previously occurred with respect to such shares. Any shares of Stock issued pursuant to a Grant and repurchased pursuant to the terms thereof shall be available for future Grants as though not previously covered by a Grant. No more than 50 million shares of Stock may be issued pursuant to Awards granted in any calendar year to any individual.
 
 
- 3 -
 
 
 
(c)
Reservation of Shares :  The Company shall reserve and keep available at all times during the term of the Plan such number of shares as shall be sufficient to satisfy the requirements of the Plan.  If, after reasonable efforts, which efforts shall not include the registration of the Plan or Grants under the Securities Act, the Company is unable to obtain authority from any applicable regulatory body, which authorization is deemed necessary by legal counsel for the Company for the lawful issuance of shares hereunder, the Company shall be relieved of any liability with respect to its failure to issue and sell the shares for which such requisite authority was so deemed necessary unless and until such authority is obtained.
 
 
(d)
Application of Funds :  The proceeds received by the Company from the sale of Stock pursuant to the exercise of Options or rights under Stock Purchase Agreements will be used for general corporate purposes.
 
 
(e)
No Obligation to Exercise :  The issuance of a Grant shall impose no obligation upon the Participant to exercise any rights under such Grant.
 
5.
Terms and Conditions of Options . Options granted hereunder shall be evidenced by agreements between the Company and the respective Optionees, in such form and substance as the Board or Committee shall from time to time approve. Option agreements need not be identical, and in each case may include such provisions as the Board or Committee may determine, but all such agreements shall be subject to and limited by the following terms and conditions:
 
 
(a)
Number of Shares :  Each Option shall state the number of shares to which it pertains.
 
 
(b)
Exercise Price : Each Option shall state the exercise price, which shall be determined as follows:
 
 
(i)
Any Incentive Stock Option granted to a person who at the time the Option is granted owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power or value of all classes of stock of the Company (“ Ten Percent Holder ”) shall have an exercise price of no less than 110% of the Fair Market Value of the Stock as of the date of grant; and
 
 
(ii)
Incentive Stock Options granted to a person who at the time the Option is granted is not a Ten Percent Holder and all Nonstatutory Options shall have an exercise price of no less than 100% of the Fair Market Value of the Stock as of the date of grant.
 
For the purposes of this Section 5(b), the Fair Market Value shall be as determined by the Board in good faith, which determination shall be conclusive and binding; provided however, that if there is a public market for such Stock, the Fair Market Value per share shall be the average of the bid and asked prices (or the closing price if such stock is listed on the NASDAQ National Market System or Small Cap Issue Market) on the date of grant of the Option, or if listed on a stock exchange, the closing price on such exchange on such date of grant.
 
 
- 4 -
 
 
 
(c)
Medium and Time of Payment :  The exercise price shall become immediately due upon exercise of the Option and shall be paid in cash or check made payable to the Company. Should the Company’s outstanding Stock be registered under Section 12(g) of the Exchange Act at the time the Option is exercised, then the exercise price may also be paid as follows:
 
 
(i)
in shares of Stock held by the Optionee for the requisite period necessary to avoid a charge to the Company’s earnings for financial reporting purposes and valued at Fair Market Value on the exercise date, or
 
 
(ii)
through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions (a) to a Company designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Company by reason of such purchase and (b) to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction.
 
At the discretion of the Board, exercisable either at the time of Option grant or of Option exercise, the exercise price may also be paid in such other form of consideration as may be acceptable to the Board, subject to applicable Delaware and federal law, including, without limitation, deemed payment through the delivery of “net shares” by the Company to the Optionee pursuant to a cashless exercise procedure.
 
 
(d)
Term and Exercise of Options :   In no event shall any Option be exercisable after the expiration of ten (10) years from the date it is granted, and no Incentive Stock Option granted to a Ten Percent Holder shall, by its terms, be exercisable after the expiration of five (5) years from the date of the Option.
 
Each Option shall be exercisable to the nearest whole share, in installments or otherwise, as the respective Option agreements may provide. During the lifetime of an Optionee, the Option shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee, and no other person shall acquire any rights therein. To the extent not exercised, installments (if more than one) shall accumulate, but shall be exercisable, in whole or in part, only during the period for exercise as stated in the Option agreement, whether or not other installments are then exercisable.
 
 
- 5 -
 
 
Termination of Status as Employee, Consultant or Director : Except as otherwise determined by the Board or the Committee, if an Optionee ceases to be employed by or provided other services to the Company, then, unless sooner terminated, the vested portion of the Option will terminate if and to the extent it is not exercised within 90 days after the date of the Optionee’s termination of employment or service (or one year if the Optionee’s employment or service terminates by reason of his or her “Disability” (as defined below) or death), provided, however, that, if the Optionee’s employment is terminated by the Company for “Cause” (as defined below), then the Option (whether or not vested) will terminate upon the date of such termination of employment or service. An Option will be forfeited upon the termination of an Optionee’s employment or service if and to the extent the Option is not or does not become vested at such time.
 
 
(e)
Definitions : For the purposes hereof, the term “Cause” means an Optionee’s (a) conviction or plea of nolo contendre to a felony; (b) commission of fraud or a material act or omission involving dishonesty with respect to the Company or its Affiliates, as reasonably determined by the Company; (c) willful failure or refusal to carry out the material responsibilities of his or her employment, as reasonably determined by the Company; (d) gross negligence, willful misconduct, or engaging in a pattern of behavior which has had or is reasonably likely to have a significant adverse effect on the Company, as reasonably determined by the Company; or (e) willfully engaging in any act or omission that is in material violation of a material policy of the Company, including, without limitation, policies on business ethics and conduct, and policies on the use of inside information and insider trading. The term “Disability” shall have the meaning ascribed thereto pursuant to Section 22(e)(3) of the Code.
 
 
(f)
Nontransferability of Option :  No Option shall be transferable by the Optionee, except by will or by the laws of descent and distribution.
 
 
(g)
Recapitalization :  Subject to any required action of shareholders, the number of shares of Stock covered by each outstanding Option, the maximum number of shares of Stock that may be covered by Awards granted to any individual in any calendar year, and the exercise price per share covered by any Option shall be proportionately adjusted for any increase or decrease in the number of issued shares of Stock of the Company resulting from a stock split, stock dividend, combination, subdivision or reclassification of shares, or the payment of a stock dividend, or any other increase or decrease in the number of such shares affected without receipt of consideration by the Company; provided, however, the conversion of any convertible securities of the Company shall not be deemed to have been “ effected without receipt of consideration ” by the Company.
 
 
- 6 -
 
 
In the event of a proposed dissolution or liquidation of the Company, a merger or consolidation in which the Company is not the surviving entity, or a sale of all or substantially all of the assets or capital stock of the Company (collectively, a  “ Reorganization ”), unless otherwise provided by the Board, each Option shall terminate immediately prior to such date as is determined by the Board, which date shall be no later than the consummation of such Reorganization.  In such event, if the entity which shall be the surviving entity does not tender to Optionee an offer, for which it has no obligation to do so, to substitute for any unexercised Option a stock option or capital stock of such surviving of such surviving entity, as applicable, which on an equitable basis shall provide the Optionee with substantially the same economic benefit as such unexercised Option, then the Board may grant to such Optionee, in its sole and absolute discretion and without obligation, the right for a period commencing thirty (30) days prior to and ending immediately prior to the date determined by the Board pursuant hereto for termination of the Option or during the remaining term of the Option, whichever is the lesser, to exercise any unexpired Option or Options without regard to the installment provisions of Paragraph 6(d) of the Plan; provided, that any such right granted shall be granted to all Optionees not receiving an offer to receive substitute options on a consistent basis, and provided further, that any such exercise shall be subject to the consummation of such Reorganization.
 
Subject to any required action of shareholders, if the Company shall be the surviving entity in any merger or consolidation, each outstanding Option thereafter shall pertain to and apply to the securities to which a holder of shares of Stock equal to the shares subject to the Option would have been entitled by reason of such merger or consolidation.
 
In the event of a change in the Stock of the Company as presently constituted, which is limited to a change of all of its authorized shares without par value into the same number of shares with a par value, the shares resulting from any such change shall be deemed to be the Stock within the meaning of the Plan.
 
To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided in this Section 5(i), the Optionee shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class, and the number or price of shares of Stock subject to any Option shall not be affected by, and no adjustment shall be made by reason of any dissolution, liquidation, merger, consolidation or sale of assets or capital stock, or any issue by the Company of shares of stock of any class or securities convertible into shares of stock of any class.
 
The Grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make any adjustments, reclassifications, reorganizations or changes in its capital or business structure or to merge, consolidate, dissolve, or liquidate or to sell or transfer all or any part of its business or assets.
 
 
- 7 -
 
 
 
(h)
Rights as a Shareholder :  An Optionee shall have no rights as a shareholder with respect to any shares covered by an Option until the effective date of the issuance of the shares following exercise of such Option by Optionee. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in Section 5(i) hereof.
 
 
(i)
Modification, Acceleration, Extension, and, Renewal of Options :  Subject to the terms and conditions and within the limitations of the Plan, the Board may modify an Option, or, once an Option in exercisable, accelerate the rate at which it may be exercised, and may extend or renew outstanding Options granted under the Plan or accept the surrender of outstanding Options (to the extent not theretofore exercised) and authorize the granting of new Options in substitution for such Options, provided such action is not prohibited by Section 422 of the Code or other applicable law; however, no modification of an Option shall without the consent of the Optionee, alter to the Optionee’s detriment or impair any rights or obligations under any Option theretofore granted under the Plan.
 
 
(j)
Exercise Before Exercise Date :  At the discretion of the Board, the Option may, but need not, include a provision whereby the Optionee may elect to exercise all or any portion of the Option prior to the stated exercise date of the Option or any installment thereof. Any shares so purchased prior to the stated exercise date shall be subject to repurchase by the Company upon termination of Optionee’s employment as contemplated by Section 5(n) hereof prior to the exercise date stated in the Option and such other restrictions and conditions as the Board or Committee may deem advisable.
 
 
(k)
Other Provisions : The Option agreements authorized under the Plan shall contain such other provisions, including, without limitation, restrictions upon the exercise of the Options, as the Board or the Committee shall deem advisable. The Board or the Committee may permit Options to be exercised beyond the time periods described herein; provided, however, that no Option may be exercised more than 10 years after the date it is granted.  Shares shall not be issued pursuant to the exercise of an Option, if, in the opinion of legal counsel for the Company, the exercise of such Option and/or the issuance of shares thereunder would violate applicable law or the rules and regulations of any exchange upon which the shares of the Company are listed. Without limiting the generality of the foregoing, the exercise of each Option shall be subject to the condition that if at any time the Company shall determine that (i) the satisfaction of withholding tax or other similar liabilities, or (ii) the listing, registration or qualification of any shares covered by such exercise upon any securities exchange or under any state or federal law, or (iii) the consent or approval of any regulatory body, or (iv) the perfection of any exemption from any such withholding, listing, registration, qualification, consent or approval is necessary or desirable in connection with such exercise or the issuance of shares thereunder, then in any such event, such exercise shall not be effective unless such withholding, listing, registration, qualification, consent, approval or exemption shall have been effected, obtained or perfected free of any conditions not acceptable to the Company.
 
 
- 8 -
 
 
6.
Stock Awards and Restricted Stock Purchase Offers .
 
 
(a)
Types of Grants .
 
 
(i)
Stock Award .  All or part of any Stock Award under the Plan may be subject to conditions established by the Board or the Committee, and set forth in the Stock Award Agreement, which may include, but are not limited to, continuous service with the Company, achievement of specific business objectives, increases in specified indices, attaining growth rates and other comparable measurements of Company performance. Such Awards may be based on Fair Market Value or other specified valuation.
 
 
(ii)
Restricted Stock Purchase Offer .  A Grant of a Restricted Stock Purchase Offer under the Plan shall be subject to such (i) vesting contingencies related to the Participant’s continued association with the Company for a specified time and (ii) other specified conditions as the Board or Committee shall determine, in their sole discretion, consistent with the provisions of the Plan.
 
 
(b)
Conditions and Restrictions .  Shares of Stock which Participants may receive as a Stock Award under a Stock Award Agreement or Restricted Stock Purchase Offer under a Restricted Stock Purchase Offer may include such restrictions as the Board or Committee, as applicable, shall determine, including restrictions on transfer, repurchase rights, right of first refusal, and forfeiture provisions. When transfer of Stock is so restricted or subject to forfeiture provisions it is referred to as “ Restricted Stock ”.  Further, with Board or Committee approval, Stock Awards or Restricted Stock Purchase Offers may be deferred, either in the form of installments or a future lump sum distribution. The Board or Committee may permit selected Participants to elect to defer distributions of Stock Awards or Restricted Stock Purchase Offers in accordance with procedures established by the Board or Committee to assure that such deferrals comply with applicable requirements of the Code (including, without limitation, Section 409A of the Code) including, at the choice of Participants, the capability to make further deferrals for distribution after retirement. Any deferred distribution, whether elected by the Participant or specified by the Stock Award Agreement, Restricted Stock Purchase Offers or by the Board or Committee, may require the payment be forfeited in accordance with the provisions of Section 6(c). Dividends or dividend equivalent rights may be extended to and made part of any Stock Award or Restricted Stock Purchase Offers denominated in Stock or units of Stock, subject to such terms, conditions and restrictions as the Board or Committee may establish.
 
 
- 9 -
 
 
 
(c)
Cancellation and Rescission of Grants .  Unless the Stock Award Agreement or Restricted Stock Purchase Offer specifies otherwise, the Board or Committee, as applicable, may cancel any unexpired, unpaid, or deferred Grants at any time if the Participant is not in compliance with all other applicable provisions of the Stock Award Agreement or Restricted Stock Purchase Offer, the Plan and with the following conditions:
 
 
(i)
A Participant shall not render services for any organization or engage directly or indirectly in any business which, in the judgment of the chief executive officer of the Company or other senior officer designated by the Board or Committee, is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company. For Participants whose employment has terminated, the judgment of the chief executive officer shall be based on the Participant’s position and responsibilities while employed by the Company, the Participant’s post-employment responsibilities and position with the other organization or business, the extent of past, current and potential competition or conflict between the Company and the other organization or business, the effect on the Company’s customers, suppliers and competitors and such other considerations as are deemed relevant given the applicable facts and circumstances.  A Participant who has retired shall be free, however, to purchase as an investment or otherwise, stock or other securities of such organization or business so long as they are listed upon a recognized securities exchange or traded over-the-counter, and such investment does not represent a substantial investment to the Participant or a greater than ten percent (10%) equity interest in the organization or business.
 
 
(ii)
A Participant shall not, without prior written authorization from the Company, disclose to anyone outside the Company, or use in other than the Company’s business, any confidential information or material, as defined in the Company’s Proprietary  Information and Invention Agreement or similar agreement regarding confidential information and intellectual property, relating to the business of the Company, acquired by the Participant either during or after employment with the Company.
 
 
(iii)
A Participant, pursuant to the Company’s Proprietary Information and Invention Agreement, shall disclose promptly and assign to the Company all right, title and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by the Company, relating in any manner to the actual or anticipated business, research or development work of the Company and shall do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in foreign countries.
 
 
- 10 -
 
 
 
(iv)
Upon exercise, payment or delivery pursuant to a Grant, the Participant shall certify on a form acceptable to the Committee that he or she is in compliance with the terms and conditions of the Plan. Failure to comply with all of the provisions of this Section 6(c) prior to, or during the six months after, any exercise, payment or delivery pursuant to a Grant shall cause such exercise, payment or delivery to be rescinded. The Company shall notify the Participant in writing of any such rescission within two years after such exercise, payment or delivery. Within ten days after receiving such a notice from the Company, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery pursuant to a Grant. Such payment shall be made either in cash or by returning to the Company the number of shares of Stock that the Participant received in connection with the rescinded exercise, payment or delivery.
 
 
(d)
Nonassignability .
 
 
(i)
Except pursuant to Section 6(e)(iii) and except as set forth in Section (d)(ii), no Grant or any other benefit under the Plan shall be assignable or transferable, or payable to or exercisable by, anyone other than the Participant to whom it was granted.
 
 
(ii)
Where a Participant terminates employment and retains a Grant pursuant to Section 6(e)(ii) in order to assume a position with a governmental, charitable or educational institution, the Board or Committee, in its discretion, and to the extent permitted by law, may authorize a third party (including but not limited to the trustee of a “blind” trust), acceptable to the applicable governmental or institutional authorities, the Participant and the Board or Committee, to act on behalf of the Participant with regard to such awards.
 
 
(e)
Termination of Employment .  If the employment or service to the Company of a Participant terminates, other than pursuant to any of the following provisions under this Section 6(e), all unexercised, deferred and unpaid Stock Awards or Restricted Stock Purchase Offers shall be cancelled immediately, unless the Stock Award Agreement or Restricted Stock Purchase Offer provides otherwise:
 
 
(i)
Retirement Under a Company Retirement Plan .  When a Participant’s employment terminates as a result of retirement in accordance with the terms of a Company retirement plan, the Board or Committee may permit Stock Awards or Restricted Stock Purchase Offers to continue in effect beyond the date of retirement in accordance with the applicable Grant Agreement and the exercisability and vesting of any such Grants may be accelerated.
 
 
(ii)
Rights in the Best Interests of the Company .  When a Participant resigns from the Company and, in the judgment of the Board or Committee, the acceleration and/or continuation of outstanding Stock Awards or Restricted Stock Purchase Offers would be in the best interests of the Company, the Board or Committee may (i) authorize, where appropriate, the acceleration and/or continuation of all or any part of Grants issued prior to such termination and (ii) permit the exercise, vesting and payment of such Grants for such period as may be set forth in the applicable Grant Agreement, subject to earlier cancellation pursuant to Section 9 or at such time as the Board or Committee shall deem the continuation of all or any part of the Participant’s Grants are not in the Company’s best interest.
 
 
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(iii)
Death or Disability of a Participant .
 
 
(1)
In the event of a Participant’s death, the Participant’s estate or beneficiaries shall have a period up to the expiration date specified in the Grant Agreement within which to receive or exercise any outstanding Grant held by the Participant under such terms as may be specified in the applicable Grant Agreement. Rights to any such outstanding Grants shall pass by will or the laws of descent and distribution in the following order: (a) to beneficiaries so designated by the Participant; if none, then (b) to a legal representative of the Participant; if none, then (c) to the persons entitled thereto as determined by a court of competent jurisdiction. Grants so passing shall be made at such times and in such manner as if the Participant were living.
 
 
(2)
In the event a Participant is deemed by the Board or Committee to be unable to perform his or her usual duties by reason of mental disorder or medical condition which does not result from facts which would be grounds for termination for cause, Grants and rights to any such Grants may be paid to or exercised by the Participant, if legally competent, or a committee or other legally designated guardian or representative if the Participant is legally incompetent by virtue of such disability.
 
 
(3)
After the death or disability of a Participant, the Board or Committee may in its sole discretion at any time (1) terminate restrictions in Grant Agreements; (2) accelerate any or all installments and rights; and (3) instruct the Company to pay the total of any accelerated payments in a lump sum to the Participant, the Participant’s estate, beneficiaries or representative; notwithstanding that, in the absence of such termination of restrictions or acceleration of payments, any or all of the payments due under the Grant might ultimately have become payable to other beneficiaries.
 
 
(4)
In the event of uncertainty as to interpretation of or controversies concerning this Section 6, the determinations of the Board or Committee, as applicable, shall be binding and conclusive.
 
 
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7.
Investment Intent .  All Grants under the Plan are intended to be exempt from registration under the Securities Act provided by Rule 701 thereunder. Unless and until the granting of Options or sale and issuance of Stock subject to the Plan are registered under the Securities Act or shall be exempt pursuant to the rules promulgated thereunder, each Grant under the Plan shall provide that the purchases or other acquisitions of Stock thereunder shall be for investment purposes and not with a view to, or for resale in connection with, any distribution thereof. Further, unless the issuance and sale of the Stock have been registered under the Securities Act, each Grant shall provide that no shares shall be purchased upon the exercise of the rights under such Grant unless and until (i) all then applicable requirements of state and federal laws and regulatory agencies shall have been fully complied with to the satisfaction of the Company and its counsel, and (ii) if requested to do so by the Company, the person exercising the rights under the Grant shall (i) give written assurances as to knowledge and experience of such person (or a representative employed by such person) in financial and business matters and the ability of such person (or representative) to evaluate the merits and risks of exercising the Option, and (ii) execute and deliver to the Company a letter of investment intent and/or such other form related to applicable exemptions from registration, all in such form and substance as the Company may require. If shares are issued upon exercise of any rights under a Grant without registration under the Securities Act, subsequent registration of such shares shall relieve the purchaser thereof of any investment restrictions or representations made upon the exercise of such rights.
 
8.
Amendment, Modification, Suspension or Discontinuance of the Plan . The Board may, insofar as permitted by law, from time to time, with respect to any shares at the time not subject to outstanding Grants, suspend or terminate the Plan or revise or amend it in any respect whatsoever, except that without the approval of the shareholders of the Company, no such revision or amendment shall (i) increase the number of shares subject to the Plan, (ii) decrease the price at which Grants may be granted, (iii) materially increase the benefits to Participants, or (iv) change the class of persons eligible to receive Grants under the Plan; provided, however, no such action shall alter or impair the rights and obligations under any Option, or Stock Award, or Restricted Stock Purchase Offer outstanding as of the date thereof without the written consent of the Participant thereunder. No Grant may be issued while the Plan is suspended or after it is terminated, but the rights and obligations under any Grant issued while the Plan is in effect shall not be impaired by suspension or termination of the Plan.
 
In the event of any change in the outstanding Stock by reason of a stock split, stock dividend, combination or reclassification of shares, recapitalization, merger, or similar event, the Board or the Committee may adjust proportionally (a) the number of shares of Stock (i) reserved under the Plan, (ii) issuable under Awards granted to any individual in any calendar year, (iii) available for Incentive Stock Options and Nonstatutory Options and (iv) covered by outstanding Stock Awards or Restricted Stock Purchase Offers; (b) the Stock prices related to outstanding Grants; and (c) the appropriate Fair Market Value and other price determinations for such Grants. In the event of any other change affecting the Stock or any distribution (other than normal cash dividends) to holders of Stock, such adjustments as may be deemed equitable by the Board or the Committee, including adjustments to avoid fractional shares, shall be made to give proper effect to such event. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Board or the Committee shall be authorized to issue or assume stock options, whether or not in a transaction to which Section 424(a) of the Code applies, and other Grants by means of substitution of new Grant Agreements for previously issued Grants or an assumption of previously issued Grants.
 
 
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Unless sooner terminated, the Plan shall terminate ten years after the date it was originally adopted by the Board.
 
9.
Tax Withholding .  The Company shall have the right to deduct applicable taxes from any compensation payable to the Participant, whether or not pursuant to the Plan, including, without limitation, the right to withhold, at the time of delivery or exercise of Options, Stock Awards or Restricted Stock Purchase Offers or vesting of shares under such Grants, an appropriate number of shares for payment of taxes required by law or to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for withholding of such taxes. If Stock is used to satisfy tax withholding, such stock shall be valued based on the Fair Market Value when the tax withholding is required to be made.
 
10.
Notice . Any written notice to the Company required by any of the provisions of the Plan shall be addressed to the chief personnel officer or to the chief executive officer of the Company, and shall become effective when it is received by the office of the chief personnel officer or the chief executive officer.
 
11.
Indemnification of Board .  In addition to such other rights or indemnifications as they may have as directors or otherwise, and to the extent allowed by applicable law, the members of the Board and the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any claim, action, suit or proceeding, or in connection with any appeal thereof, to which they or any of them may be a party by reason of any action taken, or failure to act, under or in connection with the Plan or any Grant granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such claim, action, suit or proceeding, except in any case in relation to matters as to which it shall be adjudged in such claim, action, suit or proceeding that such Board or Committee member is liable for negligence or misconduct in the performance of his or her duties; provided that within sixty (60) days after institution of any such action, suit or Board proceeding the member involved shall offer the Company, in writing, the opportunity, at its own expense, to handle and defend the same.
 
12.
Governing Law .  All rights and obligations under the Plan and each Award agreement or instrument shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to its principles of conflict of laws.
 
 
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EMPLOYEE STOCK OPTION AGREEMENT
 
UNDER THE
 
APPLIED DNA SCIENCES, INC.
 
2005 INCENTIVE STOCK PLAN
 
AGREEMENT made as of the ______ day of ______, by and between APPLIED DNA SCIENCES, INC. (the “ Company ” ) and _________________________________ (the “ Optionee ” ).
 
1.     Award . Pursuant to the Applied DNA Sciences, Inc. 2005 Incentive Stock Plan (the “Plan”), the Company hereby grants to the Optionee an option (the “Option”) to purchase up to __________________ shares of the Company’s common stock (the “Common Stock”) at an exercise price per share of $_______ upon the terms and conditions set forth in this Agreement and the Plan. The Optionee acknowledges having received a copy of the Plan. The provisions of the Plan will govern in the event of any inconsistency with the terms of this Agreement. Capitalized terms used but not defined in this Agreement will have the meanings ascribed to them by the Plan.
 
2.     Option Term . Unless terminated sooner, the Option shall expire if and to the extent it is not exercised within five years from the date hereof.
 
3.     Vesting Conditions . Except as otherwise provided, the Option will become      % vested on the date hereof and the balance of the Option will become vested in            equal annual increments (each for        % of the shares covered by the Option) beginning on the first anniversary of the date hereof, subject to the Optionee’s continuous employment with the Company or any of its subsidiaries (“Applied DNA Sciences”) through the applicable vesting date.
 
4.     Termination of Employment .
 
(a)     General . If the Optionee ceases to be employed by Applied DNA Sciences for any reason other than death or disability, then, unless sooner terminated under the terms hereof, the vested portion of the Option will terminate if and to the extent it is not exercised within three months after the date of the Optionee’s termination of employment, provided, however, that, if the Optionee’s employment is terminated by the Company for “cause” (as defined below), then the Option (whether or not vested) will terminate upon the date of such termination of employment. If the Optionee’s employment is terminated by reason of the Optionee’s death or disability, then, unless sooner terminated under the terms hereof, the vested portion of the Option will terminate if and to the extent it is not exercised within six months after the date of such termination of employment. The Option will be forfeited by the Optionee and will terminate at the time of the termination of the Optionee’s employment with Applied DNA Sciences if and to the extent the Option is not or does not become vested at such time.
 
 
 
 
 
(b)     Definitions of Disability and Cause . For the purposes hereof: (1) the term “disability” means the inability of the Optionee to perform the material duties of the Optionee’s employment by reason of a physical or mental illness or condition that is expected to last indefinitely or result in death, as determined by a duly licensed physician selected by the Company; and (2) the term “cause” means (A) the Optionee’s willful and repeated failure or refusal to perform the duties of the Optionee’s employment after written notice thereof by the Company, (B) the Optionee’s conviction of a felony or other crime that has or could reasonably be expected to have a material adverse effect on the Company or on the ability of the Optionee to properly perform the duties of the Optionee’s employment, (C) substance abuse by the Optionee which impedes the ability of the Optionee to perform the duties and responsibilities of the Optionee’s employment or which otherwise has or could reasonably be expected to have an adverse effect on the Company; or (C) the Optionee’s violation of material Company policy, or the Optionee’s gross negligence or other misconduct that has or could reasonably be expected to have a material adverse effect on the Company or on the ability of the Optionee to properly perform the duties of the Optionee’s employment.

5.     Exercise of Option . If the Option becomes vested, it may be exercised in whole or in part by delivering to the Company (a) a written notice specifying the number of whole shares of Common Stock with respect to which the Option is being exercised, and (b) payment in full of the exercise price, together with the amount, if any, deemed necessary by the Company to enable it to satisfy any income tax withholding obligations attributable to the exercise. The exercise price and withholding amount shall be payable by bank or certified check or pursuant to such other methods as may be permitted by the Company in accordance with the Plan, including, without limitation, issuance of net shares, delivery of previously-owned shares of Common Stock and broker-assisted “cashless” exercise in accordance with applicable law.
 
6.     Compliance with Law; Transfer Orders; Legends .  The Company will not be obligated to issue or deliver shares of Common Stock pursuant to this Option unless the issuance and delivery of such shares complies with applicable law, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the requirements of any stock exchange or market upon which the Common Stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.  All certificates for shares of Common Stock delivered under this Option shall be subject to such stock-transfer orders and other restrictions as the Company may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange or market upon which the Common Stock may then be listed, and any applicable federal or state securities law.  The Company may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions.
 
7.     Rights as a Stockholder . No shares of Common Stock shall be sold or delivered hereunder until full payment for such shares has been made (including, for this purpose, satisfaction of the applicable withholding tax). The Optionee shall have no rights as a stockholder with respect to any shares covered by this Option unless and until the Option is exercised and the shares covered by the exercise of the Option are issued in the name of the Optionee.
 
 
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8.     Assignment; Beneficiary . The Option and the Optionee’s rights with respect thereto may not be assigned, pledged or transferred except to the Optionee’s beneficiary following the Optionee’s death (subject to the terms of this Agreement and the Plan), and any attempted assignment, pledge or transfer in violation of this Agreement or the Plan will be void ab initio and of no force or effect. The Optionee may designate a beneficiary by filing a written (or electronic) beneficiary designation form with the Company in a manner prescribed or deemed acceptable for this purpose by the Company. Each such beneficiary designation will automatically revoke all prior designations by the Optionee. If the Optionee does not make a valid beneficiary designation during the Optionee’s lifetime or if no designated beneficiary survives the Optionee, the Optionee’s beneficiary will be deemed to be the Optionee’s surviving spouse or, if none, the Optionee’s estate.

9.     No Other Rights Conferred . The grant of the Option under this Agreement shall not be deemed to constitute a contract of employment with the Optionee or affect in any way the right of the Company or a subsidiary to terminate the Optionee’s employment at any time for any or no reason. Compensation attributable to the Option shall not be taken into account as compensation for purposes of determining the Optionee’s benefits or entitlements under any employee pension, savings, group insurance, severance or other benefit plan or arrangement, unless and except to the extent otherwise specifically provided by such plan or arrangement.
 
10.          Withholding . The Company’s obligation to issue shares of Common Stock pursuant to the exercise of the Option shall be subject to and conditioned upon the satisfaction by the Optionee of applicable tax withholding obligations. The Company and its subsidiaries may require the Optionee to remit an amount sufficient to satisfy applicable withholding taxes or deduct or withhold such amount from any payments otherwise owed the Optionee (whether or not under this Agreement or the Plan). The Optionee expressly elects to authorize the Company to deduct from any compensation or any other payment of any kind due to the Optionee, including withholding the issuance of shares of Common Stock, the amount of any federal, state, local or foreign taxes required by law to be withheld as a result of the exercise of the Option; provided, however, that the value of the shares withheld may not exceed the statutory minimum withholding amount required by law.
 
11.          Committee Authority . The Board of Directors of the Company (the “Board”) or, if applicable, the Compensation Committee of the (the “Committee”) shall have complete discretion in the exercise of its rights, powers, and duties under this Agreement. Any interpretation or construction of any provision of, and the determination of any question arising under, this Agreement shall be made by the Board or the Committee, as the case may be, in its discretion and such exercise shall be final, conclusive, and binding.
 
12.          Successors . This Agreement shall be binding upon, and inure to the benefit of, any successor or successors of the Company and any beneficiary of the Optionee.
 
 
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13.          Construction . This Agreement is intended to reflect the grant of the Option upon the terms and conditions authorized by the Plan. Any provisions of this Agreement that cannot be so administered, interpreted, or construed shall be disregarded. In the event that any provision of this Agreement is held invalid or unenforceable, such provision shall be considered separate and apart from the remainder of this Agreement, which shall remain in full force and effect. In the event that any provision, including any restrictive covenant made as a part of this Agreement, is held to be unenforceable for being unduly broad as written, such provision shall be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and shall be enforced as amended.
 
14.          Applicable Law . The validity, construction, interpretation and effect of this Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.
 
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

 
APPLIED DNA SCIENCES, INC.
 
       
 
By:
   
       
       
 
Optionee
   
       
 
 
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Exhibit 10.1
 
 
(DIVINERUNE LOGO)
 
SOFTWARE DISTRIBUTION AGREEMENT
 
This Software Distribution Agreement (“Agreement”) is entered into as of January 25 th , 2012  (the “Effective Date”) by and between DivineRune Inc. (“DivineRune”), having principal offices at 359 Ocean Avenue, Massapequa, New York 11758 and Applied DNA Sciences Inc. with offices at 25 Health Sciences Drive, Ste 215, Stony Brook, New York 11790 (“ADNAS”).
 
BACKGROUND
 
DivineRune is the owner and/or has a right to license to others certain computer software programs and related documentation. ADNAS desires (a)  an exclusive license of Divine Software and Services when they are used in conjunction with ADNAS’ DNA Authentication based products or any other nonQR code taggant, and (b) a nonexclusive, nontransferable, non-assignable and limited right and license to reproduce, market, and distribute such products solely as set forth herein, and DivineRune agrees to grant to ADNAS such right and license solely as set forth herein.
 
Now, therefore, in consideration of the mutual covenants hereinafter set forth, the receipt and sufficiency of which is hereby acknowledged, DivineRune and ADNAS, intending to be legally bound, hereby agree as follows:
 
1.     DEFINITIONS.   As used in this Agreement, and in addition to any other terms defined in this Agreement, the following terms shall have the following meanings:
 
1.1.     Documentation means the documentation of the Software prepared by DivineRune for use by End Users.
 
1.2.     End User means an entity permitted to use one or more Products under an End User Agreement, incorporating the terms and conditions required to be included as set forth in this Agreement, for the End User’s internal use only and without the further right to sublicense, distribute, transfer or transmit the Products.
 
1.3.     Executable Code means a series of one or more instructions executable after suitable processing by a computer or other programmable machine, without compilation or assembly.
 
1.4.     Fees mean the License Fees and Revenue Sharing (referenced in Section 5.1), the fees for Training Services (referenced in Section 4.2 and Appendix E), and the fees for Additional Services (referenced in Section 4.3).
 
1.5.     Minimum Fees mean the minimum aggregate fee ADNAS successor, acquirer or assignee (each, a “Successor”) agrees to pay DivineRune for the Products and Services that are under exclusivity. Minimum Fees are designed to prevent DivineRune Products and Services from being sequestered as well as ensure the active marketing of the DivineRune Products and Services.
 
1.6.     Marks mean the trademarks, service marks, or trade names of DivineRune associated with the Products as designated by DivineRune.
 
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1.7.     Master Copy means a master copy of the Software on magnetic media and a master copy of the Documentation either on magnetic media or in hard copy as determined in the reasonable discretion of DivineRune.
 
1.8.     Module means a functionally separable component of the Software.
 
1.9.     Products mean the Software and its associated Documentation.
 
1.10.          Proprietary Notices means any and all proprietary rights notices designated by DivineRune, including, but not limited to, copyright notices affixed or included by DivineRune on or in association with the Products, including such notices as are set forth on the Master Copy.
 
1.11.           Registered End Users means those prospective End Users who are accepted by DivineRune as Registered End Users in accordance with Section 2.2.
 
1.12.           Safe Country means a country more particularly described on Appendix F.
 
1.13.           Seat means, for each Module of each item of Software, a workstation, whether a dumb terminal or containing a single CPU, that has or is capable of having simultaneous access to the client or terminal Module of such Software.
 
1.14.           Server means a single CPU that can access through its registers addressable memory (such as RAM, main memory, extended memory, expanded memory, or virtual memory) that has or is capable copying the server Module of Software into such memory.
 
1.15.           Services mean the Maintenance Services, Training Services, Additional Services, and all other services to be provided by DivineRune to ADNAS under this Agreement.
 
1.16.           Software means the computer software, in Executable Code only, that is included within the scope of this Agreement as listed in the attached Appendix A, as such schedule may be amended from time to time by the mutual agreement of DivineRune and ADNAS, and as such computer software may be enhanced, upgraded, or otherwise modified from time to time by DivineRune.
 
1.17.           Source Code means a series of instructions or statements in an English-like high-level computer language, such as C, C++, C#, or JAVA that is normally transformed by an interpreter or compiler into machine-readable Executable Code for actual use on a computer.
 
1.18.           Term means the Initial Term and each Renewal Term.
 
1.19.           Engagement means the client locations where ADNAS has deployed DivineRune Software.
 
1.20.           Authentication means a process or method of accurately identifying an object for its authenticity in order to build trust and credibility between the Brand owner and consumers, protect reputation and intellectual property, meeting various compliance and quality control initiative.
 
1.21.           DNA Authentication means use of DNA, or deoxyribonucleic acid, based authentication method, i.e. PCR-based DNA Analysis and Full DNA Sequencing.
 
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2.           GRANT OF  RIGHT AND LICENSE.
 
2.1.           Grant of License . Subject to the terms and conditions of this Agreement, DivineRune grants to ADNAS, and ADNAS accepts, the following rights and licenses:
 
 
(a)
A transactional, nontransferable, nonexclusive right and license to sublicense the Products to Registered End Users for use on computers and mobile devices; without the further right to sublicense, distribute, transfer or transmit the Products;
 
 
(b)
A transactional, transferable, exclusive right (“Exclusivity”) and license to sublicense the Products to Registered End Users for use on computers and mobile devices; without the further right to sublicense, distribute, transfer or transmit the Products when Products are used in conjunction with ADNAS’ DNA Authentication based products and/or other non QR taggants;
 
 
(c)
A nontransferable, nonexclusive right and license to reproduce copies of the Products from the Master Copy for distribution only to End Users in accordance with subsection (a) above;
 
 
(d)
A nontransferable, nonexclusive right and license to use the Demonstration Copies for the sole purposes of demonstrating the features and functionality of the Products to Registered End Users;
 
 
(e)
A nontransferable, nonexclusive right and license to use the Marks in conjunction with the licenses granted to ADNAS in subsections (a), (b), and (c) above unless such Marks are exclusively for use with ADNAS’ DNA Authentication based products and/or other non QR based taggants in which case ADNAS will be granted a transferable, exclusive right and license to use the Marks in conjunction with the licenses granted to ADNAS in subsections (a), (b) and (c) above.
 
2.2.                 Scope of Appointment.  DivineRune hereby appoints ADNAS, and ADNAS hereby accepts such appointment, as DivineRune’s distributor of the Products during the term of this Agreement,  subject to the terms and conditions of this Agreement.
 
2.3  Registration Process.
(a)          In the event that ADNAS desires to market the Products to a prospective End User, then ADNAS shall deliver to DivineRune a proposed registration request (a “Request Form”). The Request Form shall contain such information as DivineRune may reasonably require from time to time upon ten (10) business days’ prior notice to ADNAS. DivineRune’s current Request For Quote is attached as Appendix C. Upon receipt of a request, DivineRune may, in DivineRune’s sole discretion, designate the person or entity described on the Request Form as a Registered End User by delivery of written notice to ADNAS (the “Registration Notice”). The effective date of registration of a Registered End User (the “Registration Effective Date”) shall be the date of the Registration Notice, except as provided in the following sentence. In the event that DivineRune does not respond to a Request Form from ADNAS within ten (10) business days after receipt of a Request Form, then the person or entity designated on such Request Form shall be deemed to be a Registered End User, and the Registration Effective Date of such Registered End User shall be the eleventh (11th) day after the date of receipt by DivineRune of such Request Form. The status of any prospective End User as a Registered End User shall expire 180 days after the Registration Effective Date, unless otherwise mutually agreed in writing. Prospective Registered End User shall remain assigned to ADNAS for an additional 180 days should ADNAS provide substantial sales activity within the last 30 days prior to expiration, such substantial sales activity to consist of client interaction within the past thirty (30) days or similar sales activity.
 
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(b)           DivineRune agrees that so long as a person or entity remains a Registered End User, DivineRune shall not attempt to market the Products to such Registered End   User. The parties acknowledge that DivineRune intends, without any obligation of DivineRune to ADNAS whatsoever, to provide for similar registration procedures and limitations with DivineRune’s other distributors, in order to prevent unnecessary prospective End User confusion. Nothing contained in this Agreement shall be deemed to create any obligation on the part of DivineRune to limit the marketing rights of any other DivineRune distributor or to create any third party rights in ADNAS to enforce the terms and conditions of any agreement between DivineRune and any third party distributor.
 
(c)           ADNAS acknowledges and agrees that DivineRune may establish requirements for prospective End Users to be granted Registered End User status and may deny Registered End User status to any prospective End User for any reason, including, without limitation, the previous granting of Registered End User status of such prospective End User to another distributor or DivineRune’s intentions to market to such prospective End User directly.
 
2.4.                   Reservation of Rights. DivineRune reserves all rights not expressly granted herein, including but not limited to the rights to market the Products either directly or through distributors and/or third parties. Except as set forth in the Agreement, no express or implied license or right of any kind is granted to ADNAS regarding the Products or the Marks, including, but not limited to, any right to know, use, produce, receive, reproduce, copy, market, sell, distribute, transfer, translate, modify, adapt, disassemble, decompile, or reverse engineer the Products or create derivative works based on the Products or any portions thereof, or obtain possession of any source code or other technical material relating to the Products.
 
2.5.                   Exclusivity Conditioned on Minimum Fee. As long as the ADNAS has paid in full all amounts owed to DivineRune pursuant to this Agreement, when due, ADNAS shall retain Exclusivity to sublicense the Products.
 
2.6.                   Conditional Exclusivity upon Change of Control. In order for the ADNAS Successor to retain Exclusivity in the event of a Change of Control (as defined below), the Successor shall, quarterly, on the last day of each fiscal quarter for the immediate four quarters after Change of Control  , pay to DivineRune,  an amount not less than the amount which the ADNAS paid to DivineRune pursuant to this Agreement in the most recently completed fiscal quarter prior to the Change of Control, which amount shall increase by five (5)% in each fiscal quarter after the Change of Control (the “Minimum Fee”).  The Minimum Fee shall be pro-rated for the remainder of the fiscal quarter in which the Change of Control occurred and for the part of the fiscal quarter in which the Agreement terminates.   If the Successor fails to pay the Minimum Fee in full when due, then, at such time, the Exclusivity shall terminate, and DivineRune shall immediately have the right to sell or license the Application to any person or entity for any length of time and for any price.
 
2.7.                   Change of Control .  “Change of Control” shall mean:
 
a)
the purchase or other acquisition by any person, entity or group of persons, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities and Exchange Act of 1934) of twenty (20%) percent or more of either the outstanding shares of common stock or the combined voting power of Company’s then outstanding voting securities entitled to vote generally; or
 
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b)
the approval by the stockholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than fifty (50%) percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company’s then outstanding securities; or
 
c)
persons on the board of directors of the Company on the Effective Date of this Agreement cease to constitute at least a majority of the board of directors of the Company; or
 
d)
a liquidation or dissolution of Company or of the sale of all or substantially all of Company’s assets.
 
2.8                 Successors and Assigns This Agreement will be binding on the Parties and their successors and assigns, including, without limitation on a Successor of the Company as defined above.
 
 
3.             MAINTENANCE SERVICES.   DivineRune shall provide to ADNAS the “Maintenance Services” described in this Section 3.
 
3.1.                New Releases . DivineRune shall make available to ADNAS all new releases and versions of the Product promptly upon completion thereof, including all modifications, error fixes, and associated documentation. Nothing contained herein, however, shall require DivineRune to create any new releases and/or versions of the Product unless otherwise expressly set forth in this Agreement.
 
3.2.                        Error Correction .  DivineRune agrees that DivineRune will use reasonable commercial efforts to correct all verifiable and reproducible “Errors”. For the purposes of this Agreement, “Error” means a failure of the Software to conform to the functional specifications contained within the Documentation, and “Error Correction” means either a software modification or addition in Executable Code that when made or added to the Software, establishes material conformity of the Software to the material functional specifications contained within the Documentation, or a procedure or routine that, when included in the regular operation of the Software, eliminates the practical adverse effect on the End User of such nonconformity. Upon delivery of an Error Correction to ADNAS, such Error Correction shall be considered to be a part of the Software. Within a reasonable period of time after verifying that such an Error is present, DivineRune shall initiate work in a diligent manner toward development of an Error Correction. DivineRune shall not be responsible for correcting Errors resulting from misuse, negligence, revision, modification, or use of the Software or any portion thereof by ADNAS, any End User, or any other person or entity. that is not in accordance with the license restrictions ADNAS shall promptly notify DivineRune of all reported Errors encountered by ADNAS or to the extent known by ADNAS, any End User in using the Software.
 
3.3.                End User Support . DivineRune agrees that DivineRune shall provide prompt End User Support services, including telephone support, to End Users reporting problems in the use of the Products and to seek assistance with regard to such problems during DivineRune’s normal business hours from 8:00 am to 8:00 pm Eastern or Eastern daylight time, as the case may be, weekends and bank holidays excepted, moreover DivineRune shall be entitled to additional fees charges due to extended hours of support. If additional end user support is requested by a customer, ADNAS and DivineRune will agree on additional fees on a case by case basis using the Client Engagement Schedule in Appendix B.
 
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4.           ADDITIONAL RESPONSIBILITIES OF DIVINERUNE.
 
4.1.                Contact with End Users and Registered End Users. DivineRune will be responsible for certain direct contact with End Users and Registered End Users during implementing and supporting the Products. Notwithstanding the earlier termination or expiration of this Agreement for any reason, DivineRune shall be responsible for performing all support services in accordance with any contractual arrangement entered directly or indirectly, thru ADNAS, into with End Users during the entire term of such contracts, unless otherwise specified herein.  This includes, but is not limited to, writing specifications, documentation and user manuals which are unique to each customer, Termination of this Agreement will not result in the automatic termination of any End User license.
 
4.2.                Delivery of Products. Within a reasonable time after the Effective Date, DivineRune shall ship to ADNAS one (1) Master Copy for use by ADNAS solely as set forth in this Agreement.
 
4.3.                Training Services . DivineRune shall provide to ADNAS staff Sales Training and Technical Training, as described in Appendix E (the “Training Services”).  Annual Training Services shall be free of charge. In addition, DivineRune shall provide the initial end-user training to End Users and Registered End Users free of charge. Any additional training request by ADNAS or End Users and Registered End Users is subject to fees to be negotiated in good faith.
 
4.4.                Additional Services . At ADNAS’s request, DivineRune will provide ADNAS with consulting, programming, and technical services related to the Products, including services for customization and adaptation (collectively, the “Additional Services”). Except for Additional Services that impact ADNAS’s ability to meet a Service Level Agreement with an End User Client which shall be provided immediately upon request, the Additional Services shall be provided based upon the availability of DivineRune personnel but in no event shall such Additional Services commence more than seven (7) days after ADNAS’s request and shall be subject to the DivineRune rates to be determined as part of Appendix B. All out of pocket expenses, including travel, food, and lodging, with prior written approval of ADNAS CEO or CFO, shall be reimbursed by ADNAS subject to and in accordance with ADNAS’s Travel and Expense policy.  All such expenses shall be reimbursed “at cost” to the DivineRune, without subsequent mark-ups or charges. ADNAS shall not reimburse DivineRune for normal commutation or living expenses or entertainment expenses. Transportation and lodging costs reimbursable hereunder shall be based on coach economy prices.  DivineRune shall submit detailed and documented invoices of any such expenses within thirty (30) days of incurring such expense. Expenses shall be paid thirty (30) days upon receipt of invoice.
 
5.           LICENSE FEES AND PAYMENT.
 
5.1.                Initial Exclusivity Compensation.   Due upon execution of this agreement, subject to the approval of ADNAS Board of Directors, ADNAS hereby agrees to issue DivineRune a three year warrant to purchase one million (1,000,000)  common shares.  The exercise price of the warrant shall be the fair market value of ADNAS shares at the time this Agreement is executed. This warrant shall vest in twelve (12) months.
 
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5.2.                Revenue Sharing.   ADNAS and DivineRune shall determine on a case by case basis the cost plus formula to be used to compensate DivineRune for each customer using the Client Engagement Schedule as attached in Appendix B. ADNAS hereby agrees that revenues due DivineRune shall be recapped and mailed by the thirtieth (30 th ) day after the end of the invoiced month or five business days after receipt of funds from the Customer.
 
5.3.                Pass Through.   DivineRune hereby agrees and acknowledges that all payments made by ADNAS constitute a “pass through” payment of amounts that may be owed to ADNAS from other entities. Therefore, DivineRune hereby agrees, acknowledges and understands that ADNAS shall not be responsible for any funds due DivineRune except for those funds actually received by ADNAS. ADNAS bears no responsibility or liability for any such payments due but not received.
 
5.4.                Timing of Payments . All Fees shall be due and payable on a monthly in arrears basis after the later of the first production use of DivineRune Software or payment by the End User to ADNAS. For example, if the first production use and payment by an End User occur in February, then payment by ADNAS to DivineRune shall be due by the end of March.
 
5.5.                Audit . ADNAS shall keep complete and accurate records to allow DivineRune, at its expense and upon no less than ten (10) business days notice, to examine and audit ADNAS’s accounts with respect to ADNAS’s payment and other obligations under this Agreement. ADNAS agrees to permit DivineRune or, at its option, a certified public accountant paid by DivineRune, to inspect such records at reasonable times during normal business hours and performed in a manner so as to minimize disruptions on ADNAS’ regular business operations. In the event such audit discloses that the Fees previously paid or reported as due to DivineRune have been underpaid by more than ten percent (10%) as of the date of the audit, then ADNAS shall immediately pay to DivineRune the difference and all documented out-of-pocket expenses (expenses not to exceed twenty-five thousand dollars) incurred by DivineRune in performing the audit. Any third party auditors or accountants used under this Section shall not be ADNAS competitors and must execute a non-disclosure agreement with ADNAS that is reasonably satisfactory to ADNAS. This audit can be performed no more than once per year.
 
5.6.                Expenses . ADNAS shall reimburse DivineRune for all preapproved expenses reasonably incurred in rendering Services to ADNAS in accordance with ADNAS’s Travel and Expense policy. Such expenses shall include, without limitation, reasonable travel expenses (including transportation, lodging, and meals) and the cost of any courier services, photocopying, facsimile, transmissions, communications charges, telephone calls, and other expenses.     All such expenses shall be reimbursed “at cost” to the DivineRune, without subsequent mark-ups or charges. ADNAS shall not reimburse DivineRune for normal commutation or living expenses or entertainment expenses. Transportation and lodging costs reimbursable hereunder shall be based on coach economy prices.  DivineRune shall submit detailed and documented invoices of any such expenses within thirty (30) days of incurring such expense. Expenses shall be paid thirty (30) days upon receipt of invoice.
 
5.7.                Delinquent Accounts . Interest may be charged by DivineRune on delinquent payments and any other fees not paid to DivineRune as provided hereunder at the rate of ONE AND ONE-HALF PERCENT (1-1/2%) per month or the maximum amount allowed by law, whichever is less, commencing with the date payment was due.
 
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5.8.                   Payment in U.S. Currency . All payments from ADNAS to DivineRune hereunder shall be in U.S. currency and shall be made by means of a company check, bank check or wire transfer drawn on a U.S. bank to a U.S. bank account designated by DivineRune.
 
5.9.                            Excise Taxes, Etc . The Fees are net amounts to be received by DivineRune, exclusive of all taxes, duties, sales taxes, value added taxes, assessments, and similar taxes and duties, and are not subject to offset or reduction because of any costs, expenses, taxes, duties, assessments, or liabilities incurred by ADNAS or imposed on DivineRune in the performance of this Agreement or otherwise due as a result of this Agreement. Notwithstanding the foregoing, DivineRune shall be responsible for the payment of any and all income taxes and income tax withholding of DivineRune. ADNAS agrees to cooperate with DivineRune in submitting all applications, certificates, and other information necessary or reasonably requested by DivineRune to reduce or eliminate any and all income taxes and/or withholding taxes on all Fees. ADNAS will pass on to DivineRune any tax refunds received by ADNAS with respect to DivineRune’s previous payment or reimbursement of applicable taxes hereunder, if any.
 
6.           DISTRIBUTION AND PACKAGING.
 
6.1.                    Generally . ADNAS shall reproduce the Products and distribute copies of the Products solely in accordance with the requirements below:
 
(a)           Upon reasonable prior notice from DivineRune, which shall be no less than ten (10) business days, ADNAS agrees to permit DivineRune access, not more often than once per year, during ADNAS’ normal business hours and performed in a manner so as to minimize disruptions on ADNAS’ regular business operations, to ADNAS’ facility where the reproduction process is undertaken in order for DivineRune to verify and audit ADNAS’s compliance with this Agreement. Such verification and audit shall be at DivineRune’s expense and may be performed, at DivineRune’s option, by an independent third party selected by DivineRune that is not a competitor of ADNAS and which party shall be bound to ADNAS by reasonable obligations of confidentially.
 
(b)           ADNAS shall affix to any software distribution media, including Internet sites referencing the Products, a label containing the Proprietary Notices. Such Proprietary Notices shall be conspicuous, and ADNAS shall not obscure or modify such Proprietary Notices.  Should ADNAS decide to market a generic version of DivineRune Product, whereas DivineRune is not able to differentiate among users, all software release/download instructions shall include DivineRune proprietary notices.
 
(c)           ADNAS shall submit to DivineRune, prior to use, distribution, or disclosure, any advertising, promotion, marketing materials, and publicity proposed to be used by ADNAS in its efforts to market the Products as set forth hereunder, or which is otherwise undertaken pursuant to this Agreement, which materials display any of the Marks (the “Marketing Materials”). ADNAS may not use, distribute, or disclose the Marketing Materials unless approved by DivineRune, which approval will not be unreasonably withheld or delayed and process of approval by Divine Rune should not take more than 3 business days.  If there is no response in three (3) business days, the Marketing Materials will be deemed approved.
 
 (d)          ADNAS has and shall exercise no authority to make statements, warranties or representations concerning the Products that exceed or are inconsistent with the marketing materials and technical specifications provided to ADNAS by DivineRune.  ADNAS has and shall exercise no authority to bind DivineRune to any undertaking or performance with respect to the Products.
 
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(e)           ADNAS shall send DivineRune a copy of each executed End User Agreement within ten (10) days of receipt thereof by ADNAS.
 
6.2.                    End Users . In connection with the distribution and licensing of the Products to End Users, and in addition to any other terms and conditions provided in this Agreement, ADNAS shall also comply with the terms and conditions of this Section 6.
 
(a)           ADNAS shall submit to DivineRune all forms of End User agreement, a sample agreement as shown in Appendix D, to be used by ADNAS in connection with the license of the Product to End Users (collectively, the “End User Agreements”) for DivineRune’s approval, such approval to be in DivineRune’s sole discretion.
 
(b)           Prior to distribution of any Product to any End User, such End User shall fully execute and deliver to ADNAS the End User Agreement approved for use in the applicable country, and ADNAS shall obtain DivineRune’s prior written approval of any significant deviations from such End User Agreement. ADNAS shall not alter, obliterate, modify, change or replace any of the End User Agreements without DivineRune’s consent.
 
 
6.3.          Demonstration Copies. ADNAS will control and limit or cause to be controlled and limited the use of the Demonstration Copies for the specific purposes authorized in Section 2.1.
 
7.           COMPLIANCE WITH LAWS.
 
(a)           Each party will comply with all applicable laws and regulations in the countries in which the Products are delivered relating in any way to its performance under this Agreement including, but not limited to, obtaining all necessary import licenses or permits and any other government approval necessary for the importation of the Products into such country. Each party will also comply with all applicable laws and regulations of such countries pertaining to the licensing, distribution, promotion, and marketing of the Products. Each party will defend, indemnify, and hold the other party, its subsidiaries and affiliated companies, and their respective officers, directors and agents, harmless from and against any and all damages and expenses, including legal fees, claimed by third parties directly or indirectly as a consequence of a party’s failure to comply with any applicable laws or regulations. This obligation shall survive termination of this   Agreement.
 
(b)           In exporting Products each party shall be solely responsible for its own compliance with all applicable United States export laws, rules, and regulations. In distributing the Products, each party agrees to keep such books and records and to take such other actions, as may be required by applicable laws, rules, and regulations, and to comply with any United States export laws, rules, and regulations applicable to such party.  DivineRune shall notify ADNAS if any Products are export controlled or restricted and shall provide ADNAS with any necessary ECCN’s or export licenses.
 
8.              ADDITIONAL RESPONSIBILITIES OF ADNAS.   ADNAS will use its reasonable efforts in its sole discretion to market and distribute the Product to potential Registered End Users. ADNAS agrees to promote the Products fairly and use good faith efforts to present the Products in a positive light to potential End Users. ADNAS will also keep DivineRune informed of any significant information relating to the marketing and distribution of the Products. :
 
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8.1.                    Quarterly  Status Report. ADNAS shall deliver to DivineRune within thirty (30) days after the end of each quarter during the Term a written report summarizing the status of the Registered End Users, including, without limitation, a list of the names, the time and substance of the last communication with such Registered End User, and plan of action for continued pursuit of such Registered End User.
 
8.2.                    Quarterly Marketing Information. ADNAS shall deliver to DivineRune written reports at least once quarterly within 30 days of the end of each calendar quarter describing to its knowledge:
 
(a)           the market conditions relating to the Products, including current trends and forecasts;
 
(b)           ADNAS’s activities relating to the Products, including significant inquiries from potential Registered End Users;
 
(c)           information regarding existing or new competitors;
 
(d)           suggestions made by End Users or members of ADNAS’s sales force for new products or enhancements; and
 
(e)           any knowledge of any infringements or attempted infringements by third parties of DivineRune’s or its licensors’ trademarks or copyrights, of any disclosures or misappropriations of DivineRune Proprietary Information, or any other infringements or misappropriation of any of DivineRune’s or its licensors’ intellectual property rights.
 
 
8.3.                    Travel and Related Expenses . ADNAS is responsible for its own costs and expenses of every kind, including travel and office expenses, relating to its duties hereunder.
 
8.4                     End Users and Registered End Users. End User license will remain valid separate from this Agreement.  Termination of this Agreement will not result in the automatic termination of any End User license.
 
8.5.                    End User Responses . At DivineRune’s request, ADNAS will promptly submit to DivineRune a copy of any proposed or actual technical response to a request for proposal or request for tender that involves the distribution of Products to an End User hereunder.  If ADNAS provides such proposal materials to DivineRune, DivineRune shall be prohibited from bidding, directly or indirectly, against ADNAS for such proposal.
 
9.             OWNERSHIP .  DivineRune and its licensors expressly retain title and ownership to all worldwide intellectual property rights, including without limitation, design, trade secrets, know-how, patent rights, trademarks, and copyrights in and to the Software, Documentation, Source Code of the Software, and any modifications, adaptations, derivative works, and enhancements made thereto. Except as may be set forth in separate written agreements with regard to Software, Documentation, Source Code of the Software, and any modifications, adaptations, derivative works, and enhancements made thereto, ADNAS hereby waives any claim that it may have had or has to title and ownership of intellectual property rights in and to the Software, Documentation, source code of the Software, and DivineRune Proprietary Information (as defined in Section 11), and any modifications, adaptations, enhancements, or derivative works made by or under the direction of DivineRune or ADNAS.
 
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10.           TRADEMARKS.
 
10.1.                 Ownership. ADNAS acknowledges that DivineRune and/or its licensors are the owners of all right, title and interest in and to the Marks, and ADNAS will not adopt for use any of the Marks in any manner whatsoever except as expressly provided in this Agreement.
 
10.2.                 Use of Marks . In written communications and in advertising, ADNAS’s use of the Marks shall at all times be in accordance with such styles and together with such trademark notices as DivineRune may require. ADNAS agrees that this Agreement does not constitute any conveyance of any right, title or interest in or to any Marks, except for the permissive uses provided herein. At the request of DivineRune, ADNAS shall submit to DivineRune any and all materials bearing or including any of the Marks, for prior review and approval by DivineRune. ADNAS agrees not to commit any acts, directly or indirectly, which contest, dispute, or otherwise impair the rights, title, or interest of DivineRune in or to the Marks. ADNAS agrees not to claim or assert any rights, title or interest in or to the Marks in any way. The parties agree that all uses of the Marks by ADNAS shall be in such a manner as to inure at all times to the benefit of DivineRune. ADNAS shall not use any language or display any Marks in such a manner as to create the impression that the Marks belong to and are owned by ADNAS. Upon the request of DivineRune, ADNAS agrees to discontinue the use of (i) any Marks being used by ADNAS in a manner inconsistent with the guidelines set forth above, or (ii) any trademark, service mark, or trade name deemed to create a likelihood of confusion with a Mark.
 
10.4.                 Notice of Infringements . ADNAS will promptly notify DivineRune of any and all third party infringements or attempted infringements of any of the Marks that may come to ADNAS’s attention, and ADNAS will assist DivineRune in taking such action against the third party infringers as DivineRune may elect in its sole discretion. DivineRune will bear the expenses of ADNAS’s assistance to DivineRune, as may be requested by DivineRune, if the infringement or attempted infringement arises by virtue of a third party’s act or omission.
 
10.5.                 ADNAS Trademarks . While ADNAS may use the Marks in connection with the marketing, licensing, and distribution of the Products, subject to the terms and conditions of this Agreement, ADNAS is not obligated to use the Marks. ADNAS may use its own trademarks to market, license, and distribute the Products, and all other requirements otherwise provided in this Agreement are met. DivineRune may not use any trademarks, service marks, or trade names owned by ADNAS, without the prior written permission of ADNAS.
 
11.           NONDISCLOSURE AND CONFIDENTIALITY.
 
11.1.                 Disclosure. Each party hereunder may disclose to the other party certain Trade Secrets and Confidential Information of such party or of such party’s associated companies, suppliers, or customers. For purposes of this Agreement, “Trade Secrets” means information which: (a) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; “Confidential Information” means information, other than Trade Secrets, that is (a) a party’s operational and business proposals and plans, pricing, financial information, methods, processes, code, data, inventions, apparatus, statistics, programs, research, development, information technology, network designs, passwords, sign-on codes, and usage data; and/or (b) any other information that is designated as confidential by the disclosing party. All of the disclosing party’s Confidential Information, including any derivative works thereof, is, and shall remain, proprietary to the disclosing party. “Proprietary Information” means Trade Secrets and Confidential Information; “Owner” refers to the party disclosing Proprietary Information hereunder, whether such party is DivineRune or ADNAS and whether such disclosure is directly from Owner or through Owner’s employees or agents; and “Recipient” refers to the party receiving any Proprietary Information hereunder, whether such party is DivineRune or ADNAS and whether such disclosure received directly or through Recipient’s employees or agents.
 
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11.2.                  Requirement of Confidentiality . Recipient agrees to hold the Proprietary Information disclosed by Owner in confidence and not to, directly or indirectly, copy, reproduce, distribute, manufacture, duplicate, reveal, report, publish, disclose, cause to be disclosed, or otherwise transfer the Proprietary Information disclosed by Owner to any third party, or utilize the Proprietary Information disclosed by Owner for any purpose whatsoever other than as expressly contemplated by this Agreement. Recipient shall protect the disclosed Proprietary Information by using the same degree of care, but no less than a reasonable degree of care, to prevent the unauthorized disclosure of the Proprietary Information as Recipient uses to protect its own proprietary or confidential information of a like nature.  With regard to the Trade Secrets, this obligation shall continue for so long as such information constitutes a trade secret under applicable law. With regard to the Confidential Information, this obligation shall continue for the Term and for a period of five (5) years thereafter. The foregoing obligations shall not apply if and to the extent that:
 
(a)           Recipient establishes that the information communicated was already known to Recipient, without obligations to keep such information confidential, at the time of Recipient’s receipt from Owner, as evidenced by documents in the possession of Recipient prepared or received prior to disclosure of such information;
 
(b)           Recipient establishes that the information communicated was received by Recipient in good faith from a third party lawfully in possession thereof and having no obligation to keep such information confidential; or
 
(c)           Recipient establishes that the information communicated was publicly known at the time of Recipient’s receipt from Owner or has become publicly known other than by a breach of this Agreement.
 
11.3.                  Security Measures . Without limiting the general obligations specified above in Section 11.2, Recipient agrees to implement the following security steps in order to protect the confidentiality and security of the Proprietary Information disclosed by Owner:
 
(a)           Implement internal procedures to limit, control and supervise the use of the Proprietary Information disclosed by Owner;
 
(b)           Make the Proprietary Information disclosed by Owner available only to employees, consultants, and agents of Recipient who are bound by obligations of confidentiality and restrictions against disclosure at least as restrictive as those contain herein;
 
(c)           Use those security procedures it uses for its own Proprietary Information, which it protects against unauthorized disclosure, appropriation or use, but not less than reasonable security procedures.
 
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12.           WARRANTIES AND INDEMNIFICATION.
 
12.1.               Warranties of DivineRune.
 
(a)           DivineRune warrants to ADNAS that (i) DivineRune have full authority to execute and perform this Agreement; (ii) this Agreement has been duly executed and delivered by DivineRune and constitutes the legal, enforceable and binding obligation of DivineRune; and (iii) DivineRune’s execution and performance of this Agreement will not violate any law or breach any other agreement  and (iv) no approval, action or authorization by any governmental authority or agency is required for DivineRune’s execution and performance hereof or, if it is, such approval, action or authorization has been obtained and written evidence thereof has been provided to ADNAS.
 
(b)           DivineRune warrants to ADNAS that the Products will perform substantially in accordance with DivineRune’s Documentation.  ADNAS’s sole and exclusive remedy for any breach of the foregoing warranty shall be, at DivineRune’s option, repair or replacement of the non-conforming software or a refund of the license fees related to the defective software.  DivineRune further warrants that: (a) the Products shall comply with all U.S. laws, regulations, orders and decrees applicable to the healthcare industry; (b)  the Products does not contain or transmit any malicious code (except for any malicious code contained in user-uploaded attachments or otherwise originating from users); (c) DivineRune owns or otherwise has sufficient rights in the Products to grant to ADNAS the rights to use the Products granted herein; (d) the Products does not infringe the copyrights, trade secrets patents or trademark rights of any third party
 
(c)           OTHER THAN AS EXPRESSLY SET FORTH IN SECTION 12.1, DIVINERUNE DOES NOT MAKE ANY EXPRESS OR IMPLIED WARRANTIES OR CONDITIONS TO DISTRIBUTOR, END USERS, OR ANY OTHER PERSONS OR ENTITIES WITH RESPECT TO THE PRODUCTS, ANY COPIES THEREOF, ANY SERVICES PROVIDED HEREUNDER OR OTHERWISE REGARDING THIS AGREEMENT, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTY OF MERCHANTABILITY, AND THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.
 
12.2.                 Warranties of ADNAS .
 
(a)           ADNAS warrants to DivineRune that (i) ADNAS has full authority to execute and perform this Agreement; (ii) this Agreement has been duly executed and delivered by ADNAS and constitutes the legal, enforceable and binding obligation of ADNAS; (iii) ADNAS’s execution and performance of this Agreement will not violate any law or breach any other agreement; and (iv) no approval, action or authorization by any governmental authority or agency is required for ADNAS’s execution and performance hereof or, if it is, such approval, action or authorization has been obtained and written evidence thereof has been provided to DivineRune.
 
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(b)           OTHER THAN AS EXPRESSLY SET FORTH IN SECTION 12.2, ADNAS DOES NOT MAKE ANY EXPRESS OR IMPLIED WARRANTIES OR CONDITIONS TO DIVINERUNE DISTRIBUTOR, END USERS OR ANY OTHER PERSONS OR ENTITIES WITH RESPECT TO THE PRODUCTS, ANY COPIES THEREOF, ANY SERVICES PROVIDED HEREUNDER OR OTHERWISE REGARDING THIS AGREEMENT, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTY OF MERCHANTABILITY, AND THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.
 
13.           INDEMNIFICATION GENERALLY.
 
13.1.                 DivineRune Indemnification . DivineRune shall, except as otherwise provided below, indemnify, defend and hold harmless ADNAS and its officers, directors and agents against any damages, costs, and fees resulting from any third party claims ADNAS that the Software or any of its elements or the use thereof in accordance with its related Documentation has, will or does violate or infringe any copyright, trade secret, or other valid proprietary right of any other person or entity. The right of indemnification as set forth herein will be subject to all of the following, all of which shall be DivineRune’s sole expense: (i) ADNAS providing DivineRune with prompt written notice of the initial claim and filing of the lawsuit relating thereto; (ii) ADNAS permitting DivineRune to select legal counsel and to defend, compromise, or settle the lawsuit in the sole discretion of DivineRune; (iii) ADNAS providing DivineRune with all available information, assistance, authority, and cooperation to enable DivineRune to defend, compromise, or settle the lawsuit as provided herein; and (iv) if the use of the Software becomes, or in DivineRune’s opinion is likely to become, the subject of a claim of infringement, ADNAS permitting DivineRune, at DivineRune’s option and expense, either to procure the right for ADNAS to continue to use the Software or to replace or modify the Software so that it becomes non-infringing. DivineRune will have no liability for any infringement or misappropriation of any copyright, trade secrets, or other proprietary rights resulting from modification of the Software performed other than by DivineRune, from use other than as specified under this Agreement, and approved End User Agreement, and the related Documentation, or from the use of the Software with products not specifically approved in writing or whose use is reasonably foreseeable by DivineRune for use with the Software.
 
13.2.                 ADNAS Indemnification. In addition to any other ADNAS obligations of indemnity provided in this Agreement, ADNAS agrees to indemnify, defend and hold harmless DivineRune, its affiliates, and their directors, officers, shareholders, employees and agents from and against any liabilities, losses, damages, causes of action or injuries, together with costs and expenses, including reasonable attorneys’ fees, claim by unaffiliated third parties arising out of or resulting from:
 
(a)           Any failure on the part of ADNAS to pay any taxes, duties or assessments ADNAS is obligated to pay hereunder or other amounts ADNAS is obligated to pay as set forth in Section 5; or,
 
(b)           The infringement or claim thereof of any patent, copyright, trademark, service mark, trade name, trade secret, proprietary and confidential information right, or any other property right of a third party arising from the use by ADNAS of any symbol, insignia, name or identifying characteristic identifying the Products other than a Mark.
 
The right of indemnification as set forth herein will be subject to all of the following: (i) DivineRune providing ADNAS with prompt written notice of the initial claim and filing of the lawsuit relating thereto; (ii) DivineRune permitting ADNAS to select legal counsel and to defend, compromise, or settle the lawsuit in the sole discretion of ADNAS; and (iii) DivineRune providing ADNAS with all available information, assistance, authority, and cooperation to enable ADNAS to defend, compromise, or settle the lawsuit as provided herein.
 
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13.3 Notice . DivineRune will give ADNAS prompt written notice of any threat, warning or notice of any such claim or action. DivineRune will have the right to conduct the defense of any such claim or action and, consistent with ADNAS’ rights hereunder, all negotiations for its settlement; provided, however, ADNAS may participate in such defense or negotiations to protect its interests, at its expense using counsel of its choice, and DivineRune will provide reasonable assistance to ADNAS and its counsel.
 
14.           TERM AND TERMINATION.
 
14.1.                 Term. Unless earlier terminated as provided in this Section 15, this Agreement shall be effective as of the Effective Date and shall remain in effect until the third (3rd) anniversary of the Effective Date (the “Initial Term”). This Agreement shall be automatically renewed for successive one-year periods (each such renewal term is referred to as a “Renewal Term”), subject to earlier termination as set forth in this Section 14 , unless either party notifies the other on or before six (6) months before the beginning of any Renewal Term.
 
14.2.                 Early Termination . Without prejudice to any other remedies, either party shall have the right at any time by giving notice to the other to terminate the Agreement forthwith in any of the following events:
 
(a)           if the other party commits a material breach of any of the terms or conditions of this Agreement and fails to cure such breach within ninety (90) days after delivery of notice thereof; or
 
(b)           at a party’s option, if the other party becomes insolvent, makes a general assignment for the benefit of creditors, suffers or permits an appointment of a receiver for its business or assets, becomes subject to any proceedings under any bankruptcy or insolvency law, whether domestic or foreign, or is liquidated, voluntarily or otherwise; or
 
(c)           at a party’s option, if the other party is acquired or sells all or a substantial part of its assets  and minimum annual sales are not met this agreement will revert to a non-exclusive license; or
 
(d)           if any substantial change takes place in the management, ownership or control of the other party resulting in the management, ownership or control of the other party by a competitor of the first party or by a company or other entity with a division or subsidiary that is a competitor of the first party and minimum annual sales are not met this agreement will revert to a non-exclusive license
 
14.3.                 Termination of Rights to Distribute in Certain Countries . In addition to any other rights and remedies available under this Agreement, at law or in equity, DivineRune may terminate ADNAS’s rights under this Agreement with respect to the right to market, license and distribute the Products in any country upon thirty  (30) days’ advance written notice in the event the government of such country (i) enacts currency control laws or regulations which make it impossible to export the Fees due to DivineRune under this Agreement; (ii) nationalizes ADNAS; or (iii) commits acts which DivineRune deems to be unreasonable and injurious to the Software or Documentation or this Agreement.
 
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14.4.                 Obligations upon Termination. Upon expiration or termination of this Agreement for any reason, ADNAS shall immediately return to DivineRune all DivineRune property, including, but not limited to, the Master Copy, the Demonstration Copies and the Proprietary Information of DivineRune. Upon return of such materials, ADNAS shall provide DivineRune with a signed written statement certifying that it has returned all DivineRune property to DivineRune. Upon termination of this Agreement for any reason, all rights and licenses granted by DivineRune hereunder to ADNAS shall immediately cease, provided such termination shall not result in termination of End User Agreements extended to End Users. Upon termination or expiration of this Agreement for any reason, all invoices and any other monies due to DivineRune by ADNAS shall remain due and payable in accordance with the terms hereof.
 
14.5.                 Survival of Terms . Upon termination or expiration of this Agreement, and in addition to any provisions that expressly provide to survive any termination of this Agreement, the provisions of this Agreement providing for payment of Fees to DivineRune, protection of DivineRune’s proprietary rights, warranties, the limitation of liability, compliance with laws, indemnities, arbitration and other provisions of this Agreement concerning the ongoing interests of DivineRune, including, but not limited to, Sections 2.3, 5, 7, 9, 10, 11, 12, 13, 14, 15, 16, and 17 shall continue and survive in full force and effect.
 
15.           ARBITRATION.
 
(a)           The parties agree that any dispute, claim or controversy relating in any way to this Agreement shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“AAA”), with judgment upon the award rendered by the arbitrator to be entered in any court of competent jurisdiction. Notwithstanding the foregoing or the then-current specified Commercial Arbitration Rules, the following shall apply with respect to the arbitration proceeding: (i) the arbitration proceeding shall be conducted by one arbitrator selected by the parties, provided if the parties fail to make such designation within five days after receipt by the AAA of any demand for arbitration, the AAA shall make the appointment in its sole discretion; (ii) the existence, subject, evidence, proceedings, and ruling resulting from the arbitration proceedings shall be deemed confidential information, and shall not be disclosed by either party, their representatives, or the arbitrator (except: (a) to the professional advisers of DivineRune or ADNAS; (b) in connection with a public offering of securities by DivineRune or ADNAS; (c) as ordered by any court of competent jurisdiction; or (d) as required to comply with any applicable governmental statute or regulation); (iii) the arbitrator shall be required to prepare written findings of fact; and (iv) the arbitrator may grant any relief or remedy which the arbitrator deems just and equitable.
 
(b)           Each party to the arbitration is to pay an equal part of the deposit fixed by the AAA. Notwithstanding the determination of the arbitrator (i) all costs associated with the arbitration and imposed by the AAA or the arbitrator shall be borne equally by each party to the arbitration, and (ii) each party to the arbitration shall be responsible for its own attorneys’ fees and other professional fees incurred in connection with the arbitration. Determinations of such arbitrator will be final and binding upon the parties to the arbitration, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction, or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be. The arbitrator shall apply the law of the State of New York without giving effect to its conflict of law rules. All proceedings before the arbitrator shall be conducted in the English language.
 
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16.           LIMITATION OF LIABILITY.
 
(a)           EXCEPT FOR (A) EACH PARTY’S INDEMNIFICATION, INCLUDING INFRINGEMENT OBLIGATIONS HEREUNDER, OR (B) ANY INTENTIONAL REFUSAL BY ANY PARTY TO PERFORM ITS MATERIAL OBLIGATIONS UNDER THIS AGREEMENT, OR (C) A CLAIM ARISING FROM A PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY UNDER THIS AGREEMENT, REGARDLESS OF THE FORM OF CLAIM OR ACTION, IN AN AMOUNT THAT EXCEEDS THE TOTAL FEES PAID OR OWED TO  UNDER THIS AGREEMENT FOR THE PREVIOUS TWELVE MONTH PERIOD. THIS LIMITATION OF LIABILITY IS CUMULATIVE AND NOT PER INCIDENT.
 
(b)           EXCEPT FOR (A) EACH PARTY’S INDEMNIFICATION, INCLUDING INFRINGEMENT OBLIGATIONS HEREUNDER, OR (B) ANY INTENTIONAL REFUSAL BY ANY PARTY TO PERFORM ITS MATERIAL OBLIGATIONS UNDER THIS AGREEMENT, OR (C) A CLAIM ARISING FROM A PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, IN NO EVENT WILL EITHER PARTYBE LIABLE TO THE OTHER PARTY FOR SPECIAL, CONSEQUENTIAL, EXEMPLARY, INCIDENTAL, OR INDIRECT DAMAGES OR COSTS (INCLUDING LEGAL FEES AND EXPENSES) OR LOSS OF GOODWILL OR PROFIT IN CONNECTION WITH THE SUPPLY, USE OR PERFORMANCE OF OR INABILITY TO USE THE PRODUCTS, ANY SERVICES PROVIDED HEREUNDER, OR IN CONNECTION WITH ANY CLAIM ARISING FROM THIS AGREEMENT, EVEN IF A PARTYHAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR COSTS.
 
(c)           No action arising out of this Agreement, regardless of form, may be brought by either party or any other third party more than two years after the date the cause of action has occurred.
 
17.           MISCELLANEOUS.
 
17.1.                 Amendments . This Agreement and the Appendixes hereto represent the entire understanding between the parties hereto and supersede all other written or oral agreements heretofore made by or on behalf of DivineRune or ADNAS and may be changed only by agreements in writing signed by the authorized representatives of the parties.
 
17.2                  Insurance. DivineRune and its agents at their sole cost and expense shall maintain insurance as requested on a case by case basis by the end user using the Client Engagement Schedule attached as Appendix B.
 
17.3.                 Applicable Law . This Agreement has been made, executed and delivered in the State of New York, U.S.A. in which state the offices of DivineRune are located. Accordingly, the parties invoke the laws of the State of New York regarding the protection of their rights and enforcement of their obligations hereunder and they mutually stipulate and agree that this Agreement is in all respects (including, but not limited to, all matters of interpretation, validity, performance and the consequences of breach) to be exclusively construed, governed and enforced in accordance with the internal laws (excluding all conflict of laws rules) of the State of New York and any applicable federal laws of the United States of America, as from time to time amended and in effect. Except as provided in Section 15 (related to Arbitration of disputes), ADNAS consents and submits to the jurisdiction and venue over any action, suit or other legal proceeding that may arise out of or in connection with this Agreement, by the United States District Court for the Southern District of New York and the state courts of the state of New York. The parties agree that the United Nations Convention on Contracts for the International Sale of Goods shall not apply in any respect to this Agreement or the parties hereto.
 
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17.4.                 Relationship of Parties . Nothing in this Agreement shall constitute or be deemed to constitute a partnership between the parties hereto or constitute or be deemed to constitute ADNAS as an affiliate of DivineRune, for any purpose whatever, and neither party shall have authority or power to bind the other party, or its affiliates, or to contract in the name of or create a liability against the other party or its affiliates, in any way or for any purpose.
 
17.5.                 Assignment. Neither this Agreement, nor the obligations of either party, may be transferred or assigned by either party without the prior written consent of the other party.
 
17.6.                 Waiver. A waiver by either of the parties hereto of any breach by the other party of any of the terms, provisions or conditions of this Agreement or the acquiescence of either party hereto in any act (whether commission or omission) which but for such acquiescence would be a breach as aforesaid, shall not constitute a general waiver of such term, provision or condition of any subsequent act contrary thereto.
 
17.7.                 Notice . All communications between the parties which are required or permitted to be in writing shall be sent by hand delivery, with receipt obtained, or by recognized courier, properly prepaid and sent to the addresses specified in the first paragraph of this Agreement. All such communications shall be deemed received by the other party upon the earlier of actual receipt or actual delivery to the address specified in the first paragraph of this Agreement. By written communication, either party may designate a different address for purposes hereof.
 
17.8.                 Force Majeure . If the performance of this Agreement by either party, or of any obligation under this Agreement, other than the payment of Fees, is prevented, restricted or interfered with by reason of war, revolution, civil commotion, riot, fire, flood, disaster, acts of public enemies, blockade or embargo, strikes, any law, order, proclamation, regulation, ordinance, demand, or requirement having a legal effect of any government or any judicial authority or representative of any such government, or any other act whatsoever, whether similar or dissimilar to those referred to in this Section, which is beyond the reasonable control of the party affected, such party shall, upon giving prior written notice to the other party, be excused from such performance to the extent of such prevention, restriction, or interference, provided that the party so affected shall use its best efforts to avoid or remove such causes of nonperformance, and shall continue performance hereunder with the utmost dispatch whenever such causes are removed. Notwithstanding the foregoing, if such act or condition beyond reasonable control continues for a period of 180 days or more, the unaffected party may, on notice to the party affected, terminate this Agreement, and neither party shall have any further obligation to the other save for those provisions hereunder which, by their terms, survive the termination of this Agreement.
 
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17.9.                 Headings. The section and subsection headings in this Agreement are inserted solely as a matter of convenience and for reference, and shall not be considered in the construction or interpretation of any provision hereof.
 
17.10.              Severability . If any provision hereof is declared invalid by a court of competent jurisdiction, such provision shall be ineffective only to the extent of such invalidity, so that the remainder of that provision and all remaining provisions of this Agreement will continue in full force and effect.
 
17.11.              Appendixes. Appendix A, B, C, D, E, and F described below and attached hereto, are incorporated into this Agreement wherever referenced.
 
Appendix A                      Description of Software
Appendix B                      Client Engagement Schedule (Sample)
Appendix C                      Request For Quote
Appendix D                      DivineRune End User Agreement
Appendix E                      Training Services
Appendix F                      Safe Countries Form of End User Agreement
 
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives effective on the Effective Date.
 
Applied DNA Sciences Inc.    DivineRune Inc.
     
/s/ Kurt Jensen   /s/ Eugene Sayan
By:    By: 
     
KURT JENSEN    Eugene Sayan 
Title:   Title:
     
CFO    CEO, President
Date: 1/25/2012    Date: 1/25/2012
 
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APPENDIX A – Description of Software
 
DivineRune Mobile & Cloud Platform
 
DivineRune Mobile & Cloud platform, meaning almost all necessary hardware, software and services are provided as a service, is a hosted turnkey solution for secure logistics, mobile commerce, and many other mobile business transactions. Downloadable DivineRune mobile applications all what are needed for Manufacturers, Wholesalers, Retail Stores and Consumers to interface with DivineRune platform.
 
For retailers and manufacturers, secure barcode (all known formats, including QR Code) tagging closes the gap between online and in-store shopping experiences, making it easier than ever for consumer to engage with a brand. Properly placed secure barcode tagging technology directly enhances supply chain by giving business, including consumers, an instant access to specific, relevant information they want in one simple step, increasing conversions.
 
A user-friendly downloaded DivineRune software application running on mobile devices protects and enhances “brand awareness”. Once DivineRune software is downloaded, business users and consumers merely position their mobile appliance, which can be a smartphone or DivineRune provided smartphone attachment for business users, in front of a secure barcode tag and are instantly rewarded with information (in the form of mobile content, a file to download, even an automatically generated tweet or SMS message) that engages them more deeply.
 
The advantages of secure barcode product tagging go even further by placing effective sales tools in the hands of associates, without necessitating investments in excessive training and expensive sales materials.  Information accessible through secure barcode product tagging ensures sales associates have instant answers, providing a higher level of customer service. Instead of wearing a blank expression when asked about specific product details, associates can instead access information via secure barcode tagging to efficiently serve the customer with confidence to close the sale.  Ability to capture and store the information on mobile device, share with others, and access to “Buy Now” or “Add to Shopping Cart” even after leaving the store. From a business standpoint, the fewer steps involved, the smaller the likelihood of losing opportunities to engage with consumers at their peak moments of receptivity. Plus, 2D Product Tagging often comes with less overhead than a traditional SMS campaign.
 
DivineRune products subject to this agreement includes;
 
 
●
DivineLogistics   A secure track & trace platform designed to address challenging problems associated in supply-chain logistics.
 
●
DivineAuthentication Stochastic, pattern based product authentication to address counterfeiting, product diversion, and other illegal activities in supply chain.
 
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APPENDIX B
 
Client Engagement Schedule (Sample)
 
Software Distribution Agreement Reference Number:   ADNAS 001-2012
 
This Schedule (“Schedule”) is part of the Software Distribution Agreement between DivineRune (hereinafter “DivineRune”) and Applied DNA Sciences Inc (hereinafter “ADNAS”):
 
Customer
Name:
Location:
Installation/Service Site Location:
Technical Contact Person:
Phone :
Email:
Billing Address:
Billing Contact Person:
Phone:
Email:
Effective Date of this Order:
Payment Terms:  
Net 30 days
Referenced Agreement:
 
The terms and conditions of the Transactional License Agreement referenced above, shall apply to this Schedule
     
Additional Terms :
1.
Term of this Schedule shall be ________ (__) years from Effective Date.
 
2.
ADNAS and DivineRune agree that the Software is for use within _________________________________ and by its customers (collectively “Customer”).
 
3.
ADNAS agrees to an Initial Activation fee of $_________.
 
4.
The parties agree that the fees below include Basic Support services, revenues shall be adjusted as;
 
This agreement is accepted in its entirety by both parties as signed below:
 
DivineRune, Inc .
 
Applied DNA Sciences, Inc.
     
(Authorized Signature)
  (Authorized Signature)
     
(Name of Person Signing)   (Name of Person Signing)
     
(Title)   (Title)
     
(Date)   (Date)
 
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APPENDIX C
 
Request for Quote
 
Date: 
     
 
ADNAS’s Main Office Location:
   
     
ADNAS’s Location Registering This Request:
   
     
ADNAS’s Employee Registering This Request:
   
     
Company Name Of Prospective End User:
   
     
Address Of Prospective End User:
   
     
Type Of Business:
   
     
Contact’s Name At Prospective End User:
   
     
How You Learned About This Prospect:
   
     
Projected Monthly Revenue in US Dollars:
   
     
What Steps Of The Sale Have You Done As Of Today:
   
 
Cold Call?
   
Initial Presentation?
 
         
Proposal?
   
Verbal Commitment?
 
         
Demo?
       
 
Projected Contract Sign Date?      
       
 
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APPENDIX D
 
Sample DivineRune End User Agreement
 
DIVINERUNE
END USER AGREEMENT (“EUA”)
NO REDISTRIBUTION PERMITTED
 
PLEASE READ THIS SOFTWARE LICENSE AGREEMENT (“LICENSE”) CAREFULLY BEFORE INSTALLING THE DIVINERUNE SOFTWARE.  BY INSTALLING THE DIVINERUNE SOFTWARE, YOU ARE AGREEING TO BE BOUND BY THE TERMS OF THIS LICENSE.  IF YOU DO NOT AGREE TO THE TERMS OF THIS LICENSE, DO NOT INSTALL THE SOFTWARE AND (IF APPLICABLE) RETURN THIS SOFTWARE TO THE PLACE WHERE YOU OBTAINED IT.
 
1. General.   The software, test scripts, documentation and other materials accompanying this License, whether on disk, print or electronic documentation, in read only memory, or any other media, (collectively, the “DivineRune Software”) are licensed, not sold, to you by DivineRune Inc. (“DivineRune”).  The rights granted herein are limited to DivineRune’s and/or DivineRune’s licensors’ respective intellectual property rights in the DivineRune Software and do not include any other patents or intellectual property rights. You own the media on which the DivineRune Software is recorded but DivineRune and/or DivineRune’s licensor (s) retain ownership of their respective portions of the DivineRune Software itself.  The terms of this License will govern any software upgrades provided by DivineRune that replace and/or supplement the original DivineRune Software, unless such upgrade is accompanied by a separate license in which case the terms of that license will govern.
 
2. Permitted License Uses and Restrictions; No Redistribution.   Subject to the terms and conditions of this License:
 
(a)
You may install, access to over Internet and use the DivineRune Software internally within your business or organization. You may make only as many internal use copies of the DivineRune Software as reasonably necessary to use the DivineRune Software as permitted under this License and distribute such copies only to your employees whose job duties require them to use the Softheon Software for such testing purposes; provided that you reproduce on each copy of the Softheon Software or portion thereof, all copyright or other proprietary notices contained on the original.
 
(b)
You may also make one copy of the Softheon Software in machine-readable form for backup purposes only.  You may not rent, lease, loan, sublicense or otherwise redistribute the Softheon Software, in whole or in part.  Except as and only to the extent permitted by applicable law, you may not decompile, reverse engineer, disassemble, modify, or create derivative works of the Softheon Software or any part thereof.
 
3. Termination.   This License is effective until terminated.  Your rights under this License will terminate automatically without notice from Softheon:  (a) if you fail to comply with any term(s) of this License after receipt of written notice and thirty (30) day opportunity to cure; (b) upon Softheon’s release of an updated or revised version of the Softheon Software; or (c) if a new version of Softheon’s operating system software is released which is incompatible with this version of the Softheon Software. Upon the termination of this License, you shall immediately cease all use and copying of the Softheon Software, in whole or in part.   You may terminate this License at any time by providing at least ninety (90) prior written notice to Softheon.
 
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4. Limited Warranty on Media (if applicable).   Softheon warrants the media on which the Softheon Software is recorded and delivered by Softheon (if any) to be free from defects in materials and workmanship under normal use for a period of ninety (90) days from the date of original retail purchase.  Your exclusive remedy under this Section shall be, at Softheon’s option, a refund of the purchase price of the product containing the Softheon Software or replacement of the Softheon Software, which is returned to Softheon or a Softheon authorized representative with a copy of the receipt.  THIS LIMITED WARRANTY AND ANY IMPLIED WARRANTIES ON THE MEDIA INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, OF SATISFACTORY QUALITY, AND OF FITNESS FOR A PARTICULAR PURPOSE, ARE LIMITED IN DURATION TO NINETY (90) DAYS FROM THE DATE OF ORIGINAL RETAIL PURCHASE.  SOME JURISDICTIONS DO NOT ALLOW LIMITATIONS ON HOW LONG IMPLIED WARRANTY LASTS, SO THE ABOVE LIMITATION MAY NOT APPLY TO YOU.  THE LIMITED WARRANTY SET FORTH HEREIN IS THE ONLY WARRANTY MADE TO YOU AND IS PROVIDED IN LIEU OF ANY OTHER WARRANTIES (IF ANY) CREATED BY ANY DOCUMENTATION, PACKAGING OR OTHERWISE.  THIS LIMITED WARRANTY GIVES YOU SPECIFIC LEGAL RIGHTS, AND YOU MAY ALSO HAVE OTHER RIGHTS, WHICH VARY BY JURISDICTION.
 
5. Disclaimer of Warranties. YOU EXPRESSLY ACKNOWLEDGE AND AGREE THAT USE OF THE SOFTHEON SOFTWARE IS AT YOUR SOLE RISK AND THAT THE ENTIRE RISK AS TO SATISFACTORY QUALITY, PERFORMANCE, ACCURACY AND EFFORT IS WITH YOU. EXCEPT FOR THE LIMITED WARRANTY ON MEDIA SET FORTH ABOVE AND TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, AND WITHOUT WARRANTY OF ANY KIND, AND SOFTHEON AND SOFTHEON’S LICENSORS (COLLECTIVELY REFERRED TO AS “SOFTHEON” FOR THE PURPOSES OF SECTIONS 5 AND 6) HEREBY DISCLAIM ALL WARRANTIES AND CONDITIONS WITH RESPECT TO THE Softheon SOFTWARE, EITHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES AND/OR CONDITIONS OF MERCHANTABILITY, OF SATISFACTORY QUALITY, OF FITNESS FOR A PARTICULAR PURPOSE, OF ACCURACY, OF QUIET ENJOYMENT,.  SOFTHEON DOES NOT WARRANT AGAINST INTERFERENCE WITH YOUR ENJOYMENT OF THE SOFTHEON SOFTWARE, THAT THE FUNCTIONS CONTAINED IN THE SOFTHEON SOFTWARE WILL MEET YOUR REQUIREMENTS, THAT THE OPERATION OF THE SOFTHEON SOFTWARE WILL BE UNINTERRUPTED OR ERROR-FREE, OR THAT DEFECTS IN THE SOFTHEON SOFTWARE WILL BE CORRECTED. NO ORAL OR WRITTEN INFORMATION OR ADVICE GIVEN BY SOFTHEON OR AN SOFTHEON AUTHORIZED REPRESENTATIVE SHALL CREATE A WARRANTY.  .  SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES OR LIMITATIONS ON APPLICABLE STATUTORY RIGHTS OF A CONSUMER, SO THE ABOVE EXCLUSION AND LIMITATIONS MAY NOT APPLY TO YOU.
 
6. Limitation of Liability. TO THE EXTENT NOT PROHIBITED BY LAW, IN NO EVENT SHALL Softheon BE LIABLE FOR PERSONAL INJURY, OR ANY INCIDENTAL, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES WHATSOEVER, INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF PROFITS, LOSS OF DATA, BUSINESS INTERRUPTION OR ANY OTHER COMMERCIAL DAMAGES OR LOSSES, ARISING OUT OF OR RELATED TO YOUR USE OR INABILITY TO USE THE SOFTHEON SOFTWARE, HOWEVER CAUSED, REGARDLESS OF THE THEORY OF LIABILITY (CONTRACT, TORT OR OTHERWISE) AND EVEN IF Softheon HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. SOME JURISDICTIONS DO NOT ALLOW THE LIMITATION OF LIABILITY FOR PERSONAL INJURY, OR OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THIS LIMITATION MAY NOT APPLY TO YOU.  In no event shall Softheon’s total liability to you for all damages (other than as may be required by applicable law in cases involving personal injury) exceed the amount of fifty dollars ($50.00).  The foregoing limitations will apply even if the above stated remedy fails of its essential purpose.
 
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7. Export Law Assurances.   You may not use or otherwise export or re-export the Softheon Software except as authorized by United States law and the laws of the jurisdiction in which the Softheon Software was obtained.  In particular, but without limitation, the Softheon Software may not be exported or re-exported (a) into (or to a national or resident of) any U.S. embargoed countries (currently Cuba, Iran, Libya, North Korea, Sudan, and Syria) or (b) to anyone on the U.S. Treasury Department’s list of Specially Designated Nationals or the U.S. Department of Commerce Denied Person’s List or Entity List.  By using the Softheon Software, you represent and warrant that you are not located in, under control of, or a national or resident of any such country or on any such list.
 
8. Government End Users. The Softheon Software and related documentation are “Commercial Items”, as that term is defined at 48 C.F.R. §2.101, consisting of “Commercial Computer Software” and “Commercial Computer Software Documentation”, as such terms are used in 48 C.F.R. §12.212 or 48 C.F.R. §227.7202, as applicable.  Consistent with 48 C.F.R. §12.212 or 48 C.F.R. §227.7202-1through 227.7202-4, as applicable, the Commercial Computer Software and Commercial Computer Software Documentation are being licensed to U.S. Government end users (a) only as Commercial Items and (b) with only those rights as are granted to all other end users pursuant to the terms and conditions herein.  Unpublished-rights reserved under the copyright laws of the United States.
 
9. Controlling Law and Severability. This License will be governed by and construed in accordance with the laws of the State of New York, as applied to agreements entered into and to be performed entirely within New York. This License shall not be governed by the United Nations Convention on Contracts for the International Sale of Goods, the application of which is expressly excluded. If for any reason a court of competent jurisdiction finds any provision, or portion thereof, to be unenforceable, the remainder of this License shall continue in full force and effect.
 
10. Complete Agreement.   This License constitutes the entire agreement between the parties with respect to the use of the Softheon Software licensed hereunder and supersedes all prior or contemporaneous understandings regarding such subject matter.  No amendment to or modification of this License will be binding unless in writing and signed by Softheon. The parties hereto confirm that they have requested that this License and all related documents be drafted in English.
 
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APPENDIX E
 
Training Services
 
SALES TRAINING
2 Days of training to include:
 
 
1.
Training On The Demonstration Of DivineRune Software
 
 
2.
How To Quality and Find Prospects
 
 
3.
How To Do A Written Proposal
 
 
4.
Written Marketing Support Material Such As Brochures, Presentation Tools and References
 
TECHNICAL TRAINING
3 Days of training to Include:
 
 
1.
Evaluating Your Customer’s Requirements (Hardware and Software) And How To Present Them To The Customer: Supply Chain Management, Secure Logistic, Mobile Commerce, etc.)
 
 
2.
How To Physically Install, Configure and Test DivineRune Software
 
 
3.
How To Do System Administrator And End User Hands-On Training Of DivineRune Software
 
Software Distribution Agreement – R 2011.02
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ADNAS-2011-001 DivineRune Software Distribution Agreement 2012-01-25 FINAL draft
 
APPENDIX F
 
Safe Countries
 
Australia
 
Canada
 
Countries of Scandinavia
 
Countries of the European Community
 
Liechtenstein
 
Mexico
 
New Zealand
 
Switzerland
 
United States of America
 
Software Distribution Agreement – R 2011.02
Page 28
 
Exhibit 31.1
 
CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
I, James A. Hayward, certify that:
 
 
 
1.
I have reviewed this quarterly report on Form 10-Q of Applied DNA Sciences, Inc.;
 
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 
 
a.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
c.
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
d.
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
 
 
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
 
 
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
 
Date: May 15, 2012
 
By:
/s/ JAMES A. HAYWARD
 
 
James A. Hayward
 
 
Chief Executive Officer
 
 
Applied DNA Sciences, Inc.
 
 
Exhibit 31.2
 
CERTIFICATION PURSUANT TO RULE 13A-14(a) OR 15D-14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
I, Kurt H. Jensen, certify that:
 
 
 
1.
I have reviewed this quarterly report on Form 10-Q of Applied DNA Sciences, Inc.;
 
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 
 
a.
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
b.
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
c.
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
d.
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter  (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
 
 
a.
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
 
 
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
 
Date: May 15, 2012
 
 
By:
/s/ KURT H. JENSEN
 
 
Kurt H. Jensen
 
 
Chief Financial Officer
 
 
Applied DNA Sciences, Inc.
 
 
Exhibit 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
          The undersigned, James A. Hayward, Chief Executive Officer of Applied DNA Sciences, Inc. (the “Company”), in connection with the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2012 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, hereby certifies pursuant to the requirements of 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
 
 
●
the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and
 
 
●
the information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
          This certification is being provided pursuant to 18 U.S.C. 1350 and is not to be deemed a part of the Report, nor is it to be deemed to be “filed” for any purpose whatsoever.
 
 
By:
/s/ JAMES A. HAYWARD
 
 
James A. Hayward
 
 
Chief Executive Officer
 
 
Applied DNA Sciences, Inc.
 
 
May 15, 2012
 
 
Exhibit 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
          The undersigned, Kurt H. Jensen, Chief Financial Officer of Applied DNA Sciences, Inc. (the “Company”), in connection with the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2012 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, hereby certifies pursuant to the requirements of 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
 
●
the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and
 
 
●
the information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
          This certification is being provided pursuant to 18 U.S.C. 1350 and is not to be deemed a part of the Report, nor is it to be deemed to be “filed” for any purpose whatsoever.
 
 
By:
/s/ KURT H. JENSEN
 
 
Kurt H. Jensen
 
 
Chief Financial Officer
 
 
Applied DNA Sciences, Inc.
 
 
May 15, 2012