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 June 30, 2013
 
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.)
 
50 Health Sciences Drive
Stony Brook, New York
 
11790
(Address of principal executive offices)
 
(Zip Code)
 
631-240-8800
(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 August 8, 2013, the registrant had 744,219,263 shares of common stock outstanding.
 


 
 

 

 
Applied DNA Sciences, Inc.
 
Form 10-Q for the Quarter Ended June 30, 2013
 
Table of Contents
   
 
Page
PART I - FINANCIAL INFORMATION
 
   
1
   
19
   
27
   
27
   
28
   
28
   
29
   
 
 
 

 

 
Part I 
 
Item 1 - Financial Statements
 
APPLIED DNA SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
   
   
June 30,
   
September 30,
 
   
2013
   
2012
 
   
(unaudited)
       
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
1,831,791
   
$
724,782
 
Accounts receivable, net of allowance of $70,000 and $0, respectively
   
587,655
     
296,994
 
Prepaid expenses
   
141,563
     
80,037
 
Total current assets
   
2,561,009
     
1,101,813
 
                 
Property, plant and equipment-net of accumulated depreciation of $337,593 and $251,958 respectively
   
664,106
     
210,845
 
                 
Other assets:
               
Deposits
   
51,260
     
36,276
 
                 
Intangible assets:
               
Intellectual property, net of accumulated amortization of $19,470 and $0, respectively
   
564,610 
     
— 
 
Total Assets
 
$
3,840,985
   
$
1,348,934
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued liabilities
 
$
1,533,478
   
$
592,009
 
                 
Total Liabilities
   
1,533,478
     
592,009
 
                 
Commitments and Contingencies
               
                 
Stockholders’ Equity
               
Preferred stock, par value $0.001 per share; 10,000,000 shares authorized; -0- issued and outstanding as of June 30, 2013 and September 30, 2012
   
     
 
Series A Preferred stock, par value $0.001 per share; 5,500 shares designated; -0- issued and outstanding as of June 30, 2013 and September 30, 2012
   
     
 
Common stock, par value $0.001 per share; 1,350,000,000 shares authorized; 733,524,076 and 646,182,550 shares issued and outstanding as of June 30, 2013 and September 30, 2012, respectively
   
733,524
     
646,183
 
Additional paid in capital
   
184,549,123
     
169,117,881
 
Accumulated deficit
   
(182,975,140
)
   
(169,007,139
)
Total stockholders’ equity
   
2,307,507
     
756,925
 
                 
Total Liabilities and Stockholders’ Equity
 
$
3,840,985
   
$
1,348,934
 
   
 
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 June 30,
   
Nine Months Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenues
 
$
644,842
   
$
528,574
   
$
1,307,117
   
$
1,563,880
 
                                 
Operating expenses:
                               
Selling, general and administrative
   
 3,240,815
     
1,752,501
     
8,516,390
     
5,729,575
 
Research and development
   
184,981
     
99,958
     
509,132
     
274,528
 
Depreciation and amortization
   
62,280
     
103,338
     
105,105
     
300,419
 
                                 
Total operating expenses
   
3,488,076
     
1,955,797
     
9,130,627
     
6,304,522
 
                                 
LOSS FROM OPERATIONS
   
(2,843,234
   
(1,427,223
)
   
(7,823,510
   
(4,740,642
)
                                 
Other income (expense):
                               
Interest, net
   
333
     
(2,422
)
   
738
     
(642,790
)
Gain (loss) on change in fair value of warrant liability
   
707,289
     
     
(6,145,229
   
 
                                 
Net loss before provision for income taxes
   
(2,135,612
   
(1,429,645
)
   
(13,968,001
)
   
(5,383,432
)
                                 
Income taxes (benefit)
   
     
     
     
 
                                 
NET LOSS
 
$
(2,135,612
 
$
(1,429,645
 
$
(13,968,001
 
$
(5,383,432
                                 
Net loss per share-basic and diluted
 
$
(0.00
 
$
(0.00
 
$
(0.02
 
$
(0.01
                                 
Weighted average shares outstanding-
                               
    Basic and diluted
   
721,142,161
     
594,931,878
     
683,709,950
     
556,036,906
 
                                 
See the accompanying notes to the unaudited condensed consolidated financial statements
 
2
 

 

 
APPLIED DNA SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
       
   
Nine months ended June 30,
 
   
2013
   
2012
 
Cash flows from operating activities:
           
Net loss
 
$
(13,968,001
)
 
$
(5,383,432
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
105,105
     
300,419
 
Fair value of vested options issued to officers, directors and employees
   
1,334,993
     
1,564,311
 
Change in fair value of warrant liability
   
6,145,229
     
 
Amortization of capitalized financing costs
   
     
85,975
 
Amortization of debt discount attributable to convertible debentures
   
     
541,120
 
Fair value change from employee option modification
   
408,605
     
 
Fair value of vested warrants issued for service
   
28,256
     
58,238
 
Common stock issued in settlement of interest
   
     
507,939
 
Bad debt expense
   
70,000
     
 
Change in operating assets and liabilities:
               
Accounts receivable
   
(360,661
   
(234,180
Prepaid expenses and deposits
   
(76,510
   
(44,247
Accounts payable and accrued liabilities
   
616,067
     
(389,151
Deferred revenue
   
     
25,000
 
Net cash used in operating activities
   
(5,696,917
   
(2,968,008
                 
Cash flows from investing activities:
               
Purchase of assets under RedWeb asset purchase agreement
   
(584,080
   
 
Purchase of property and equipment
   
(213,494
   
(65,792
Net cash used in investing activities
   
(797,574
   
(65,792
                 
Cash flows from financing activities:
               
Net proceeds from sale of common stock
   
2,000,000
     
1,542,600
 
Proceeds from sale of Series A preferred stock
   
5,500,000
     
 
Proceeds from exercise of warrants
   
150,000
     
 
Proceeds from exercise of options
   
1,500
     
 
Purchase and cancellation of previously issued warrants
   
(50,000
   
 
Net cash provided by financing activities
   
7,601,500
     
1,542,600
 
                 
Net increase (decrease) in cash and cash equivalents
   
1,107,009
     
(1,491,200
Cash and cash equivalents at beginning of period
   
724,782
     
2,747,294
 
Cash and cash equivalents at end of period
 
$
1,831,791
   
$
1,256,094
 
                 
Supplemental Disclosures of Cash Flow Information:
               
Cash paid during period for interest
 
$
   
$
 
Cash paid during period for taxes
 
$
   
$
 
                 
Non-cash investing and financing activities:
               
Common stock issued in exchange for previously incurred debt
 
$
   
$
4,022,000
 
Property, plant and equipment acquired, included in accounts payable
 
$
325,402
   
$
 
                 
See the accompanying notes to the unaudited condensed consolidated financial statements
 
3
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES
 
General
 
The accompanying unaudited condensed consolidated interim financial statements as of June 30, 2013 and for the three and nine months ended June 30, 2013 and 2012 are unaudited. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of 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 GAAP 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 and nine month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2013. These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended September 30, 2012 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC.
 
The condensed consolidated balance sheet as of September 30, 2012 contained herein has been derived from the audited consolidated financial statements as of September 30, 2012, but do not include all disclosures required by GAAP.
 
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 limited 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 an early stage operating company. For the period from inception through June 30, 2013, the Company has accumulated losses of $182,975,140.
 
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.
 
Use of Estimates
 
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  The most complex and subjective estimates include:  recoverability of long-lived assets, including the value assigned to intangible assets and property and equipment, fair value calculations for warrants, contingencies and allowance for doubtful accounts.  Management reviews its estimates on a regular basis and the effects of any material revisions are reflected in the condensed consolidated interim financial statements in the period they are deemed to be necessary.  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.
 
4
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
 
For revenue from product sales, the Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition (“ASC 605”). ASC 605 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 June 30, 2013 and September 30, 2012, the Company did not record any deferred revenue for the respective periods.
 
Cash Equivalents
 
For the purpose of the accompanying unaudited condensed consolidated interim 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 June 30, 2013 and September 30, 2012, the Company had an allowance for doubtful accounts of $70,000 and $0, respectively.  The Company writes-off receivables that are deemed uncollectible.
 
Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes include, but are not limited to, accounting for intangibles, warrants, equity based compensation and depreciation and amortization.
 
The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.  During the three and nine months ended June 30, 2013 and 2012, the Company incurred losses from operations.  Based upon these results, and trends in the Company’s performance projected through 2013, it is more likely than not that the Company will not realize any benefit from the deferred tax assets recorded by the Company in previous periods.  Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability.  In management’s opinion, adequate provisions for income taxes have been made for all years.  If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.  The Company has identified its federal tax return and its state tax return in New York as “major” tax jurisdictions. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s condensed consolidated interim financial statements.  The Company’s evaluation was performed for tax years 2009 through 2012.  The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.  It is the Company’s policy to accrue interest and penalties on unrecognized tax benefits as components of income tax provision.
 
5
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
 
Property Plant and Equipment
 
Property plant and equipment are stated at cost and are depreciated using the straight line method over their estimated useful lives.  The estimated useful lives for computer equipment, lab equipment and furniture is 3 to 5 years and leasehold improvements are amortized over the shorter of their useful life or the lease term.  Property plant and equipment consist of:
 
   
June 30,
2013
(unaudited)
   
September 30,
2012
 
Computer equipment
 
$
38,640
   
$
33,464
 
Lab equipment
   
589,737
     
296,904
 
Furniture
   
151,039
     
132,435
 
Leasehold improvements
   
222,283
     
 
Total
   
1,001,699
     
462,803
 
Accumulated depreciation
   
(337,593
   
(251,958
Property and equipment, net
 
$
664,106
   
$
210,845
 
 
Impairment of Long-Lived Assets
 
The Company accounts for its long-lived assets in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”) for purposes of determining and measuring impairment of its long-lived assets other than goodwill. ASC 360 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 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted 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 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
 
Comprehensive Income
 
The Company does not have any items of comprehensive income in any of the periods presented.
 
Segment Information
 
The Company follows the provisions of ASC 280, Segment Reporting (“ASC 280”). ASC 280 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 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.
 
Loss per Share
 
The Company presents loss per share utilizing a dual presentation of basic and diluted loss per share.  Basic loss per share includes no dilution and has been calculated based upon the weighted average number of common shares outstanding during the period. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company’s stock options and warrants. For the three and nine months ended June 30, 2013 and 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 835,560,840 and 798,128,629 for the three and nine months ended June 30, 2013, respectively. Fully diluted shares outstanding were 646,110,663 and 641,715,691 for the three and nine months ended June 30, 2012, respectively.
 
6
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
 
Stock Based Compensation
 
The Company accounts for stock-based compensation in accordance with ASC 718, Stock Compensation.  ASC 718 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. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s common stock options are estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company expenses stock-based compensation by using the straight-line method. In accordance with ASC 718, excess tax benefits realized from the exercise of stock-based awards are classified in cash flows from financing activities. The future realization of the reserved deferred tax assets related to these tax benefits associated with the exercise of stock options will result in a credit to additional paid in capital if the related tax deduction reduces taxes payable. The Company has elected the “with and without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year. Under this approach, the windfall tax benefit would be recognized in additional paid-in-capital only if an incremental tax benefit is realized after considering all other benefits presently available.  Stock-based compensation expense recognized under ASC 718 for the three and nine months ended June 30, 2013 were $870,576 and $1,743,598 (including the stock option modification, see Note F), respectively, and for the three and nine months ended June 30, 2012 were $389,533 and $1,564,311, respectively.
 
As of June 30, 2013, 121,354,192 employee stock options were outstanding with 91,892,325 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 nine months ended June 30, 2013 included an aggregate of 14% from one customer of the Company’s total revenues.  No customers represented greater than 10% of the Company’s total revenues for the three months ended June 30, 2013.
 
Two and one customer(s) accounted for 59% and 46% of the Company’s revenues earned from sale of products and services for the three and nine months ended June 30, 2012, respectively.
 
One and two customer(s) accounted for 10% and 54% of the Company’s total accounts receivable at June 30, 2013 and September 30, 2012, respectively.
 
Research and Development
 
The Company accounts for research and development costs in accordance with the ASC 730, Research and Development (“ASC 730”).  Under ASC 730, 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 $184,981 and $99,958 for the three month periods ended June 30, 2013 and 2012, respectively, and $509,132 and $274,528 for the nine month periods ended June 30, 2013 and 2012, respectively.
 
Advertising
 
The Company follows the policy of charging the costs of advertising to expense as incurred.  The Company charged to operations $21,825 and $158,636 as advertising costs for the three and nine month periods ended June 30, 2013 and $13,244 and $68,148 for the three and nine month periods ended June 30, 2012, respectively.
 
7
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE A — SUMMARY OF ACCOUNTING POLICIES (continued)
 
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
 
The Company’s financial instruments are primarily composed of cash, accounts receivable, accounts payable and accrued liabilities, and warrants. The fair value of cash, accounts receivable, accounts payable and accrued liabilities, as reflected in the condensed consolidated balance sheet, approximate its fair value due to the short-term maturity of these instruments.
 
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related asset or liabilities.
 
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
 
The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.
 
For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.
 
As of June 30, 2013, there were no transfers in or out of Level 3 from other levels.
 
The fair value of each warrant is estimated using the Binomial Lattice option valuation model. Significant observable and unobservable inputs include stock price, exercise price, annual risk free rate, term, and expected volatility, and are classified within Level 3 of the valuation hierarchy. An increase or decrease in volatility, in isolation, can significantly increase or decrease the fair value of the warrant. See Note I.
 
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 unaudited condensed consolidated financial position, results of operations or cash flows.
 
Subsequent Events
 
The Company has evaluated events that occurred subsequent to the balance sheet date and through the date the financial statements were available to be issued. Other than those events disclosed in the notes to these financial statements, management concluded that no additional subsequent events required disclosure in these financial statements.
 
8
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE B – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
Accounts payable and accrued liabilities at June 30, 2013 and September 30, 2012 are as follows:
 
 
June 30,
     
 
2013
 
September 30,
 
 
(unaudited)
 
2012
 
Accounts payable
  $ 1,248,944     $ 473,060  
Accrued consulting & legal fees
    148,622       102,500  
Accrued salaries payable
    135,912       16,449  
Total
  $ 1,533,478     $ 592,009  
  
  NOTE C – WARRANT LIABILITY
 
As more fully described in Note E below, on November 28, 2012, the Company entered into a securities purchase agreement (“Purchase Agreement”) with Crede CG II, Ltd. (“Crede”). In connection with the Purchase Agreement, the Company issued Series A, B and C Warrants allowing Crede to purchase 10,752,688, 29,569,892 and 26,881,720 shares of Common Stock, respectively.
 
The Company determined that the Series A and B Warrants described above should be classified as a liability due to transactions which may cause an adjustment to the conversion rate (reset provisions) contained in the warrant agreements and remeasured at each reporting date at their fair value with the changes reported in earnings (loss). Due to a callable provision of the Series C Warrants, the Company deemed such as an equity instrument. The Series C Warrants were repurchased by the Company for $50,000 on January 22, 2013.  Liability classification of the Series A and B Warrants will end upon expiration of reset provisions, at which time the Warrants will be reclassified to equity based on their then fair value. The Company determined the allocated fair value of the Warrants to be $1,181,324 on the issuance date using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.20 per share; dividend yield 0%; expected terms 5 years; risk free interest rate: 0.64%; expected volatility of: 146.32%; and the expected price at which holders are likely to exercise their Warrants of $0.2232.
 
On April 25, 2013, Crede effected the cashless exercise of the Series A and Series B Warrants (see Note E).  At April 25, 2013 (date of exercise), the Company determined the fair value of the Warrants to be $7,326,553 using the Binomial Lattice model with the following assumptions: fair value of the Company’s Common Stock $0.221 per share; dividend yield 0%; expected term: 4.54 years; risk free interest rate: 0.71%; expected volatility of: 125.97%; and an exercise price of $0.2232. The change in fair value of the warrant liability amounted to a (gain) loss of $(707,289) and $6,145,229 for the three months and nine months ended June 30, 2013, respectively and was included in the results of operations.  Upon exercise, the fair value of the Series A and Series B Warrants were reclassified to equity.
 
NOTE D - RELATED PARTY TRANSACTIONS
 
The Company has consulting agreements with outside contractors, certain of whom are also Company stockholders. The agreements are generally month to month.
 
NOTE E - CAPITAL STOCK
 
The Company is authorized to issue 1,350,000,000 shares of Common Stock with a par value of $0.001, 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 June 30, 2013 and September 30, 2012, there were 733,524,076 and 646,182,550 shares of Common Stock issued and outstanding, respectively, and no shares of Preferred Stock issued and outstanding.
 
During the three months ended June 30, 2013 and 2012, the Company expensed $15,018 and $0 related to stock based compensation, respectively. During the nine month periods ended June 30, 2013 and 2012, the Company has expensed $28,256 and $58,238 related to stock based compensation, respectively.
 
9
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE E - CAPITAL STOCK (continued)
 
Preferred and Common Stock Transactions during the Nine Months Ended June 30, 2013:
 
On January 7, 2013, the Company completed the Second Closing of its transaction with Crede pursuant to the Purchase Agreement with Crede. The Company sold 5,500 shares of Series A Preferred Stock (“Series A Preferred”) to Crede at a price of $1,000 per share. The Company received gross proceeds of $5,500,000.   The Company exercised its option on January 8, 2013 and converted the Series A Preferred held by Crede into 25,462,963 shares of the Company’s Common Stock at a conversion price of $0.216 per share.
 
The Series A Preferred was convertible at the option of the holder thereof, in whole or in part, from time to time and at any time, at the lesser of (i) the Fixed Conversion Price and (ii) the Non-Fixed Conversion Price. The Fixed Conversion Price was equal to $0.186, which was the purchase price for the Common Stock at the Initial Closing. The Non-Fixed Conversion Price was equal to the consolidated closing bid price of the Company’s Common Stock for the most recently completed trading day as of the time of conversion. The Series A Preferred was convertible into Common Stock at the Company’s option, in whole or in part, from time to time during the ten trading day period beginning one trading day following the effectiveness of the registration statement (as described below) through the eleventh trading day following effectiveness of such registration statement, at the Non-Fixed Conversion Price, provided that certain equity conditions were met and the Company was not in breach of certain conditions. The Series A Preferred would have been automatically converted into Common Stock on the one year anniversary of the issuance of the Series A Preferred at the then applicable Non-Fixed Conversion Price, provided that certain equity conditions are met and the Company is not in breach of certain conditions. The Series A Preferred contained weighted average anti-dilution protection. The Series A Preferred did not accrue dividends except to the extent dividends are paid on the Common Stock. The Company’s Common Stock was junior in rank to the Series A Preferred with respect to preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company. The Series A Preferred generally had no voting rights except as required by law.
 
Pursuant to the Purchase Agreement, Crede agreed to purchase the Series A Preferred on the first business day following the date a registration statement covering the resale of all shares of Common Stock issuable pursuant to the Purchase Agreement, including those underlying the Series A Preferred and Series A, B and C Warrants, was declared effective by the SEC. The Company’s registration statement on Form S-3 was declared effective by the SEC on January 4, 2013.
 
Pursuant to the Purchase Agreement, Crede purchased at the Initial Closing, held on November 29, 2012, 10,752,688 shares of the Company’s Common Stock at a price of $0.186 per share, resulting in gross proceeds to the Company of $2,000,000. In addition, at the Initial Closing, Crede was issued (i) five year Series A Warrants allowing it to initially purchase 10,752,688 shares of Common Stock at a price of $0.2232 per share, (ii) five year Series B Warrants allowing it to initially purchase 29,569,892 shares of Common Stock at a price of $0.2232 per share which became exercisable at the Second Closing and (iii) Series C Warrants to initially purchase 26,881,720 shares of Common Stock which became exercisable for six months after the eleventh trading day following the Second Closing.  Crede may also exchange the Warrants for Common Stock pursuant to a Black-Scholes formula. The Series A, B and C Warrants each contain a 9.9% “blocker” so that in no event shall any of the Warrants be exercisable or exchangeable into or for Common Stock to the extent that such exercise or exchange would result in Crede having “beneficial ownership” (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) of more than 9.9% of the Company’s Common Stock.
 
On January 22, 2013, the Company exercised its option to repurchase the Series C Warrants issued to Crede for $50,000.
 
Crede may exercise Series A and Series B Warrants by paying in cash or on a cashless basis by exchanging such Warrants for Common Stock using the Black-Scholes value. In the event that the Common Stock trades at a price 25% or more above the exercise price of the Series A and Series B Warrants for a period of 20 consecutive days (with average daily dollar volume of Common Stock on the OTC Bulletin Board at least equal to $300,000), the Company may obligate Crede to exercise such Warrants for cash.  On April 25, 2013, Crede effected the cashless exercise of 10,752,688 Series A Warrants and 29,569,892 Series B Warrants, and the Company thereupon issued to Crede an aggregate of 31,257,045 shares of its Common Stock.
 
Crede has the right to participate in other equity or equity-linked financings completed by the Company for a period of 180 days from the later of the Initial Closing or the date the registration statement went effective.
 
10
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE E - CAPITAL STOCK (continued)
 
In addition, the Company has agreed not to issue additional Common Stock or securities convertible into Common Stock at a price below $0.186 per share or the market price of the Common Stock on the date the registration statement was declared effective, for a period of 180 days from the effective date of the registration statement, except for issuances (i) pursuant to acquisitions, joint ventures, license arrangements, leasing arrangements and other similar arrangements, (ii) to employees, consultants, directors and officers approved by the Board or pursuant to a plan approved by the Board, (iii) pursuant to one or more contracts entered into by the Company with third parties which would result in revenues to the Company during a three-month period equal to an annual run rate of $15 Million in revenues and (iv) pursuant to a contract entered into by the Company with a third party which would reasonably be expected to result in more than $3 Million in annual receivables.
 
Until one year after the Second Closing, the Company is prohibited from entering into any transaction to (i) sell any convertible securities at a conversion rate or other price that is generally based on and/or varies with the trading prices of the Company’s Common Stock at any time after the initial issuance of such convertible securities or (ii) sell securities at a future determined price, including, without limitation, an “equity line of credit” or an “at the market offering.”
 
On July 19, 2013, the Company entered into another securities purchase agreement (“Purchase Agreement”) with an affiliate of Crede; see Note K, Subsequent Events, for further details on the new financing.
 
NOTE F - 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
 
$
0.04000
 
3,000,000
   
2.17
   
$
0.04000
 
3,000,000
 
$
0.04000
 
$
0.04405
 
510,784
   
4.04
   
$
0.04405
 
510,784
 
$
0.04405
 
$
0.04750
 
3,789,489
   
5.04
   
$
0.04750
 
3,789,489
 
$
0.04750
 
$
0.05529
 
226,081
   
4.53
   
$
0.05529
 
226,081
 
$
0.05529
 
$
0.06000
 
2,000,000
   
0.64
   
$
0.06000
 
2,000,000
 
$
0.06000
 
$
0.07100
 
1,000,000
   
1.57
   
$
0.07100
 
1,000,000
 
$
0.07100
 
$
0.09000
 
6,900,000
   
3.18
   
$
0.09000
 
6,900,000
 
$
0.09000
 
$
0.17900
 
100,000
   
2.35
   
$
0.17900
 
100,000
 
$
0.17900
 
$
0.21400
 
100,000
   
2.85
   
$
0.21400
 
   
 
$
0.50000
 
1,600,000
   
0.32
   
$
0.50000
 
1,600,000
 
$
0.50000
 
     
19,226,354
   
2.83
   
$
 0.10331
 
19,126,354
 
$
0.10273
 
 
11
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE F - STOCK OPTIONS AND WARRANTS (continued)
 
Transactions involving warrants are summarized as follows:
 
   
Number of
Shares
   
Weighted Average
Price Per Share
 
Balance, October 1, 2011
   
58,205,280
   
$
0.140
 
Granted
   
1,075,000
     
0.071
 
Exercised
   
(5,039,633
)
   
        (0.045
)
Cancelled or expired
   
(8,400,000
)
   
(0.161
)
Balance at September 30, 2012
   
45,840,647
   
$
0.145
 
Granted
   
67,404,300
     
0.223
 
Exercised
   
(60,236,873
)
   
(0.170
Cancelled or expired
   
(33,781,720
)
   
(0.280
)
Balance, June 30, 2013
   
19,226,354
   
$
0.103
 
 
Transactions involving warrants are summarized as follows:
 
On November 7, 2012, 100,000 warrants were issued in connection with services. The warrants are exercisable on or after May 7, 2013 for three years at an exercise price of $0.179 per share. The fair value of the warrants of $13,238 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 129.56% and risk free rate from 0.36% and were charged to current period operations.
 
On November 29, 2012, in connection with a securities purchase agreement as described in Note E above, the Company issued an aggregate of 67,204,300 warrants to purchase the Company’s common stock exercisable for one to five years after defined date or events, at an exercise price of $0.2232.
 
In March 2013, the Company issued an aggregate of 1,500,000 shares of its common stock in connection with the exercise of warrants at an exercise price of $0.10 per share; net proceeds of $150,000.
 
In April 2013, the Company issued 11,285,376 shares of its common stock in connection with the cashless exercise of 15,438,337 warrants to acquire the Company’s stock at a weighted average exercise price of $0.063 per share.
 
In May 2013, the Company issued 2,418,971 shares of its common stock in connection with the cashless exercise of 2,975,956 warrants to acquire the Company’s stock at a weighted average exercise price of $0.042 per share.
 
On May 7, 2013, 100,000 warrants were issued in connection with services. The warrants are exercisable on or after November 7, 2013 for three years at an exercise price of $0.214 per share.  The fair value of the warrants of $15,018 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 119.72% and risk free rate from 0.35% and were charged to current period operations.
 
As described in Note E above, on January 22, 2013, the Company exercised its option to repurchase 26,881,720 Series C Warrants issued to Crede for $50,000.  On April 25, 2013, Crede effected the cashless exercise of 10,752,688 Series A Warrants and 29,569,892 Series B Warrants, and the Company thereupon issued to Crede an aggregate of 31,257,045 shares of its Common Stock.
 
12
 

 

 
APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE F - STOCK OPTIONS AND WARRANTS (continued)
 
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 there under. 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 there under 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 the Company’s success with an award of options to purchase shares of Common Stock.  As of June 30, 2013, a total of 137,583,192 shares have been issued and options to purchase 121,354,192 shares are outstanding 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
 
$
0.0500
 
24,000,000
   
1.91
   
$
0.0500
   
24,000,000
 
$
0.0500
 
$
0.0585
 
50,000,000
   
5.04
   
$
0.0585
   
31,250,000
 
$
0.0585
 
$
0.0600
 
30,000,000
   
2.00
   
$
0.0600
   
22,500,000
 
$
0.0600
 
$
0.0650
 
634,825
   
3.43
   
$
0.6500
   
634,825
 
$
0.0650
 
$
0.0680
 
4,770,000
   
3.42
   
$
0.0680
   
4,770,000
 
$
0.0680
 
$
0.0700
 
2,850,000
   
1.86
   
$
0.0700
   
1,837,500
 
$
0.0700
 
$
0.0900
 
1,500,000
   
3.17
   
$
0.0900
   
1,500,000
 
$
0.0900
 
$
0.1100
 
5,400,000
   
4.96
   
$
0.1100
   
5,400,000
 
$
0.1100
 
$
0.1799
 
2,099,367
   
4.42
   
$
0.1799
   
 
$
 
$
0.2000
 
100,000
   
4.88
    $
      0.2000
   
 
$
 
     
121,354,192
   
3.49
   
$
0.0628
   
91,892,325
 
$
0.0610
 
 
13
 

 

APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE F - STOCK OPTIONS AND WARRANTS (continued)
 
Transactions involving stock options issued to employees are summarized as follows:
                   
   
Number of
Shares
   
Weighted Average
Exercise Price Per Share
    Aggregate
Intrinsic Value
Outstanding at October 1, 2011
   
120,650,000
   
$
0.060
       
Granted
   
6,558,825
     
0.070
       
Exercised
   
(500,000
)
   
 (0.080
     
Cancelled or expired
   
(1,500,000
)
   
 (0.080
     
Outstanding at September 30, 2012
   
125,208,825
   
$
0.060
       
Granted
   
7,599,367
     
0.131
       
Exercised
   
(5,979,000
)
   
(0.042
)
     
Canceled or expired
   
  (5,475,000
   
        (0.109
     
Outstanding at June 30, 2013
   
121,354,192
   
$
0.063
       
Vested at June 30, 2013
   
91,892,325
   
$
0.061
    $
 0.138
Non-vested at June 30, 2013
   
29,461,867
   
$
0.068
    $
 0.131
 
Transactions involving stock options granted to employees are summarized as follows:
 
On November 30, 2012, the Company granted an aggregate of 2,099,367 options to non-employee board of director members (except Mr. Catenacci) under the 2005 Incentive Stock Plan. The options are exercisable at $0.1799 per share for five years, vesting one year from the date of issuance. The fair value of options was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 146.33% and risk free rate of 0.82%.
 
On May 12, 2013, the Company granted an aggregate of 100,000 options to an employee under the 2005 Incentive Stock Plan.  The options are exercisable at $0.20 per share for five years, vesting at 25% each anniversary for the next four years. The fair value of the options was determined using the Black Scholes Option Pricing Model with the following assumptions:  dividend yield $-0-, volatility of 117.57% and risk free rate of 0.60%.
 
During the nine months ended June 30, 2013, the Company issued 4,639,483 shares of its Common Stock in connection with the cashless exercise of 5,954,000 options to acquire the Company stock at weighted average $.053 per share. The Company also issued 25,000 shares of its Common Stock in connection with the exercise of 25,000 options at $0.06 per share.
 
On May 15, 2013 the Company extended the term of 5,400,000 options that were set to expire to June 16, 2018.  The Company recorded $408,605 of stock compensation expense for the three and nine months ended June 30, 2013 in connection with this modification as the incremental difference between the fair value of the stock options immediately before and after the modification.
 
The Company recorded $870,576 and $1,743,598 (including the stock option modification) as stock compensation expense for the three and nine month periods ended June 30, 2013, respectively, and $389,533 and $1,564,311 for the three and nine month periods ended June 30, 2012, respectively, for the vesting portion of all employee options outstanding. As of June 30, 2013, unrecorded compensation cost related to non-vested awards was $289,106, which is expected to be recognized through 2018.
 
NOTE G - COMMITMENTS AND CONTINGENCIES
 
On June 14, 2013, the Company entered into an operating lease agreement for its new corporate headquarters located in Stony Brook, New York.  The lease is for a 30,000 square foot building.  The term of the lease commenced on June 15, 2013 and expires on May 31, 2016, with the option to extend the lease for two additional three-year periods.  The base rent during the initial lease term is $449,142 per annum.  This new location replaces a lesser amount of space leased by the Company in an adjacent building, which was for corporate use.   Total lease rental expenses for the three and nine month periods ended June 30, 2013 were $82,033 and $226,581, respectively.  Total lease rental expenses for the three and nine month periods ended on June 30, 2012 were $63,200 and $173,502, respectively.
 
14
 

 

 
Employment and Consulting Agreements
 
The Company has employment agreements with the Chief Executive Officer and Chief Financial Officer as disclosed in the notes to audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2012 filed with the SEC. Also, 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.  When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business.
 
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. alleged 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 were asserted against the Company, including alleged misappropriation of trade secrets, antitrust violations, civil RICO, and patent infringement. Demodulation, Inc. sought damages and injunctive relief against the Company. The Company believes these claims were without merit.  On January 27, 2012, the Company filed a motion to dismiss the amended complaint for failure to state a claim and on other grounds. On December 12, 2012, the Court entered an order on the Company’s motion to dismiss the amended complaint. The Court granted in part and denied in part the Company’s motion to dismiss. The Court dismissed four out of the five claims asserted against the Company without prejudice, leaving only the patent infringement claim.  Subsequently, the parties stipulated to sever the patent infringement claim against the Company from the claims against the other defendants.  The Court entered an order severing the patent claim on February 20, 2013, and terminated the main lawsuit against the Company.  Demodulation, Inc. may seek to re-file its patent claim as a separate action, but to date has not done so.     If Demodulation re-files its action, the Company intends to vigorously defend the action.
 
Smartwater, Ltd. v. Applied DNA Sciences, Inc. (No. 12-CV-05731-JS-AKT (E.D.N.Y.))
 
On June 6, 2012, a complaint for patent infringement was filed against the Company by Smartwater, Ltd. in the United States District Court for the District of Massachusetts in an action entitled Smartwater, Ltd. v. Applied DNA Sciences, Inc., No. 1:12-cv-11009-PBS. The complaint alleged that the Company infringed one or more claims under two of plaintiff’s patents by selling or offering for sale, manufacturing and using certain of the Company’s products, by inducing others to infringe and by contributing to infringement by others. The plaintiff sought injunctive relief with respect to the patents as well as awards of damages and attorneys’ fees. The Company had not been served with the complaint and on August 24, 2012 the plaintiff voluntarily dismissed the complaint and refiled a similar complaint in the United States District Court for the Southern District of Florida, No. 12-61660-DMM (S.D. Fla.). On August 30, 2012, plaintiff served the Company with the complaint. The refiled complaint seeks injunctive relief with respect to one of the patents as well as awards of damages and attorneys’ fees. The Company filed a motion to dismiss and a motion to transfer the action to the Eastern District of New York. On November 19, 2012, the Court granted the Company’s motion to transfer the action to the Eastern District of New York. The Company’s motion to dismiss is pending before the Court in the Eastern District of New York.  An initial conference with the Court was held on February 21, 2013, at which time the Court directed the conduct of limited document discovery pending the Court’s decision on the motion to dismiss. On June 21, 2013, plaintiff filed a motion seeking leave from the Court to file an amended complaint asserting additional allegations in support of its claims.  The Company filed its opposition to the motion on July 29, 2013.  The Company believes that none of its products infringe any claims under either of plaintiff’s patents, and moreover notes that one of plaintiff’s patents has expired   and the other is due to expire on February 25, 2014.  The Company believes the allegations in the complaint are without merit and intends to defend the action vigorously. The ultimate outcome of this claim cannot be determined at the date of this report.
 
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APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE H - LIQUIDITY
 
The Company incurred a net loss of $13,968,001 and generated negative operating cash flow of $5,696,917 for the nine months ended June 30, 2013. However, the Company has attained positive working capital of $1,027,531 as of June 30, 2013.  Management believes that the positive cash balance and working capital as of June 30, 2013 as well as the proceeds from the securities purchase agreement with Crede entered into on July 19, 2013 (see Note K) along with the current customer base, the projected cash flow and the minimum guaranteed revenues for the next fiscal year will allow the Company to continue to improve its working capital and to have sufficient capital resources to meet projected cash flow requirements.
 
NOTE I - FAIR VALUE
 
The carrying value of cash, accounts receivable, accounts payable and accrued expenses approximate estimated fair values because of their short maturities.
 
The carrying value of the warrant liability is determined using the Binomial Lattice model option pricing model as described in Note C. Certain assumptions used in the calculation of the warrants liability represent level-3 unobservable inputs. The Company did not have any assets or liabilities categorized as Level 1 or 2 as of June 30, 2013.
 
The following table summarizes the activity of Level 3 inputs measured on a recurring basis:
     
Fair Value Measurements of Common Stock Warrants Using Significant Unobservable Inputs (Level 3)
 
Nine Months Ended June 30,
   
2013
   
2012
Balance at October 1,
  $     $  
Issuance of Series A and B Warrants
    1,181,324        
Adjustment resulting from change in value recognized in earnings (a)
    6,145,229        
Reclassification to equity upon exercise
    (7,326,553 )      
Balance at June 30,
  $     $  
 
(a) Adjustment resulting from change in fair value is the amount of total gains or losses for the period attributable to the change in unrealized gains or losses relating to liabilities held at the reporting date. The unrealized gain or loss is recorded in change in fair value of warrant liability in the accompanying condensed consolidated statements of operations.
 
NOTE J – ASSET PURCHASE AGREEMENT
 
On May 10, 2013, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with RedWeb Technologies Limited (“RedWeb”), a corporation incorporated and registered under the laws of England & Wales, to purchase certain assets of RedWeb (“Purchased Assets”) relating to its forensic tagging security system for a purchase price of £400,000 ($624,080). The Company completed the acquisition of the Purchased Assets on the same day. The Purchased Assets include RedWeb’s Sentry 500 Intruder Spray System, RedWeb’s Advanced Molecular Taggent Technology and all products relating thereto, certain intellectual property and supplies relating to the foregoing. £40,000 ($62,408) of the purchase price shall be held in escrow for up to one year to be applied against the indemnification obligations of RedWeb pursuant to the Asset Purchase Agreement. This transaction was accounted for as an asset acquisition in accordance with ASC 805.  The Company assigned $584,080 of the purchase price to intellectual property and the remaining $40,000 was for supplies, which were expensed during the three months ended June 30, 2013.
 
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APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE K – SUBSEQUENT EVENTS
 
Securities Purchase Agreement
 
On July 19, 2013, the Company entered into a securities purchase agreement (“Purchase Agreement”) with Crede CG III, Ltd. (“Crede”).  Pursuant to the Purchase Agreement, at the initial closing on July 19, 2013 (“Initial Closing”), Crede purchased 10,695,187 shares of the Company’s Common Stock at a price of $0.187 per share which was the consolidated closing bid price of the Common Stock on the day prior to the signing of the Purchase Agreement.  The Company received gross proceeds of $2,000,000.  Pursuant to the Purchase Agreement, Crede agreed to purchase an additional $5,500,000 of the Company’s Series B Convertible Preferred Stock (“Series B Preferred”) at a purchase price of $1,000 per share on the date a registration statement (as described below) is declared effective by the SEC (“Second Closing”).
 
The Series B Preferred is convertible at the option of the holder thereof, in whole or in part, from time to time and at any time, at the lesser of (i) the Fixed Conversion Price and (ii) the Non-Fixed Conversion Price. The Fixed Conversion Price is equal to $0.187 per share which is the purchase price for the Common Stock at the Initial Closing.  The Non-Fixed Conversion Price is equal to the consolidated closing bid price of the Company’s Common Stock for the most recently completed trading day as of the time of conversion.  The Series B Preferred will be convertible into Common Stock at the Company’s option, in whole or in part, from time to time during the period beginning one trading day following the effectiveness of the registration statement (as described below) through the eleventh trading day following effectiveness of such registration statement, at the Non-Fixed Conversion Price, provided that certain equity conditions are met and the Company is not in breach of certain conditions.  The Series B Preferred will be automatically converted into Common Stock on the one year anniversary of the issuance of the Series B Preferred at the then applicable Non-Fixed Conversion Price, provided that certain equity conditions are met and the Company is not in breach of certain conditions.  The Series B Preferred contains weighted average anti-dilution protection.  The Series B Preferred will not accrue dividends except to the extent dividends are paid on the Common Stock.  The Company’s Common Stock will be junior in rank to the Series B Preferred with respect to preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company.  The Series B Preferred will generally have no voting rights except as required by law.
 
The Company also issued Crede at the Initial Closing Warrants with a term of five years (though such term may be extended in certain instances) (“Series A Warrants”) allowing it to purchase 10,695,187 shares of Common Stock at a price of $0.2431 per share which is equal to a 30% premium to the consolidated closing bid price of the Common Stock on the day prior to the signing of the Purchase Agreement.  At the Initial Closing, the Company also issued Crede a second set of Warrants (“Series B Warrants”) allowing it to purchase 29,411,764 shares of Common Stock, which is equal to one share of Common Stock for every share of Common Stock which would be issuable to it if it fully converted the Series B Preferred into Common Stock at the Fixed Conversion Price.  The exercise price of the Series B Warrants is $0.2431 per share, which is equal to a 30% premium to the consolidated closing bid price of the Common Stock on the day prior to the signing of the Purchase Agreement.  The Series B Warrants are not exercisable until the earlier of (i) November 7, 2013 and (ii) the Second Closing, and have a term of five years (though such term may be extended in certain instances).
 
 In addition, at the Initial Closing, the Company issued to Crede a third set of Warrants (“Series C Warrants”) which is only exercisable for six months from the earlier of (i) November 7, 2013 and (ii) after the eleventh trading day following the Second Closing.  The Series C Warrants will allow Crede to purchase, at a price of $0.2431 per share (equal to a 30% premium to the consolidated closing bid price of the Common Stock on the day prior to the signing of the Purchase Agreement), 26,737,967 shares of Common Stock, which is equal to one-third the sum of (i) the number of shares of Common Stock issued at the Initial Closing, (ii) the number of shares of Common Stock which would be issuable to it if it fully converted the Series B Preferred into Common Stock at the Fixed Conversion Price, (iii) the number of shares of Common Stock subject to the Series A Warrants and (iv) the number of shares of Common Stock subject to the Series B Warrants.
 
The Series B and Series C Warrants provide the Company with an option to repurchase any remaining unexercised portion of such Warrants for a repurchase price equal to $50,000, if the Second Closing is terminated pursuant to the Purchase Agreement. The Company also has the option to repurchase the Series C Warrants at an aggregate repurchase price equal to $10,000 at the close of trading on the tenth trading day immediately following the Second Closing but only if the registration statement (described below) is effective and covers and is available for use for the resale of (i) all shares of Common Stock issued at the First Closing, (ii) all shares of Common Stock issued upon conversion of the Series B Preferred, (iii) all shares of Common Stock which would then be issuable if the full then unconverted portion of the Series B Preferred were then fully converted into Common Stock at the then applicable conversion price, (iv) all shares of Common Stock subject to the Series A Warrants and (v) all shares of Common Stock subject to the Series B Warrants.
 
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APPLIED DNA SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(unaudited)
 
NOTE K – SUBSEQUENT EVENTS (continued)
 
Crede may exercise Series A and Series B Warrants by paying in cash or on a cashless basis by exchanging such Warrants for Common Stock using a negotiated Black-Scholes value.  In the event that the Common Stock trades at a price 25% or more above the exercise price of the Series A and Series B Warrants for a period of 20 consecutive days (with average daily dollar volume of Common Stock on the OTC Bulletin Board at least equal to $300,000), the Company may obligate Crede to exercise such Warrants for cash.
 
Pursuant to a registration rights agreement between the Company and Crede, the Company agreed to file a registration statement within 30 days of the Initial Closing and to use its best efforts to get such registration statement effective within 90 days.  The registration statement will cover the resale of all shares of Common Stock issuable pursuant to the Purchase Agreement, including the shares of Common Stock underlying the Series B Preferred and Series A, B and C Warrants.  The registration statement was declared effective by the SEC on July 31, 2013.  The Company has also agreed to prepare and file amendments and supplements to the registration statement to the extent necessary to keep the registration statement effective for the period of time required under the Purchase Agreement.  In the event the registration statement failed to be declared effective within the 90 day period, the Company would have been subject to monthly penalties which would expire six months after the Initial Closing.
 
The Company agreed to pay Crede an investment fee equal to $100,000 at the Initial Closing and $265,000 at the Second Closing.
 
The Series B Preferred and the Series A, B and C Warrants each contain a 9.9% “blocker” so that in no event shall the Series B Preferred or any of the Series A, B and C Warrants be convertible or exercisable (including through the cashless exercise exchange provision) into or for Common Stock to the extent that such conversion or exercise would result in Crede having “beneficial ownership” (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) of more than 9.9% of the Common Stock. Crede would, however, have the right from time to time to convert, exercise or exchange for shares of Common Stock, which over time would aggregate to greater than 9.9% beneficial ownership if all such shares of Common Stock so acquired had been held at one time by Crede.
 
Crede has the right to participate in other equity or equity-linked financings completed by the Company for a period of 180 days from the later of the Initial Closing or the date the registration statement goes effective.
 
In addition, the Company has agreed not to issue additional Common Stock or securities convertible into Common Stock at a price below $0.187 per share or the market price of the Common Stock on the date the registration statement is declared effective, for a period of 180 days from the effective date of the registration statement, except for issuances (i) pursuant to acquisitions, joint ventures, license arrangements, leasing arrangements and other similar arrangements, (ii) to employees, consultants, directors and officers approved by the Board or pursuant to a plan approved by the Board, (iii) pursuant to one or more contracts entered into by the Company with third parties which would result in revenues to the Company during a three-month period equal to an annual run rate of $15 Million in revenues and (iv) pursuant to a contract entered into by the Company with a third party which would reasonably be expected to result in more than $3 Million in annual receivables.
 
Until one year after the Second Closing, the Company is prohibited from entering into any transaction to (i) sell any convertible securities at a conversion rate or other price that is generally based on and/or varies with the trading prices of the Company’s Common Stock at any time after the initial issuance of such convertible securities or (ii) sell securities at a future determined price, including, without limitation, an “equity line of credit” or an “at the market offering.”
 
On July 31, 2013, the Company completed the Second Closing of its transaction with Crede and sold 5,500 shares of Series B Preferred to Crede at a price of $1,000 per share.  The Company received gross proceeds of $5,500,000 less an investment fee of $265,000.
 
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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, 2012.  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 modified and derivatized botanical-DNA based security and authentication solutions that can help protect products, brands and intellectual property of companies, and protect governments and consumers from theft, counterfeiting, fraud and diversion.  SigNature® DNA, SmartDNA®, DNANet®, BioMaterial Genotyping™, digitalDNA®, and Cashield®, our principal anti-counterfeiting and product authentication solutions, can be used in numerous industries, including cash-in-transit (transport and storage of banknotes), microcircuits and other electronics, homeland security, textiles and apparel, identity cards and other secure documents, law enforcement, 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 ribbons, threads, 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, microcircuits and other electronics, 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.
 
DNANet . We have recently developed DNANet tactical DNA products for law enforcement, in the form of DNA-marked sprays and liquids. These products, which are 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. DNANet is now included in the SmartDNA family of products.
 
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 global cotton industry from cotton growers, mills, wholesalers, distributors, manufacturers and retailers through trade groups and government agencies.
 
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digitalDNA . digitalDNA 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 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.
 
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 European Union 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.
 
Plan of Operations
 
General
 
To date, the substantial portion of our revenues has 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 in expanding our laboratory and office facilities and increasing our personnel to meet anticipated future demand.   We expect to generate revenues from sales of our SigNature Program, Cashield, DNANet, SmartDNA, digitalDNA and BioMaterial Genotyping offerings.  We have developed or are currently attempting to develop business in the following target markets: homeland security, cash-in-transit, textile and apparel authentication, secure documents, pharmaceuticals, consumer products, law enforcement, fine wine, art and collectibles, and digital and recording media.  Our developments in the cash-in-transit, component authentication and textile and apparel authentication markets have contributed to 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. 
 
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
●           Equity based compensation.
 
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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.
 
For revenue from product sales, we recognize revenue in accordance with ASC 605, Revenue Recognition (“ASC 605”). ASC 605 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 incorporates ASC 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 ASC 605-25 on our financial position and results of operations are not significant.
 
Allowance for Uncollectible Receivables
 
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 June 30, 2013 and September 30, 2012, the Company had an allowance for doubtful accounts of $70,000 and $0, respectively.  The Company writes-off receivables that are deemed uncollectible.
 
Equity Based Compensation
 
The Company follows ASC 718, Compensation (“ASC 718”) which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values.
 
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 June 30, 2013 and 2012
 
Revenues
 
For the three months ended June 30, 2013, we generated $644,842 in revenues from operations principally from the sales of authentication services. For the three months ended June 30, 2012, we generated $528,574 in revenues from operations. The $116,268 or 22.0% increase in sales for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was primarily caused by SigNature DNA sales to suppliers of the United States Defense Logistics Agency (“DLA”).  In late January 2013, the DLA announced that it would subsidize SigNature DNA marking costs for its trusted suppliers, and in March 2013, after this and other mechanisms were in place, we were able to begin SigNature DNA shipments for this market. The sales to these third party suppliers during the three months ended June 30, 2013 was offset by a decrease in sales due to the completion of our prior pilot contract with the Logistics Management Institute (“LMI”).
 
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Costs and Expenses
 
Selling, General and Administrative
 
Selling, general and administrative expenses increased from $1,752,501 for the three months ended June 30, 2012 to $3,240,815 for the three months ended June 30, 2013.  The increase of $1,488,314, or 84.9%, is primarily attributable to higher professional fees, specifically for legal and consulting, increased salary due to the increase in headcount by approximately 60.0% from June 30, 2012 as compared to June 30, 2013 and bad debt expense of $70,000 for the three months ended June 30, 2013 as compared to $0 for the three months ended June 30, 2012.  The increase is also due to expenses incurred for the relocation of our corporate office during the three months ended June 30, 2013.
 
Research and Development
 
Research and development expenses increased from $99,958 for the three months ended June 30, 2012 to $184,981 for the three months ended June 30, 2013. The increase of $85,023 or 85.1% is attributable to additional research and development activity needed to support the increase in current operations.
 
Depreciation and Amortization
 
In the three months ended June 30, 2013, depreciation and amortization decreased by $41,058 or 39.7% from $103,338 for the three months ended June 30, 2012 to $62,280 for the three months ended June 30, 2013.  The decrease is primarily attributable to completion of the amortization of our intangible property which we incurred approximately $90,000 of amortization expense during the three months ended June 30, 2012 as compared to $19,470 for the three months ended June 30, 2013.  The amortization during the three months ended June 30, 2013 related to the intellectual property acquired from RedWeb.  This decrease was offset by an increase in depreciation and amortization expense for the leasehold improvements and lab equipment purchased associated with the relocation of our corporate office and intellectual property acquired with the RedWeb asset purchase agreement during the three months ended June 30, 2013.
 
Total Operating Expenses
 
Total operating expenses increased to $3,488,076 for the three months ended June 30, 2013 from $1,955,797 for the three months ended June 30, 2012, for an increase of $1,532,279 or 78.3% primarily attributable to an increase in professional fees, salaries paid and in R&D expenditures, which was offset by a decrease in depreciation and amortization expense, as described above.
 
Interest, net
 
Interest, net for the three months ended June 30, 2013 was income of $333 from a net interest expense of $2,422 for the three months ended June 30, 2012. The decrease in interest expense was due to no outstanding notes payable as of June 30, 2013.
 
Gain from Change in Fair Value of Warrant Liability
 
In November 2012, we issued warrants containing certain reset provisions which require us to classify them as a liability and mark these warrants to market and record the change in fair value each reporting period as a non-cash adjustment to our current period operations.  This resulted in a gain of $707,289 for the three months ended June 30, 2013 which is included in current period operations as compared to $-0- for the same period last year.  These warrants were reclassified to equity upon exercise on April 25, 2013.
 
Net Loss
 
Net loss for the three months ended June 30, 2013 increased to $2,135,612 from a net loss of $1,429,645 for the three months ended June 30, 2012, which is primarily attributable to factors described above.
 
Comparison of Results of Operations for the Nine Months Ended June 30, 2013 and 2012
 
Revenues
 
For the nine months ended June 30, 2013, we generated $1,307,117 in revenues from operations principally from the sales of authentication services. For the nine months ended June 30, 2012, we generated $1,563,880 in revenues from operations. The decrease of $256,763 or 16.4% in sales for the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 was primarily caused by the completion of our prior pilot contract with LMI, and a slower than anticipated replacement of that revenue by DNA marking contracts with commercial electronics manufacturers.  In late January 2013, DLA announced that it would subsidize SigNature DNA marking costs for its trusted suppliers, and in March 2013, after this and other mechanisms were in place, we were able to begin SigNature DNA shipments for this market.
 
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Costs and Expenses
 
Selling, General and Administrative
 
Selling, general and administrative expenses increased from $5,729,575 for the nine months ended June 30, 2012 to $8,516,390 for the nine months ended June 30, 2013. The increase of $2,786,815, or 48.6%, is primarily attributable to higher professional fees, specifically for legal and consulting, increased salary due to an approximate increase in headcount of 60.0% from June 30, 2012 as compared to June 30, 2013 and bad debt expense of $70,000 for the nine months ended June 30, 2013 as compared to $0 for the nine months ended June 30, 2012.
 
Research and Development
 
Research and development expenses increased from $274,528 for the nine months ended June 30, 2012 to $509,132 for the nine months ended June 30, 2013. The increase of $234,604 or 85.5% is attributable to additional research and development activity needed with current operations.
 
Depreciation and Amortization
 
In the nine months ended June 30, 2013, depreciation and amortization decreased by $195,314 or 65.0% from $300,419 for the nine months ended June 30, 2012 to $105,105 for the nine months ended June 30, 2013.   The decrease is primarily attributable to completion of the amortization of our intangible property which we incurred approximately $270,000 of amortization expense during the nine months ended June 30, 2012 as compared to $19,470 for the nine months ended June 30, 2013.  The amortization during the nine months ended June 30, 2013 related to the intellectual property acquired from RedWeb.  This decrease was offset by an increase in depreciation and amortization expense for the leasehold improvements, lab equipment and assets acquired with the RedWeb asset purchase agreement during the nine months ended June 30, 2013.
 
Total Operating Expenses
 
Total operating expenses increased to $9,130,627 for the nine months ended June 30, 2013 from $6,304,522 for the nine months ended June 30, 2012, or an increase of $2,826,105 or 44.8% primarily attributable to an increase in professional fees paid, salaries and in R&D expenditures which was offset by a decrease in depreciation and amortization expense.
 
Interest, net
 
Interest, net for the nine months ended June 30, 2013 was income of $738 from a net interest expense of $642,790 for the nine months ended June 30, 2012. The decrease in interest expense was due to no outstanding notes payable as of June 30, 2013.
 
Loss from Change in Fair Value of Warrant Liability
 
In November 2012, we issued warrants containing certain reset provisions which require us to classify them as a liability and mark the warrants to market and record the change in fair value each reporting period as a non-cash adjustment to our current period operations.  This resulted in a $6,145,229 charge to current period operations as compared to $-0- for the same period last year.  These warrants were reclassified to equity upon exercise on April 25, 2013.
 
Net Loss
 
Net loss for the nine months ended June 30, 2013 increased to $13,968,001 from a net loss of $5,383,432 for the nine months ended June 30, 2012, which is primarily attributable to factors described above.
 
Liquidity and Capital Resources
 
Our liquidity needs consist of our working capital requirements and research and development expenditure funding. As of June 30, 2013, we had working capital of $1,027,531. For the nine months ended June 30, 2013, we generated a net cash flow deficit from operating activities of $5,696,917 consisting primarily of our loss of $13,968,001, net with non-cash adjustments of $105,105 in depreciation and amortization charges, $70,000 in bad debt expense, $1,771,854 for equity based compensation and $6,145,229 change in fair value of warrant liability. Additionally, we had a net increase in operating assets of $437,171 and a net increase in operating liabilities of $616,067. Cash used in investing activities was $797,574 consisting primarily of $584,080 of assets acquired under the RedWeb asset purchase agreement and $213,494 for the purchase of equipment and leasehold improvement related to the relocation of our corporate office. Cash provided by financing activities for the nine months ended June 30, 2013 totaled $7,601,500 consisting primarily of proceeds of $5,500,000 from the sale of our Series A Preferred, $2,000,000 from the sale of our common stock, $150,000 from the exercise of warrants, net with $50,000 paid to re-acquire previously issued warrants.
 
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On January 7, 2013, we completed the second closing (“Second Closing”) of our transaction with Crede CG II, Ltd. (“Crede”) and sold to Crede 5,500 shares of our Series A Preferred at a price of $1,000 per share, resulting in gross proceeds to us of $5,500,000. On January 8, 2013, we exercised our option and converted the Series A Preferred held by Crede into 25,462,963 shares of our Common Stock at a conversion price of $0.216 per share.
 
We had entered into a Securities Purchase Agreement (“Purchase Agreement”) with Crede dated November 28, 2012 pursuant to which Crede agreed to purchase the Series A Preferred on the first business day following the date a registration statement covering the resale of all shares of Common Stock issuable pursuant to the Purchase Agreement, including those underlying the Series A Preferred and Series A, B and C Warrants, is declared effective by the SEC. The Company’s registration statement on Form S-3 was declared effective by the SEC on January 4, 2013.
 
Pursuant to the Purchase Agreement, Crede purchased at the initial closing held on November 29, 2012 (“Initial Closing”) 10,752,688 shares of our Common Stock at a price of $0.186 per share, resulting in gross proceeds to us of $2,000,000. In addition, at the Initial Closing, Crede was issued (i) five year Series A Warrants allowing it to initially purchase 10,752,688 shares of Common Stock at a price of $0.2232 per share, (ii) five year Series B Warrants allowing it to initially purchase 29,569,892 shares of Common Stock at a price of $0.2232 which became exercisable at the Second Closing and (iii) Series C Warrants allowing it to initially purchase 26,881,720 shares of Common Stock which became exercisable for six months after the eleventh trading day following the Second Closing. Crede may also exchange the Warrants for Common Stock pursuant to a Black-Scholes formula. The Series A, B and C Warrants each contain a 9.9% “blocker” so that in no event shall any of the Warrants be exercisable or exchangeable into or for Common Stock to the extent that such exercise or exchange would result in Crede having “beneficial ownership” (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) of more than 9.9% of the Company’s Common Stock.
 
On January 22, 2013, the Company exercised its option to repurchase the Series C Warrants issued to Crede for $50,000.  On April 25, 2013, Crede effected the cashless exercise of 10,752,688 Series A Warrants and 29,569,862 Series B Warrants, and the Company thereupon issued to Crede an aggregate of 31,257,045 shares of its Common Stock.
 
Crede has the right to participate in other equity or equity –linked financings completed by the Company for a period of 180 days from January 4, 2013. In addition, the Company has agreed not to issue additional Common Stock or securities convertible into Common Stock at a price below $0.186 per share or the market price of the Common Stock on the date the registration statement was is declared effective, for a period of 180 days from the effective date of the registration statement, except for issuances (i) pursuant   to acquisitions, joint ventures, license arrangements, leasing arrangements and other similar arrangements, (ii) to employees, consultants, directors and officers approved by the Board or pursuant to a plan approved by the Board, (iii) pursuant to one or more contracts entered into by us with third parties which would result in revenues to us during a three-month period equal to an annual run rate of $15 Million in revenues and (iv) pursuant to a contract entered into by us with a third party which would reasonably be expected to result in more than $3 Million in annual receivables.
 
Until one year after the Second Closing, we are prohibited from entering into any transaction to (i) sell any convertible securities at a conversion rate or other price that is generally based on and/or varies with the trading prices of the our Common Stock at any time after the initial issuance of such convertible securities or (ii) sell securities at a future determined price, including, without limitation, an “equity line of credit” or an “at the market offering.”
 
Management believes that our positive cash balance and working capital as of June 30, 2013, as well as the proceeds from the securities purchase agreement with Crede entered into on July 19, 2013,  along with our current customer base, projected cash flow and the minimum guaranteed revenues for the next fiscal year will allow us to continue to improve our working capital and to have sufficient capital resources to meet projected cash flow requirements.
 
We expect capital expenditures to be less than $1,000,000 in fiscal 2013. Our primary investments will be in laboratory equipment to support prototyping, manufacturing and our authentication services.
 
We may be required to seek additional capital should our current positive working capital fall short. 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 could restrict our ability to grow. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. 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.  In addition, certain of the terms described above in connection with the Crede financing may negatively impact the Company’s ability to obtain financing for the periods indicated.
 
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Substantially all of the real property used in our business is leased.
 
Asset Purchase Agreement
 
On May 10, 2013, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with RedWeb Technologies Limited (“RedWeb”), a corporation incorporated and registered under the laws of England & Wales, to purchase certain assets of RedWeb (“Purchased Assets”) relating to its forensic tagging security system for a purchase price of £400,000 ($624,080). The Company completed the acquisition of the Purchased Assets on the same day. The Purchased Assets include RedWeb’s Sentry 500 Intruder Spray System, RedWeb’s Advanced Molecular Taggent Technology and all products relating thereto, certain intellectual property and supplies relating to the foregoing. £40,000 ($62,408) of the purchase price shall be held in escrow for up to one year to be applied against the indemnification obligations of RedWeb pursuant to the Asset Purchase Agreement.  The Company assigned $584,080 of the purchase price to intellectual property and the remaining $40,000 was for supplies, which were expensed during the three months ended June 30, 2013.
 
Subsequent Events
 
As previously reported on the Current Report on Form 8-K filed by the Company on July 22, 2013, the Company entered into a securities purchase agreement (“Purchase Agreement”) with Crede CG III, Ltd. (“Crede”).  Pursuant to the Purchase Agreement, at the initial closing on July 19, 2013 (“Initial Closing”), Crede purchased 10,695,187 shares of the Company’s Common Stock at a price of $0.187 per share which was the consolidated closing bid price of the Common Stock on the day prior to the signing of the Purchase Agreement.  The Company received gross proceeds of $2,000,000.  Pursuant to the Purchase Agreement, Crede agreed to purchase an additional $5,500,000 of the Company’s Series B Convertible Preferred Stock (“Series B Preferred”) at a purchase price of $1,000 per share on the date a registration statement (as described below) is declared effective by the SEC (“Second Closing”).
 
The Series B Preferred is convertible at the option of the holder thereof, in whole or in part, from time to time and at any time, at the lesser of (i) the Fixed Conversion Price and (ii) the Non-Fixed Conversion Price. The Fixed Conversion Price is equal to $0.187 per share which is the purchase price for the Common Stock at the Initial Closing.  The Non-Fixed Conversion Price is equal to the consolidated closing bid price of the Company’s Common Stock for the most recently completed trading day as of the time of conversion.  The Series B Preferred will be convertible into Common Stock at the Company’s option, in whole or in part, from time to time during the period beginning one trading day following the effectiveness of the registration statement (as described below) through the eleventh trading day following effectiveness of such registration statement, at the Non-Fixed Conversion Price, provided that certain equity conditions are met and the Company is not in breach of certain conditions.  The Series B Preferred will be automatically converted into Common Stock on the one year anniversary of the issuance of the Series B Preferred at the then applicable Non-Fixed Conversion Price, provided that certain equity conditions are met and the Company is not in breach of certain conditions.  The Series B Preferred contains weighted average anti-dilution protection.  The Series B Preferred will not accrue dividends except to the extent dividends are paid on the Common Stock.  The Company’s Common Stock will be junior in rank to the Series B Preferred with respect to preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company.  The Series B Preferred will generally have no voting rights except as required by law.
 
The Company also issued Crede at the Initial Closing Warrants with a term of five years (though such term may be extended in certain instances) (“Series A Warrants”) allowing it to purchase 10,695,187 shares of Common Stock at a price of $0.2431 per share which is equal to a 30% premium to the consolidated closing bid price of the Common Stock on the day prior to the signing of the Purchase Agreement.  At the Initial Closing, the Company also issued Crede a second set of Warrants (“Series B Warrants”) allowing it to purchase 29,411,764 shares of Common Stock, which is equal to one share of Common Stock for every share of Common Stock which would be issuable to it if it fully converted the Series B Preferred into Common Stock at the Fixed Conversion Price.  The exercise price of the Series B Warrants is $0.2431 per share, which is equal to a 30% premium to the consolidated closing bid price of the Common Stock on the day prior to the signing of the Purchase Agreement.  The Series B Warrants are not exercisable until the earlier of (i) November 7, 2013 and (ii) the Second Closing, and have a term of five years (though such term may be extended in certain instances).
 
In addition, at the Initial Closing, the Company issued to Crede a third set of Warrants (“Series C Warrants”) which is only exercisable for six months from the earlier of (i) November 7, 2013 and (ii) after the eleventh trading day following the Second Closing.  The Series C Warrants will allow Crede to purchase, at a price of $0.2431 per share (equal to a 30% premium to the consolidated closing bid price of the Common Stock on the day prior to the signing of the Purchase Agreement), 26,737,967 shares of Common Stock, which is equal to one-third the sum of (i) the number of shares of Common Stock issued at the Initial Closing, (ii) the number of shares of Common Stock which would be issuable to it if it fully converted the Series B Preferred into Common Stock at the Fixed Conversion Price, (iii) the number of shares of Common Stock subject to the Series A Warrants and (iv) the number of shares of Common Stock subject to the Series B Warrants.
 
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The Series B and Series C Warrants provide the Company with an option to repurchase any remaining unexercised portion of such Warrants for a repurchase price equal to $50,000, if the Second Closing is terminated pursuant to the Purchase Agreement. The Company also has the option to repurchase the Series C Warrants at an aggregate repurchase price equal to $10,000 at the close of trading on the tenth trading day immediately following the Second Closing but only if the registration statement (described below) is effective and covers and is available for use for the resale of (i) all shares of Common Stock issued at the First Closing, (ii) all shares of Common Stock issued upon conversion of the Series B Preferred, (iii) all shares of Common Stock which would then be issuable if the full then unconverted portion of the Series B Preferred were then fully converted into Common Stock at the then applicable conversion price, (iv) all shares of Common Stock subject to the Series A Warrants and (v) all shares of Common Stock subject to the Series B Warrants.
 
Crede may exercise Series A and Series B Warrants by paying in cash or on a cashless basis by exchanging such Warrants for Common Stock using a negotiated Black-Scholes value.  In the event that the Common Stock trades at a price 25% or more above the exercise price of the Series A and Series B Warrants for a period of 20 consecutive days (with average daily dollar volume of Common Stock on the OTC Bulletin Board at least equal to $300,000), the Company may obligate Crede to exercise such Warrants for cash.
 
Pursuant to a registration rights agreement between the Company and Crede, the Company agreed to file a registration statement within 30 days of the Initial Closing and to use its best efforts to get such registration statement effective within 90 days.  The registration statement will cover the resale of all shares of Common Stock issuable pursuant to the Purchase Agreement, including the shares of Common Stock underlying the Series B Preferred and Series A, B and C Warrants.  The registration statement was declared effective by the SEC on July 31, 2013.  The Company has also agreed to prepare and file amendments and supplements to the registration statement to the extent necessary to keep the registration statement effective for the period of time required under the Purchase Agreement.  In the event the registration statement failed to be declared effective within the 90 day period, the Company would have been subject to monthly penalties which would expire six months after the Initial Closing.
 
The Company agreed to pay Crede an investment fee equal to $100,000 at the Initial Closing and $265,000 at the Second Closing.
 
The Series B Preferred and the Series A, B and C Warrants each contain a 9.9% “blocker” so that in no event shall the Series B Preferred or any of the Series A, B and C Warrants be convertible or exercisable (including through the cashless exercise exchange provision) into or for Common Stock to the extent that such conversion or exercise would result in Crede having “beneficial ownership” (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) of more than 9.9% of the Common Stock. Crede would, however, have the right from time to time to convert, exercise or exchange for shares of Common Stock, which over time would aggregate to greater than 9.9% beneficial ownership if all such shares of Common Stock so acquired had been held at one time by Crede.
 
Crede has the right to participate in other equity or equity-linked financings completed by the Company for a period of 180 days from the later of the Initial Closing or the date the registration statement goes effective.
 
In addition, the Company has agreed not to issue additional Common Stock or securities convertible into Common Stock at a price below $0.187 per share or the market price of the Common Stock on the date the registration statement is declared effective, for a period of 180 days from the effective date of the registration statement, except for issuances (i) pursuant to acquisitions, joint ventures, license arrangements, leasing arrangements and other similar arrangements, (ii) to employees, consultants, directors and officers approved by the Board or pursuant to a plan approved by the Board, (iii) pursuant to one or more contracts entered into by the Company with third parties which would result in revenues to the Company during a three-month period equal to an annual run rate of $15 Million in revenues and (iv) pursuant to a contract entered into by the Company with a third party which would reasonably be expected to result in more than $3 Million in annual receivables.
 
Until one year after the Second Closing, the Company is prohibited from entering into any transaction to (i) sell any convertible securities at a conversion rate or other price that is generally based on and/or varies with the trading prices of the Company’s Common Stock at any time after the initial issuance of such convertible securities or (ii) sell securities at a future determined price, including, without limitation, an “equity line of credit” or an “at the market offering.”
 
On July 31, 2013, the Company completed the Second Closing of its transaction with Crede and sold 5,500 shares of Series B Preferred to Crede at a price of $1,000 per share.  The Company received gross proceeds of $5,500,000 less an investment fee of $265,000.
 
Product Research and Development
 
We anticipate spending approximately $600,000 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 $800,000 on the acquisition of intellectual rights and leasehold improvements during the next 12 months To manage our expected growth, if any, over the next 2 to 3 years.  As disclosed in Note G in the accompanying condensed consolidated financial statements, during June 2013 we relocated our corporate office to a larger facility.
 
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Number of Employees
 
We currently have 44 full-time employees and four part-time employees, including three in management, 34 in operations, 9 in sales and marketing, one in human resources, and one in investor relations.   Expenses related to travel, marketing, salaries, and general overhead will be increased as necessary to support our anticipated 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.    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. As of June 23, 2012, we began working with Insperity Inc. to help us manage many of our back-end administrative human resources responsibilities. This change is being done to provide Fortune 500 type benefits to our current employees, making us more attractive to new hires as well as saving us money by not having to build out an internal HR department at this point in time. Insperity Inc. is a publicly traded company (NYSE: NSP) that supports businesses with payroll, medical benefits, online-training, and human resources services and support.
 
We do not have any off-balance sheet arrangements.
 
Inflation
 
The effect of inflation on our revenue and operating results was not significant.
 
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 June 30, 2013, 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 June 30, 2013, 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.
 
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Part II - Other Information
 
Item 1 – Legal Proceedings
 
“Item 3 – Legal Proceedings” of our most recent Annual Report on Form 10-K filed on December 20, 2012 and “Item 1 – Legal Proceedings” of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, as filed on May 15, 2013, include a discussion of our legal proceedings.  During the fiscal quarter ended June 30, 2013, there have been no material changes from the legal proceedings discussed in our Form 10-K and Form 10-Q except as follows:
 
Smartwater, Ltd. v. Applied DNA Sciences, Inc. (No. 12-CV-05731-S-AKT (E.D.N.Y.)
 
The Company’s motion to dismiss plaintiff’s complaint is pending before the Court in the Eastern District of New York. An initial conference with the Court was held on February 21, 2013, at which time the Court directed the conduct of limited document discovery pending the Court’s decision on the motion to dismiss. On June 21, 2013, plaintiff filed a motion seeking leave from the Court to file an amended complaint asserting additional allegations in support of its claims. The Company filed its opposition to the motion on July 29, 2013. The Company believes that none of its products infringe any claims under either of plaintiff’s patents, and moreover notes that one of plaintiff’s patents has expired and the other is due to expire on February 25, 2014. The Company believes the allegations in the complaint are without merit and intends to defend the action vigorously. The ultimate outcome of this claim cannot be determined at the date of this report.
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Item 6 – Exhibits
 
10.1*
Asset Purchase Agreement, dated May 10, 2013, between Applied DNA Sciences, Inc. and RedWeb Technologies Limited
 
10.2*
Agreement of Lease, dated June 14, 2013, between Applied DNA Sciences, Inc. and Long Island High Technology Incubator, 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.
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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: August 13, 2013
/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
 

Execution Version
 
ASSET PURCHASE AGREEMENT
 
between
 
REDWEB TECHNOLOGIES LIMITED
 
and
 
APPLIED DNA SCIENCES, INC.
 
dated as of
 
May 10, 2013
 
 
 

 

 
TABLE OF CONTENTS
     
   
Page
     
ARTICLE I           PURCHASE AND SALE
 
1
Section 1.01
Purchase and Sale of Assets
 
1
Section 1.02
No Liabilities
 
1
Section 1.03
Purchase Price
 
1
Section 1.04
Inventory
 
2
Section 1.05
Passing of Title and Risk
 
2
ARTICLE II          CLOSING
 
2
Section 2.01
Closing
 
2
Section 2.02
Closing Deliverables
 
3
ARTICLE III         REPRESENTATIONS AND WARRANTIES OF SELLER
 
4
Section 3.01
Organization and Authority of Seller; Enforceability
 
4
Section 3.02
No Conflicts; Consents
 
4
Section 3.03
Title to Purchased Assets
 
4
Section 3.04
Condition of Assets
 
4
Section 3.05
Inventory
 
5
Section 3.06
Intellectual Property
 
5
Section 3.07
Compliance With Laws
 
6
Section 3.08
Legal Proceedings
 
6
Section 3.09
Brokers
 
6
ARTICLE IV         REPRESENTATIONS AND WARRANTIES OF BUYER
 
6
Section 4.01
Organization and Authority of Buyer; Enforceability
 
6
Section 4.02
No Conflicts; Consents
 
7
Section 4.03
Legal Proceedings
 
7
Section 4.04
Brokers
 
7
ARTICLE V          COVENANTS
 
7
Section 5.01
Intellectual Property Transfer
 
7
Section 5.02
Public Announcements
 
7
Section 5.03
Bulk Sales Laws
 
8
Section 5.04
Transfer Taxes
 
8
Section 5.05
Further Assurances
8

-i-
 

 

 
TABLE OF CONTENTS
(continued)
     
    Page
     
Section 5.06
Non-Competition
 
8
Section 5.07
Use of Name
 
8
Section 5.08
Transition and Cooperation
 
9
ARTICLE VI         INDEMNIFICATION
 
9
Section 6.01
Survival
 
9
Section 6.02
Indemnification By Seller
 
9
Section 6.03
Indemnification By Buyer
 
11
Section 6.04
Indemnification Procedures
 
11
Section 6.05
Escrow Fund
 
11
Section 6.06
Tax Treatment of Indemnification Payments
 
12
Section 6.07
Effect of Investigation
 
12
Section 6.08
Cumulative Remedies
 
12
ARTICLE VII        MISCELLANEOUS
 
12
Section 7.01
Expenses
 
12
Section 7.02
Notices
 
13
Section 7.03
Interpretation
 
13
Section 7.04
Severability
 
13
Section 7.05
Entire Agreement
 
14
Section 7.06
Successors and Assigns
 
14
Section 7.07
No Third-party Beneficiaries
 
14
Section 7.08
Amendment and Modification
 
14
Section 7.09
Waiver
 
14
Section 7.10
Governing Law
 
14
Section 7.11
Submission to Jurisdiction
 
14
Section 7.12
Specific Performance
 
15
Section 7.13
Counterparts
15

-ii-
 

 

 
ASSET PURCHASE AGREEMENT
 
This Asset Purchase Agreement (this “ Agreement ”), dated as of May 10, 2013, is entered into between RedWeb Technologies Limited, a corporation incorporated and registered  under the laws of England & Wales with company number 06997431 (“ Seller ”) and Applied DNA Sciences, Inc., a corporation organized under the laws of the State of Delaware (“ Buyer ”).
 
RECITALS
 
WHEREAS, Seller wishes to sell and assign to Buyer, and Buyer wishes to purchase and assume from Seller, the rights and obligations of Seller to the Purchased Assets  (as defined herein), subject to the terms and conditions set forth herein;
 
NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
 
ARTICLE I
PURCHASE AND SALE
 
Section 1.01     Purchase and Sale of Assets .  Subject to the terms and conditions set forth herein, Seller shall sell, assign, transfer, convey and deliver to Buyer, and Buyer shall purchase from Seller, all of Seller’s right, title and interest in the assets set forth in Section 1.01 of the disclosure schedules (“ Disclosure Schedules ”) attached hereto (the “ Purchased Assets ”), free and clear of any mortgage, pledge, lien, charge, security interest, claim or other encumbrance of any kind (“ Encumbrance ”).  The Purchased Assets shall exclude Seller’s Trackable Assets and GPS Tracking products (“ Excluded Assets ”).
 
Section 1.02     No Liabilities .  Buyer shall not assume any liabilities or obligations of Seller of any kind, whether known or unknown, contingent, matured or otherwise, whether currently existing or hereinafter created ( “Seller Liability” ).  Without limiting the generality of the foregoing, Buyer shall not assume any Seller Liability arising out of or constituting (i) the operation of Seller’s business prior to the Closing Date, including those related to Purchased Assets, (ii) any contingent liability, (iii) any contract of Seller, (iv) any fees or expenses arising out of this Agreement or the Closing, (v) any Action as defined in Section 3.08 existing on the Closing Date whether or not related to the Purchased Assets, (vi) any Taxes of Seller for any period, or arising out of or owing through operation of Seller’s business prior to the Closing Date, and (vii) any actions or omissions of Seller on or prior to the Closing Date.
 
Section 1.03     Purchase Price .
 
(a)           The purchase price (the “ Purchase Price ”) for the Purchased Assets shall be £400,000.  At the Closing, Buyer shall pay (i) to Seller £360,000 by wire transfer of immediately available funds in accordance with the wire transfer instructions set forth in Section 1.03 of the Disclosure Schedules and (ii) £40,000 (the “ Escrow Fund ”) by wire transfer of immediately available funds to a bank account that Buyer shall open and maintain for the purpose of holding such Escrow Fund.
 
 
 

 

 
(b)            Exhibit A sets forth an allocation of the Purchase Price (and other capitalized costs) among the Purchased Assets. Buyer and Seller shall report any federal, state, local and foreign Tax consequences of the transaction in a manner consistent with such allocation. Buyer and Seller further covenant and agree not to take a position with respect to Taxes that is inconsistent with such allocation on any Tax return or otherwise, except as may be required by law.
 
Section 1.04     Inventory .  Within thirty (30) days of Closing, Buyer will perform an audit of the Inventory (“ Audited Inventory ”) to verify the accuracy of the Inventory count in Section 1.01 of the Disclosure Schedules. If such audit shows that the Audited Inventory count is less than the Inventory count specified in Section 1.01 of the Disclosure Schedules, then Buyer shall be entitled to a reimbursement (“ Inventory Reimbursement ”). The Inventory Reimbursement shall be calculated by subtracting the Audited Inventory count from the Inventory count as specified in Section 1.01 of the Disclosure Schedules and multiplying the difference by the Seller-established price for such Inventory item. Such Inventory Reimbursement shall be paid to Buyer by Seller  in accordance with the indemnification procedures set forth in Section 6.04 , provided, that Buyer shall include in its written notice to Seller its calculation of the Inventory Reimbursement.
 
Section 1.05     Passing of Title and Risk .
 
(a)           Title to and beneficial ownership of:
 
(i)           The Purchased Assets which are capable of transfer by delivery shall pass on their delivery and such delivery shall be deemed to take place on their being made available by Seller for collection on Closing in accordance with Section 2.02(b) ; and
 
(ii)          All other Purchased Assets shall pass on Closing.
 
(b)           The risk in respect of all Purchased Assets shall pass to Buyer as from the time when title to them passes.
 
(c)           All of the Purchased Assets shall as from Closing (pending any necessary legal assignment or assurance of them) be held by Seller on trust for Buyer absolutely and Seller shall exercise all rights in respect of them for and on behalf of Buyer and as Buyer may reasonably request.
 
ARTICLE II
CLOSING
 
Section 2.01     Closing .  The closing of the transactions contemplated by this Agreement (the “ Closing ”) shall take place simultaneously with the execution of this Agreement on the date of this Agreement (the “ Closing Date ”) at the offices of Fulbright & Jaworski L.L.P., 666 Fifth Avenue, New York, N.Y. 10103.  The consummation of the transactions contemplated by this Agreement shall be deemed to occur at 12:01 a.m. on the Closing Date.
 
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Section 2.02     Closing Deliverables .
 
(a)           At the Closing, Seller shall deliver to Buyer the following:
 
(i)            a bill of sale in the form of Exhibit B hereto (the “ Bill of Sale ”) and duly executed by Seller, transferring the Purchased Assets to Buyer;
 
(ii)           the patent, trademark, and domain name assignments in the form of Exhibit C hereto (the “ Intellectual Property Assignments ”) and duly executed by Seller, transferring all of Seller’s right, title and interest in and to the trademark registrations and applications, patents and patent applications and domain name registrations included in the Purchased Assets to Buyer;
 
(iii)          all documents of title or other records establishing title to the Purchased Assets (or any of them);
 
(iv)          a certificate of the Secretary or Assistant Secretary (or equivalent officer) of Seller certifying as to (A) the resolutions of the board of directors of Seller, duly adopted and in effect, which authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby, and (B) the names and signatures of the officers of Seller authorized to sign this Agreement and the documents to be delivered hereunder; and
 
(v)           such other customary instruments of transfer, assumption, filings or documents, in form and substance reasonably satisfactory to Buyer, as may be required to give effect to this Agreement.
 
(b)           At the Closing, Seller shall make available for collection at the premises at which they are currently held, used or stored, such of the Purchased Assets as are transferable by delivery.
 
(c)           At the Closing, Buyer shall deliver to Seller the following:
 
(i)            The Purchase Price;
 
(ii)           the Bill of Sale executed by Buyer;
 
(iii)          the Intellectual Property Assignments duly executed by Buyer; and
 
(iv)          a certificate of the Secretary or Assistant Secretary (or equivalent officer) of Buyer certifying as to (A) the resolutions of the board of directors of Buyer, duly adopted and in effect, which authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby, and (B) the names and signatures of the officers of Buyer authorized to sign this Agreement and the documents to be delivered hereunder.
 
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
 
Seller represents and warrants to Buyer that the statements contained in this Article III are true and correct as of the date hereof.  For purposes of this Article III , “Seller’s knowledge,” “knowledge of Seller” and any similar phrases shall mean the actual or constructive knowledge of any director or officer of Seller, after due inquiry.
 
Section 3.01     Organization and Authority of Seller; Enforceability .  Seller is a corporation duly incorporated and registered in England & Wales with company number 06997431 and is validly existing and in good standing under the laws thereunder.  Seller has full corporate power and authority to enter into this Agreement and the documents to be delivered hereunder, to carry out its obligations hereunder and to consummate the transactions contemplated hereby.  The execution, delivery and performance by Seller of this Agreement and the documents to be delivered hereunder and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of Seller.  This Agreement and the documents to be delivered hereunder have been duly executed and delivered by Seller, and (assuming due authorization, execution and delivery by Buyer) this Agreement and the documents to be delivered hereunder constitute legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms, in each case, subject to bankruptcy, insolvency, reorganization, moratorium and similar requirements of general application relating to or affecting creditor’ rights and to general principles of equity.
 
Section 3.02       No Conflicts; Consents .  The execution, delivery and performance by Seller of this Agreement and the documents to be delivered hereunder, and the consummation of the transactions contemplated hereby, do not and will not: (a) violate or conflict with the certificate of incorporation, by-laws or other organizational documents of Seller; (b) violate or conflict with any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Seller or the Purchased Assets; (c) conflict with, or result in (with or without notice or lapse of time or both) any violation of, or default under, or give rise to a right of termination, acceleration or modification of any obligation or loss of any benefit under any contract or other instrument to which Seller is a party or to which any of the Purchased Assets are subject; or (d) result in the creation or imposition of any Encumbrance on the Purchased Assets.  No consent, approval, waiver or authorization is required to be obtained by Seller from any person or entity (including any governmental authority) in connection with the execution, delivery and performance by Seller of this Agreement and the consummation of the transactions contemplated hereby.
 
Section 3.03       Title to Purchased Assets .  Seller owns and has good title to the Purchased Assets, free and clear of Encumbrances.
 
Section 3.04       Condition of Assets .  The Purchased Assets are in good condition and are adequate for the uses to which they are being put, and none of such Purchased Assets are in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost.  The Products are free from defects in design, workmanship and materials and are in conformity with their applicable specifications.
 
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Section 3.05      Inventory .  All inventory, finished goods, raw materials, work in progress, packaging, supplies, parts and other inventories (collectively “ Inventory ”) included in the Purchased Assets consist of a quality and quantity usable and salable in the ordinary course of business consistent with past practice.  All Inventory is owned by Seller free and clear of all Encumbrances, and no Inventory is held on a consignment basis.
 
Section 3.06       Intellectual Property .
 
(a)            Section 3.06(a) of the Disclosure Schedules is a complete and accurate list of  all (i) registered Seller Trademarks, registered domain names and issued Seller Patents; and (ii) each pending application with respect to any Intellectual Property specified in (i) above (“ Seller Intellectual Property ”).  Seller possesses all right, title, and interest in and to and has adequate, valid and enforceable rights to use all the Seller Intellectual Property free and clear of all Encumbrances.  Seller is not bound by any outstanding judgment, injunction, order or decree restricting the use of the Seller Intellectual Property, or restricting the licensing or assignment thereof to any person or entity.  Seller has not granted any license, option, covenant not to sue or other right to a third party to use or commercially exploit Seller Intellectual Property.  Seller has not been required to pay any royalties or make any payments to any third party to use the Seller Intellectual Property or to reproduce, make derivative works, reproduce, make, sell or otherwise commercially exploit any products or services using the Seller Intellectual Property and to its knowledge after the Seller Intellectual Property has been transferred to Buyer, Buyer will not be required to make any payments to any third party to use the Seller Intellectual Property or to reproduce, make derivative works, reproduce, make, sell or otherwise commercially exploit any products or services using the Seller Intellectual Property.  With respect to Seller Intellectual Property, (i) the Seller has not received any notice that such Intellectual Property is not valid, subsisting, enforceable and in full force and effect and (ii) Seller has paid all maintenance fees and made all filings required to maintain Seller’s ownership thereof.  For all such Seller Intellectual Property (except for Know-How), Section 3.06(a) of the Disclosure Schedules lists (A) the jurisdiction where the application or registration is located, (B) the application or registration number, and (C) the application or registration date.
 
(b)           The Seller has not received any notice that the Seller’s prior and current use of the Seller Intellectual Property has or does infringe, violate, dilute or misappropriate the Intellectual Property of any person or entity and there are no claims pending or threatened by any person or entity with respect to the ownership, validity, enforceability, effectiveness or use of the Seller Intellectual Property and to its knowledge after the Seller Intellectual Property has been transferred to Buyer, Buyer’s use will not infringe, violate, dilute or misappropriate the Intellectual Property of any person or entity.  No person or entity is infringing, misappropriating, diluting or otherwise violating any of the Seller Intellectual Property, and neither Seller nor any affiliate of Seller has made or asserted any claim, demand or notice against any person or entity alleging any such infringement, misappropriation, dilution or other violation.  Seller has not received any communication, and no action has been instituted, settled or threatened that alleges any such infringement, misappropriation, dilution or other violation.  Other than the Seller Intellectual Property assigned hereunder, no other Intellectual Property is needed to make or sell the RedWeb Sentry 500 Intruder Spray, the Box System, the Forensic Tagging Products (as defined in Section 1.01 ) and enigmaTAG.
 
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(c)           All current and former employees, agents, and consultants of the Seller who have made material contributions to the development of the Seller Intellectual Property or who have had access in any material respect to the Seller’s confidential and proprietary information with respect to the Seller Intellectual Property have entered into enforceable contractual obligation with Seller whereby (a) Seller is entitled to all ownership rights in any Seller Intellectual Property, that the employee, agent, or consultant may have invented, discovered, originated, made, or conceived while working for Seller, and all such ownership rights are duly assigned to Seller, and (b) the employee, agent, or consultant has agreed, subject to applicable Law, to hold and maintain in confidence all confidential and proprietary information of the Seller.  The Seller’s general practice has been to require all employees, agents, and consultants who contribute to the development of Intellectual Property, or who have had access to confidential and proprietary information with respect to the Intellectual Property, to enter into Invention and Confidentiality Agreements.  For any Seller Intellectual Property where an employee may have rights under laws related to employees’ rights in and to their own inventions made in the course of their employment, Seller has timely taken steps to protect Sellers’ ownership in such Seller Intellectual Property.
 
Section 3.07       Compliance With Laws .  So far as the Seller is aware, Seller has complied, and is now complying, with all applicable federal, state and local laws and regulations applicable to the manufacture sale, packaging and labeling of the Purchased Assets.
 
Section 3.08       Legal Proceedings .  There is no claim, action, suit, proceeding or governmental investigation (“ Action ”) of any nature pending or, to Seller’s knowledge, threatened against or by Seller (a) relating to or affecting the Purchased Assets; or (b) that challenges or seeks to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement.  No event has occurred or circumstances exist that may give rise to, or serve as a basis for, any such Action.
 
Section 3.09       Brokers .  No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller.
 
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
 
Buyer represents and warrants to Seller that the statements contained in this Article IV are true and correct as of the date hereof.  For purposes of this Article IV , “Buyer’s knowledge,” “knowledge of Buyer” and any similar phrases shall mean the actual or constructive knowledge of any director or officer of Buyer, after due inquiry.
 
Section 4.01      Organization and Authority of Buyer; Enforceability .  Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.  Buyer has full corporate power and authority to enter into this Agreement and the documents to be delivered hereunder, to carry out its obligations hereunder and to consummate the transactions contemplated hereby.  The execution, delivery and performance by Buyer of this Agreement and the documents to be delivered hereunder and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of Buyer.  This Agreement and the documents to be delivered hereunder have been duly executed and delivered by Buyer, and (assuming due authorization, execution and delivery by Seller) this Agreement and the documents to be delivered hereunder constitute legal, valid and binding obligations of Buyer enforceable against Buyer in accordance with their respective terms, in each case, subject to bankruptcy, insolvency, reorganization, moratorium and similar requirements of general application relating to or affecting creditor’ rights and to general principles of equity.
 
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Section 4.02       No Conflicts; Consents .  The execution, delivery and performance by Buyer of this Agreement and the documents to be delivered hereunder, and the consummation of the transactions contemplated hereby, do not and will not: (a) violate or conflict with the certificate of incorporation, by-laws or other organizational documents of Buyer; or (b) violate or conflict with any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Buyer.  No consent, approval, waiver or authorization is required to be obtained by Buyer from any person or entity (including any governmental authority) in connection with the execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby.
 
Section 4.03       Legal Proceedings .  There is no Action of any nature pending or, to Buyer’s knowledge, threatened against or by Buyer that challenges or seeks to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement.  No event has occurred or circumstances exist that may give rise to, or serve as a basis for, any such Action.
 
Section 4.04       Brokers .  No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Buyer.
 
ARTICLE V
COVENANTS
 
Section 5.01       Intellectual Property Transfer .  To enable Buyer to exercise the rights granted under this Agreement, Seller will promptly deliver or otherwise provide to Buyer Seller Know-How within the possession or Control of Seller or any of its Affiliates.  Seller will promptly deliver to Buyer tangible copies of Seller Know-How including documents, files, diagrams, specifications, designs, schematics, reports, records, laboratory notebooks, data, materials, prototypes, test devices, models and simulations, inventory or other written or other tangible material in Seller’s or its Affiliates’ possession or Control in any media, to the extent it discloses or embodies Seller Know-How.
 
Section 5.02       Public Announcements .  Unless otherwise required by applicable law, neither party shall make any public announcements regarding this Agreement or the transactions contemplated hereby without the prior written consent of the other party (which consent shall not be unreasonably withheld or delayed), it being understood that Buyer will have to make a filing on Form 8-K with the Securities and Exchange Commission.
 
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Section 5.03       Bulk Sales Laws .  Except as required by law, the parties hereby waive (to the extent permitted by applicable law) compliance with the provisions of any bulk sales, bulk transfer or similar laws of any jurisdiction that may otherwise be applicable with respect to the sale of any or all of the Purchased Assets to Buyer.
 
Section 5.04       Transfer Taxes .  All transfer, documentary, sales, use, stamp, registration, and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement and the documents to be delivered hereunder shall be borne and paid by Buyer when due, other than any Taxes payable in respect of the income, profits or chargeable gains of Seller, which shall be borne and paid by Seller. The parties acknowledge and agree that it is considered that section 49(1) of VATA and article 5 of the Value Added Tax (Special Provisions) Order 1995 will apply to the transaction contemplated by this Agreement, so that the transaction is treated as a transfer of a going concern. Seller and Buyer shall use all reasonable endeavours to secure that pursuant to such provisions the transaction contemplated by this Agreement is treated as neither a supply of goods nor a supply of services for VAT purposes. If notwithstanding the foregoing, UK VAT is chargeable, Buyer shall pay such VAT against production of a valid VAT invoice from Seller.
 
Section 5.05       Further Assurances .  Following the Closing, each of the parties hereto shall execute and deliver such additional documents, instruments, conveyances and assurances and take such further actions as may be reasonably required to carry out the provisions hereof and give effect to the transactions contemplated by this Agreement and the documents to be delivered hereunder.
 
Section 5.06       Non-Competition .  Seller undertakes with Buyer that it shall not, and that it shall procure that no member of Seller’s group shall, and that the Seller’s majority stockholder, Valhalla Investments, Inc., shall not, for a period of 36 months following the Closing: (i)  directly or indirectly, in any capacity, compete in the United States and Europe with (x) the business of Buyer in the manufacture, production, distribution or sale of any of the Purchased Assets or (y) the supply of any services Buyer provides in connection with the Purchased Assets, (ii) make any use of or disclose any Confidential Information of Buyer, including that related to the Purchased Assets, and (iii) solicit or employ any employees of or consultants to Buyer.  “Confidential Information” means information with respect to Buyer’s business, including the business arising out of the Purchased Assets, relating to customers, suppliers, pricing information, other financial information, techniques and capabilities, intellectual property, product information, market information, processes, formulae, trade secrets, marketing plans, etc. For the avoidance of doubt, nothing in this Section 5.06 shall restrict the Seller in the manufacture, production, distribution or sale of the Excluded Assets.
 
Section 5.07       Use of Name .
 
(a)           Seller agrees that following the Closing it will not use the name “RedWeb” or any variation thereof or any name containing “RedWeb” with respect to its business, products, website, advertising or any promotional materials (except as specifically provided for in Section 5.07(b) below) and that it will immediately following the Closing change its corporate name to a name not including “RedWeb.” In addition, Seller shall change the domain name of its website so as not to include “RedWeb” in its website (except as specifically provided for in Section 5.07(b) below) and shall execute a domain name assignment as set forth on Exhibit D . The Buyer agrees that for a period of 2 years following the Closing it shall maintain the domain name redwebsecurity.com and shall ensure that (i) all e-mails sent to the e-mail addresses alex.shaw@redwebsecurity.com and alex@redwebsecurity.com are automatically forwarded to such e-mail address as the Seller shall nominate and (ii) the web link http://gps.redwebsecurity.com is automatically re-directed to such web page as the Seller shall nominate.
 
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(b)           For the avoidance of doubt, nothing in Section 5.07(a) shall prevent Seller, Valhalla Investments, Inc. or any company in which either of them is a shareholder from: (i) using the name “RedWeb Trackers,” (ii) using any trademark relating to the tracking business of Seller or (iii) operating a website under the domain names redwebtrackers.co.uk or redwebtrackers.com, in all cases, only as they specifically relate to the Trackable Assets and GPS Tracking products currently sold by Seller.
 
Section 5.08       Transition and Cooperation .  From and after the Closing, Buyer shall make reasonable commercial efforts to cause Chris Taylor to assist Seller in transitioning or transferring the control and enjoyment of the Purchased Assets to Buyer.
 
ARTICLE VI
INDEMNIFICATION
 
Section 6.01       Survival .  Subject to the limitations and other provisions of this Agreement, the representations and warranties contained herein shall survive the Closing and shall remain in full force and effect until the date that is one year from the Closing Date; provided, that the indemnification provisions set forth in Section 6.02(b) shall survive indefinitely. All covenants and agreements of the parties contained herein shall survive the Closing indefinitely or for the period explicitly specified therein.
 
Section 6.02       Indemnification By Seller .
 
(a)           Subject to the other terms and conditions of this Article VI , Seller shall defend, indemnify and hold harmless Buyer, its affiliates and their respective stockholders, directors, officers and employees from and against all claims, judgments, damages, liabilities, settlements, losses, costs and expenses, including attorneys’ fees and disbursements, arising from or relating to:
 
(i)        any inaccuracy in or breach of any of the representations or warranties of Seller contained in this Agreement;
 
(ii)       any breach or non-fulfillment of any covenant, agreement or obligation to be performed by Seller pursuant to this Agreement or any document to be delivered hereunder; or
 
(iii)      any asset which is not a Purchased Asset or any Seller Liability (including but not limited to those set forth in Section 1.02 ).
 
(b)           It is the intention of the parties that all employees and workers of Seller (and any Seller Affiliates, or suppliers of services to Seller or Seller Affiliates (“ Supplier ”)) will remain employed by Seller (or relevant Seller Affiliate or Supplier). Therefore, if as a consequence of the transaction contemplated by this Agreement, any:
 
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(i)           contract of employment of any employee, worker, former employee or former worker of Seller or any Seller Affiliate or Supplier shall or shall be alleged to have transferred from Seller (or relevant Seller Affiliate or Supplier) to Buyer (or any Buyer Affiliate) pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 2006, as amended (the “ Transfer Regulations ”) or otherwise by operation of law (“ Undisclosed Employee” ) at any time; or
 
(ii)          liability in respect of the employment (including any obligation or liability in relation to a pension scheme) or the termination of employment of any employee, worker, former employee or former worker of Seller or any Seller Affiliate or Supplier shall or shall be alleged to have transferred from Seller (or relevant Seller Affiliate or Supplier) to Buyer (or any Buyer Affiliate) pursuant to the Transfer Regulations or otherwise by operation of law (“ Undisclosed Liability” ) at any time; then:
 
1.           Buyer (or relevant Buyer Affiliate), may, upon becoming aware of a transfer of an Undisclosed Employee or allegation thereof, terminate such contract forthwith; and
 
2.           Seller shall indemnify Buyer (on behalf of itself and each Buyer Affiliate) against all Termination Costs and all Legal Proceedings and Losses arising as a result of the termination of any Undisclosed Employee’s employment, any Undisclosed Liability and any and all liabilities arising out of any failure or alleged failure of any party to comply with its obligations under the Transfer Regulations (including, but not limited to, Regulation 13 and 15 of the Transfer Regulations). There shall be no limit on Seller’s liability in respect of any claims arising under this Section 6.02(b) .
 
(iii)           Buyer shall consult with Seller before terminating the contract of any Undisclosed Employee or settling any Undisclosed Liability and the Seller shall be entitled at its own cost and expense, to defend any claim brought by an Undisclosed Employee or in respect of an Undisclosed Liability using such legal advisers as it sees fit.
 
(c)           If the EPO patent (filing number 12152848) (“ European Patent ”) has not issued with adequate claims to cover the commercial product by the date that is the one-year anniversary of the Closing Date, then Seller shall reimburse Buyer in the amount of £35,000. Such reimbursement shall be paid to Buyer in accordance with the indemnification procedures set forth in Section 6.04 . Buyer will take reasonable steps to timely prosecute claims to cover the commercial product in the European Patent.
 
(d)          The aggregate liability of Seller in respect of all claims under this Agreement or any document to be delivered hereunder shall not exceed the amount of the Escrow Fund, except as specifically provided for in Section 6.02(b) above.
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Section 6.03       Indemnification By Buyer .  Subject to the other terms and conditions of this Article VI , Buyer shall defend, indemnify and hold harmless Seller, its affiliates and their respective stockholders, directors, officers and employees from and against all claims, judgments, damages, liabilities, settlements, losses, costs and expenses, including attorneys’ fees and disbursements, arising from or relating to:
 
(a)           any inaccuracy in or breach of any of the representations or warranties of Buyer contained in this Agreement or any document to be delivered hereunder; or
 
(b)           any breach or non-fulfillment of any covenant, agreement or obligation to be performed by Buyer pursuant to this Agreement or any document to be delivered hereunder.
 
Section 6.04       Indemnification Procedures .
 
(a)           Whenever any claim shall arise for indemnification hereunder, the party entitled to indemnification (the “ Indemnified Party ”) shall promptly provide written notice of such claim to the other party (the “ Indemnifying Party ”), which notice shall contain sufficient detail to allow the Indemnifying Party to reasonably assess the nature and amount of the claim.
 
(b)           In connection with any claim giving rise to indemnity hereunder resulting from or arising out of any Action by a person or entity who is not a party to this Agreement, the Indemnifying Party, at its sole cost and expense and upon written notice to the Indemnified Party, may assume the defense of any such Action with counsel reasonably satisfactory to the Indemnified Party.  The Indemnified Party shall be entitled to participate in the defense of any such Action, with its counsel and at its own cost and expense.  If the Indemnifying Party does not assume the defense of any such Action, the Indemnified Party may, but shall not be obligated to, defend against such Action in such manner as it may deem appropriate, including, but not limited to, settling such Action, after giving notice of it to the Indemnifying Party, on such terms as the Indemnified Party may deem appropriate and no action taken by the Indemnified Party in accordance with such defense and settlement shall relieve the Indemnifying Party of its indemnification obligations herein provided with respect to any damages resulting therefrom.  The Indemnifying Party shall not settle any Action without the Indemnified Party’s prior written consent (which consent shall not be unreasonably withheld or delayed).
 
(c)           Buyer shall seek recovery of losses in connection with any indemnification claims as follows:
 
(i)        first, from the amounts held in the Escrow Fund (as described below), until (x) such funds have been depleted or (y) the remaining balance of the Escrow Fund has been released to Seller (minus the aggregate amount of all outstanding claims on such date) upon the expiration of the twelve (12) month escrow period, in accordance with Section 6.05(c) ; and
 
(ii)       second, and only in the case of those claims arising from Section 6.02(b) , directly from Seller.
 
Section 6.05       Escrow Fund .
 
(a)           At the Closing, Buyer shall deposit the Escrow Fund into a bank account opened and maintained by Buyer. The Escrow Fund shall be maintained for twelve (12) months from the Closing Date. The bank shall require joint signatures from both Buyer and Seller in order to release any portion of the Escrow Funds to Buyer.
 
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(b)           In order to recover losses in connection with any indemnification claims from the Escrow Fund, Buyer shall provide notice of such claim to Seller in accordance with Section 6.04(a) . Seller shall have five (5) days from its receipt of such notice to: (x) deliver to the bank its signature allowing for the release of the amount of such claim or (y) deliver to Buyer a written objection to any claim or portion thereof or the amount of such claim. If Seller delivers a written objection pursuant to clause (y) above, the parties agree that they shall make commercially reasonable efforts to negotiate and resolve the dispute. If no resolution is reached, then the parties shall resolve such dispute in an appropriate court of law in accordance with Section 7.11 .
 
(c)           Within five (5) days after the twelve (12) month anniversary of the Closing Date, Buyer shall notify Seller of the remaining balance of the Escrow Fund, if any, minus the aggregate amount of all outstanding claims on such date. Seller shall either (x) deliver to the bank its signature allowing for the release of such remaining balance or (y) deliver to Buyer a written objection to the amount of such remaining balance. If Seller delivers a written objection pursuant to clause (y) above, the parties shall resolve such dispute as provided above in Section 6.05(b) .
 
Section 6.06       Tax Treatment of Indemnification Payments .  All indemnification payments made by Seller under this Agreement shall be treated by the parties as an adjustment to the Purchase Price for tax purposes, unless otherwise required by law.
 
Section 6.07       Effect of Investigation .  Buyer’s right to indemnification or other remedy based on the representations, warranties, covenants and agreements of Seller contained herein will not be affected by any investigation conducted by Buyer with respect to, or any knowledge acquired by Buyer at any time, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or agreement. Notwithstanding the foregoing, as of the date hereof, neither Buyer nor any of its officers, employees, consultants or agents has knowledge that Seller is in breach of any of its representations, warranties, covenants or agreements.
 
Section 6.08      Cumulative Remedies .  The rights and remedies provided in this Article VI are cumulative and are in addition to and not in substitution for any other rights and remedies available at law or in equity or otherwise.
 
ARTICLE VII
MISCELLANEOUS
 
Section 7.01       Expenses .  All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses.
 
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Section 7.02       Notices .  All notices, requests, consents, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been given (a) when delivered by hand (with written confirmation of receipt); (b) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the next business day if sent after normal business hours of the recipient; or (d) on the fifth day after the date mailed, by certified or registered airmail, return receipt requested, postage prepaid.  Such communications must be sent to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 7.02 ):
 
If to Seller:
Redweb Technologies Limited
Venture Point, Towers Business Park
Wheelhouse Rd., Rugeley
Staffordshire WS15 1UZ
Facsimile:           0871 508 1229
E-mail:          duncan@valhallinvestmentsinc.com
Attention:          Duncan Cheadle
 
with a copy to:
Everyman Legal Limited, Unit 1G Network Point,
Range Road, Windrush Park, Witney, Oxfordshire,
United Kingdom OX29 YN
Facsimile:           +44 845 868 0961
E-mail:          stephen.evans @everymanlegal.com
Attention:         Stephen Evans
 
If to Buyer:
Applied DNA Sciences, Inc.
25 Health Sciences Drive
Suite 215
Stony Brook, New York  11790
Facsimile:           631-444-8848
E-mail:          Kurt.Jensen@adnas.com
Attention:          Kurt Jensen, Chief Financial Officer
 
with a copy to:
Fulbright & Jaworski L.L.P.
Facsimile:           212-318-3400
E-mail: mkraines@fulbright.com
Attention:          Merrill M. Kraines
   
Section 7.03       Interpretation .  The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement. The parties have jointly participated in the negotiation and drafting of this Agreement. In the event of an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumptions or burdens of proof shall arise favoring any party by virtue of the authorship of any of the provisions of this Agreement.
 
Section 7.04       Severability .  If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction.
 
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Section 7.05       Entire Agreement .  This Agreement and the documents to be delivered hereunder constitute the sole and entire agreement of the parties to this Agreement with respect to the subject matter contained herein, and supersede all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter.  In the event of any inconsistency between the statements in the body of this Agreement and the documents to be delivered hereunder, the Exhibits and Disclosure Schedules (other than an exception expressly set forth as such in the Disclosure Schedules), the statements in the body of this Agreement will control.
 
Section 7.06       Successors and Assigns .  This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.  Neither party may assign its rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed.  No assignment shall relieve the assigning party of any of its obligations hereunder.
 
Section 7.07       No Third-party Beneficiaries .  Except as provided in Article VI , this Agreement is for the sole benefit of the parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
 
Section 7.08     Amendment and Modification .  This Agreement may only be amended, modified or supplemented by an agreement in writing signed by each party hereto.
 
Section 7.09       Waiver .  No waiver by any party of any of the provisions hereof shall be effective unless explicitly set forth in writing and signed by the party so waiving.  No waiver by any party shall operate or be construed as a waiver in respect of any failure, breach or default not expressly identified by such written waiver, whether of a similar or different character, and whether occurring before or after that waiver.  No failure to exercise, or delay in exercising, any right, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.
 
Section 7.10       Governing Law .  This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of New York.
 
Section 7.11       Submission to Jurisdiction .  Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby shall be brought and maintained exclusively in the United States District Court for the Eastern District of New York, or if such court is without subject matter jurisdiction of such suit, action or proceeding, in the  Supreme Court of the State of New York in and for the County of New York, and each party hereby irrevocably consents to the exclusive personal jurisdiction and venue of such court in any such suit, action or proceeding.
 
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Section 7.12        Specific Performance .  The parties agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy to which they are entitled at law or in equity.
 
Section 7.13       Counterparts .  This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement.  A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.
 
[SIGNATURE PAGE FOLLOWS]
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.
       
 
REDWEB TECHNOLOGIES LIMITED
 
       
       
       
 
By
   
 
Name:
 
  Title:  
 
 
 
 
APPLIED DNA SCIENCES, INC.
 
       
       
       
 
By
   
 
Name:
 
  Title:  
 
AGREED WITH RESPECT
TO SECTION 5.07:
     
VALHALLA INVESTMENTS, INC.  
     
     
     
By:     
Name:
 
Title:  
 
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DEFINITIONS
 
(i)            “Affiliate” means, with respect to any Person, any other Person who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person.  The term “control” means the ownership of a majority of the voting securities of the applicable Person, and the terms “controlled” and “controlling” have meanings correlative thereto.
 
(ii)           “Control” or “Controlled” means, with respect to any Intellectual Property right, possession by a party (including its Affiliates) of the right (whether by ownership, license or otherwise) to grant to another party a license or a sublicense under such Intellectual Property right without violating the terms of any agreement or other arrangement with any third party.
 
(iii)          “Copyrights” means all original works of authorship in any medium of expression, whether or not published, all copyrights (whether registered or unregistered), all registrations and applications for registration of such copyrights, and all issuances, extensions and renewals of such registrations and applications.
 
(iv)          “Intellectual Property” means all of the following and similar intangible property and related proprietary rights, interests and protections, however arising, pursuant to the laws of any jurisdiction throughout the world: (a) Trademarks; (b) Copyrights; (c) Know-How; (d) Patents; (e) copies and tangible embodiments of the foregoing (in whatever form or medium); and (f) all rights to sue and recover and retain damages, costs and attorneys’ fees for past, present and future infringement and any other rights relating to any of the foregoing.
 
(v)           “Know-How” means all confidential information, trade secrets, confidential business information (including ideas, inventions, formulas, designs, devices, technology, know-how, research and development, inventions, methods, processes, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals) and computer software (including all data and related documentation) whether or not patentable or copyrightable.
 
(vi)         “ Legal Proceedings ” shall mean any action, proceedings, claim, challenge, demand or other legal recourse brought against Buyer and/or any Buyer Affiliate.
 
(vii)        “ Losses ” shall mean any liability, damage, loss, compensation, award (including any tribunal award), cost, expense, charge, fine, penalty or outgoing suffered or incurred by Buyer and/or any Buyer Affiliate.
 
(viii)       “ Patents ” means all patented and patentable designs and inventions and improvements thereto, all design, plant and utility patents, letters patent, utility models, pending patent applications and provisional applications and all issuances, divisions, continuations, continuations-in-part, reissues, extensions, reexaminations, renewals and foreign counterparts of such patents and applications.
 
 
 

 

 
(ix)           “ Person ” means an individual, partnership, corporation, limited liability company, joint stock company, unincorporated organization or association, trust, joint venture, association or other similar entity, whether or not a legal entity.
 
(x)            “ Tax ” (including with correlative meaning the term “ Taxes ”) means (i) any federal, state, local or foreign income, gross receipts, capital, franchise, import, goods and services, value added, sales and use, estimated, alternative minimum, add-on minimum, sales, use, transfer, registration, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, social security, unemployment, disability, payroll, license, employee withholding, unclaimed property, escheat or other tax of any kind whatsoever, including any interest, penalties or additions to tax or additional amounts in respect of the foregoing, (ii) any liability for the payment of any amounts of the type described in clause (i) as a result of being a member of a consolidated, combined, unitary or aggregate group for any taxable period, and (iii) any liability for the payment of any amounts of the type described in clause (i) or clause (ii) as a result of being a transferee or successor to any person or as a result of any express or implied obligation to indemnify any other person.
 
(xi)           “ Termination Costs ” means:
 
1.           the cost of termination of the employment of any Undisclosed Employee;
 
2.           any costs associated with employing any Undisclosed Employee from the transfer date to the date of their dismissal and any social security or other similar costs payable thereon;
 
3.           any Losses resulting from an obligation to provide to an Undisclosed Employee any defined benefits payable on early retirement  (including, but not limited to, any entitlement to benefits arising from a right to be considered for early retirement or the loss of opportunity to increase the number of years of pensionable service) or redundancy which derive from the Undisclosed Employee’s membership of any pension scheme, and which claim is founded on an assertion that an obligation to provide such benefits transferred by virtue of the Transfer Regulations the Acquired Rights Directive 77/187/EC or 2001/23/EC (as appropriate); and
 
4.           any obligation to pay any pension contributions in respect of any Undisclosed Employee.
 
(xii)            “Trademarks” means all trademarks, service marks, trade names, brand names, logos, trade dress and other proprietary indicia of goods and services, vanity numbers whether registered or unregistered, internet domain names registered in any top-level domain by any authorized private registrar or governmental authority and all registrations and applications for registration of such trademarks, including intent-to-use translations, adaptations, derivations, and combinations, applications, all issuances, extensions and renewals of such registrations and applications and the goodwill connected with the use of and symbolized by any of the foregoing.
 
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AGREEMENT OF LEASE BETWEEN
 
LONG ISLAND HIGH TECHNOLOGY INCUBATOR, INC.,
 
LANDLORD
 
AND
 
APPLIED DNA SCIENCES, INC.,
 
TENANT
 
50 Health Sciences Drive
Stony Brook, New York
 
 
 

 

 
AGREEMENT OF LEASE
 
This Agreement of Lease (this Lease ), dated as of 6/14 , 2013, is by and between LONG ISLAND HIGH TECHNOLOGY INCUBATOR, INC., a nonprofit educational corporation existing under the laws of the State of New York, having its principal place of business located at 25 Health Sciences Drive, Stony Brook, New York 11790, hereinafter referred to as Landlord ”, and Applied DNA Sciences, Inc., having its principal place of business located at 25 Health Sciences Drive, Stony Brook, New York 11790, hereinafter referred to as Tenant ”.
 
WHEREAS , the New York State Legislature (hereinafter called the Legislature ”) has determined that the development and operation of a high technology incubator with related service, business and technical facilities on the campus of the State University of New York at Stony Brook (the Stony Brook Campus ”) fulfills a necessary and desirable public purpose and promotes employment and educational opportunities within the Long Island Region served by the State University of New York at Stony Brook (“ SBU ”); and
 
WHEREAS , the Legislature finds that encouraging the development of high technology incubator space at institutions of higher education has heretofore been declared to be the policy of New York State; and
 
WHEREAS , the Legislature enacted certain legislation to enable the Trustees of the State University of New York (the State University of New York being hereinafter referred to as Overlandlord ”) to enter into a lease (“ Ground Lease ”) with Landlord for the development, construction and operation of industrial and high technology incubator space and research and development facilities on a portion of the Stony Brook Campus, said enabling legislation being hereinafter referred to as the Enabling Act ”; and
 
WHEREAS , the Enabling Act has become Chapter 304 of the Laws of 1988; and
 
WHEREAS , such facility is located at 25 and 50 Health Sciences Drive, Stony Brook, NY 11790, as more particularly shown on Exhibit A   attached hereto and made a part hereof (the Facility ”); and
 
WHEREAS , Landlord and Tenant believe that Tenant qualifies as a high technology company in the area of DNA encryption technology, as provided in the January 22, 1986 Resolution of the State University of New York Board of Trustees “Use of University Facilities by Emerging Technology Enterprises” (SUNY Document Number 5604; furnished upon request); and
 
WHEREAS , Tenant has developed competence and expertise in technical matters relating to DNA encryption, counterfeit protection, and authentication, as well as expertise in development of a biotechnology company, and wishes to support the goals and objectives of SBU as outlined in Attachment A   annexed hereto; and
 
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WHEREAS , Tenant wishes to support growth of future emerging high technology companies in the incubator program at the Facility and will contribute to such program as an anchor tenant at the Facility and use the Premises for purposes consonant with the provisions of Chapter 304 of the Laws of 1988 and with the mission and programs of SBU as articulated by the Board of Trustees of SBU in the “Program Policy Statement” contained in Schedule C of the Ground Lease; and
 
WHEREAS , Tenant currently occupies certain premises in the building known as 25 Health Sciences Drive, Stony Brook, New York pursuant to a sublease between Landlord and Tenant dated November 1, 2005; and
 
WHEREAS , Tenant desires to relocate to and lease from Landlord the entire building known as 50 Health Sciences Drive (the Building ) pursuant to the terms herein.
 
WHEREAS, Tenant s occupancy of the Building will support Overlandlord, Landlord and the Stony Brook Campus to continue to prepare itself and its students for participation in a high technology economy engaged in research, development and commercialization efforts vital to the educational mission of SBU.
 
NOW, THEREFORE , in consideration of ten ($10.00) dollars and other good and valuable consideration, Landlord and Tenant hereby agree as follows:
 
1.              Premises. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Building, which Landlord and Tenant agree consists of approximately 30,000 rentable square feet (the “Premises”) together with the right to use in common with Overlandlord, Landlord and others, the parking area and grounds located within the Facility and all public or private streets, roads, highways, alleys, driveways, sidewalks, easements, rights of way and appurtenances which give vehicle or pedestrian access to the Premises as more particularly shown on Exhibit A   annexed to this Lease. Under State University Board of Trustees resolution of January 22, 1986 and further referenced in paragraph (b) of the Patents and Inventions Policy of State University of New York dated September 19, 1979, and amended November 16, 1988, the Premises are considered Tenant facilities and not state university facilities for purposes of patent and copyright ownership.
 
2.             Term. The term of this Lease shall be for two years and eleven and one half months from June 15, 2013 ( Commencement Date ) through May 31, 2016, (“Expiration Date”) -unless earlier terminated or extended in writing in accordance with the terms of this Lease.
 
3.              Rent. The rent payable hereunder is $449,142 per year, which sum shall be payable in equal monthly installments of $37,428.50 on the first day of each month during the term of this Lease. Rent payable by Tenant under this Lease shall be paid when due without prior demand therefor and without any deductions or setoffs or counterclaims whatsoever.
 
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Any sums of money required to be paid under this Lease by Tenant in addition to the Rent herein provided, shall be deemed “Additional Rent” due and payable after demand therefor with the Rent next due (provided Tenant shall have been given ten (10) days’ notice of any such Additional Rent) or as may be otherwise provided herein. Such Additional Rent shall be deemed to be and shall constitute Rent hereunder and shall be collectible in the same manner and with the same remedies as if they had been Rent originally reserved herein. Tenant’s obligation to pay Additional Rent accruing during the term of the Lease shall survive the earlier termination and/or expiration of the term of this Lease. If Landlord receives from Tenant any payment less than the sum of the monthly Rent including Additional Rent and other charges then due and owing, Landlord, in its sole discretion, may allocate such payment in whole or in part to any Rent, any Additional Rent, and/or other charge then due or to any combination thereof.
 
Installments of the Rent and any Additional Rent payable hereunder shall be made payable to Landlord or to such other party as Landlord may designate from time to time by written notice to Tenant hereunder. Rent for any partial month during the term of the Lease shall be ratably apportioned based on the actual number of days therein.
 
4.              Services. Landlord shall supply all ordinary and necessary water, gas, electrical, and sewage services to Tenant and Tenant shall pay the charges for such services at the same rates charged by the local public utility companies providing such utility, or at such discounted rate as may be available to Tenant or Landlord within thirty (30) days of Tenant’s receipt of a bill for the same. In addition, such services that have not been separately metered (water and sewer) may be separately metered by Landlord and Tenant agrees to pay for such services in accordance with such metering as set forth above. Should Landlord decide to separately meter the Premises, the installation, maintenance and/or repair of such meters shall be Landlord’s sole responsibility and at Landlord’s sole cost and expense. Tenant may avail itself of other campus services at established third-party rates. The parties acknowledge that Tenant is eligible for discounts on such services as set forth under the Excelsior contract with New York State.
 
All activities of the Tenant involving the facilities and services of SBU will be consistent with applicable policies and guidelines of SBU.
 
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Except as otherwise expressly provided in this Lease, Landlord shall not be liable to Tenant for any loss or damage or expense which Tenant may sustain or incur by reason of any failure, inadequacy or defect in the character, quantity, quality or supply of electric current furnished to the Premises for any cause beyond Landlord’s reasonable control. No diminution or abatement of Rent, Additional Rent, or other compensation shall be or will be claimed by Tenant, nor shall this Lease or any of the obligations of Tenant hereunder be affected or reduced by reason of such interruptions, stoppages or curtailments, nor shall the same give rise to a claim in Tenant’s favor that such failure constitutes actual or constructive, total or partial eviction from the Premises, unless such interruptions, stoppages or curtailments have been due to the arbitrary, willful or negligent act, or failure to act, of Landlord.
 
5.             Changes and Alterations. Tenant shall have the right to make decorative alterations, such as painting, wall coverings and floor coverings (collectively Decorative Alterations ”) without Landlord’s consent. In addition, Tenant shall have the right to make non-structural changes to the Premises which do not adversely affect any building systems and do not exceed $100,000.00 per year in the aggregate, without Landlord’s consent, provided that Tenant provides Landlord with a copy of any existing plans and/or sketches prior to the commencement of work. However, Tenant shall not make any other changes to the Premises, or any part thereof, without Landlord’s consent and Landlord’s agent consent (currently the Office of Campus Planning, Design and Construction hereinafter referred to as “ PDC ,” at SBU), which consent shall not be unreasonably withheld, conditioned or delayed. Within fifteen (15) days of Landlord’s receipt of any request by Tenant for approval of proposed changes to the Premises, Landlord shall approve or disapprove (stating in reasonable detail the reasons for any disapproval) such request. If Landlord fails to approve or disapprove such request within said fifteen (15) day period, Landlord’s consent to such changes shall be deemed given. All work must be approved for compliance with applicable building codes and energy conservation codes by the CPDC Code Compliance Manager prior to the start of any work. At Tenant’s request, Landlord shall join in any applications for any authorizations required from any authority in connection with any approved alterations and otherwise cooperate, without cost, with Tenant regarding the same. Plans prepared by Tenant shall be provided to Landlord in connection with all alterations. All alterations for which the Landlord has provided its written consent pursuant to this Section shall be accomplished at Tenant’s expense by contractors approved in writing by Landlord, such consent not to be unreasonably withheld, conditioned, or delayed. Should Landlord fail to respond to any request to approve any contractor within fifteen (15) days after such request, such contractor(s) shall be deemed approved.
 
With respect to any alterations described herein, Tenant agrees that it shall: (i) obtain, prior to commencing any alterations and at its own expense, all permits, approvals and certificates required by any governmental or quasi-governmental authorities and provide to Landlord, upon completion, any necessary certificates of final approval thereof as well as duplicates of all such required permits, approvals and certificates; and (ii) cause its contractors and subcontractors to carry such workers’ compensation, general liability, and personal property damage insurance as Landlord may reasonably require.
 
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All installations installed in the Premises at any time, either by Tenant or Landlord on behalf of Tenant, shall be surrendered with the Premises (unless as to any structural alterations or other types of alterations such as chemical storage areas, radioactive areas, walk-in cold or warm rooms, changes to slab flooring, reinforcing dividing walls, installation of blow-out safety devices/windows, roof penetrations or the like and that create a permanent impediment for future use of the Premises, Landlord, by written notice to Tenant given with its consent to such alterations, elects to have them removed by Tenant, in which event the same shall be removed by Tenant at Tenant’s expense upon expiration of the term of this Lease.) All installations installed in the Premises at any time (excluding movable fixtures, trade fixtures, attached furniture, personal property not constituting leasehold improvements, and specialty installations), either by Tenant or Landlord on behalf of Tenant, shall, upon installation, become the property of Landlord.
 
6.              Tenant Repairs and Maintenance . Tenant shall take proper care of the Premises including repair and maintenance of plumbing, gas, electric, heating, cooling, ventilation, compressed air and other building systems serving the Premises exclusively.

 
7.               Landlord Repairs and Maintenance . Notwithstanding anything above to the contrary, Landlord shall, at its sole cost and expense, replace the HVAC systems and all equipment and fixtures located outside the Premises but serving the Premises at the end of their useful lives or as may otherwise be necessary or required, unless such replacement is necessary due to damage to such systems, equipment or fixtures caused by Tenant or its agents or employees. In addition, Landlord, at its sole cost and expense, shall repair, maintain and replace, as necessary or required, the structure and roof (including the roof membrane) of the Premises and make all other structural repairs and replacements to and in the Premises as are necessary or required to keep the same in good condition and repair. Landlord agrees that it shall install a new roof on the Premises within twelve (12) months after the Commencement Date. Landlord shall further (i) maintain and make all necessary repairs to the Common Areas (as defined below) including keeping the same clear of snow, ice and debris, (ii) keep the Common Areas in good condition in a first class, high grade manner consistent with reputable business standards and practices, (iii) keep the Common Areas in compliance with all applicable federal, state and local laws and regulations and insurance requirements and (iv) at no additional cost to Tenant, keep all parking areas adequately lit at all times. “Common Areas” shall mean the areas and equipment at the Facility, the Premises or of any other land or property made available by Landlord for the safety, benefit or convenience of the Tenant and Tenant’s employees or invitees, including but not limited to, parking areas, driveways, truck service ways, sidewalks and curbs; entrances and exits from the adjacent streets; traffic lights, traffic islands, landscaped areas; fencing; lighting facilities; sprinkler system serving landscaped areas or buildings; sewage system; directional or safety signs; pylon signs and sign panels which identify the Premises. Notwithstanding anything to the contrary herein, if Overlandlord fails to keep the access roads serving the Facility clear of snow at any time during the term of this Lease and if Landlord is unable to provide such service, Tenant may, after notice to Landlord (which may be oral) and an opportunity to cure (which shall not exceed four (4) hours), perform such snow removal, and Landlord shall pay the actual reasonable costs incurred by Tenant. Such request shall be reasonably supported by invoices for the work that has been completed.
 
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Tenant shall be solely responsible for the disposal of all waste in the Premises; provided, however, Landlord shall, at its sole cost and expense, promptly dispose of and remediate any pre-existing Hazardous Materials (as hereinafter defined) at the Premises. Subject to Landlord’s repair obligations and except as otherwise expressly provided herein, Tenant hereby assumes the full and sole responsibility for the condition, operation, repair, replacement, maintenance and management of the Premises.
 
Except as specifically provided in this Lease, there shall be no allowance to Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making any repairs, alterations, additions or improvements in or to any portion of the Premises or in and to the fixtures, appurtenances or equipment thereof in accordance with the provisions of this Lease. Landlord agrees that in performing any repairs, alterations, additions or improvements in or to any portion of the Premises or the Facility or in or to the fixtures, appurtenances or equipment thereof, Landlord shall use commercially reasonable efforts not to interfere with Tenant’s conduct of its business at the Premises. The provisions of this Article with respect to the making of repairs shall not apply in the case of fire or other casualty which are dealt with in Article 22 hereof.
 
8.             Security Deposit . Tenant agrees to provide an amount equal to $50,000.00, as a security deposit to be held by Landlord in trust in a separate, non-interest bearing account for the faithful performance and observance by Tenant of the terms, provisions and conditions of this Lease. If Tenant pays the rents and performs all of its other obligations under this Lease, Landlord will return the unused portion of the security deposit within thirty (30) days after the end of the term of this Lease. It is agreed that in the event Tenant defaults in respect of any of the terms, provisions and conditions of this Lease beyond applicable notice and cure periods, including, but not limited to, the payment of Rent and Additional Rent, Landlord may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any Rent and Additional Rent or any other sum as to which Tenant is in default or for any sum which Landlord may reasonably expend or may be required to expend by reason of Tenant’s default in respect of any of the terms, covenants and conditions of this Lease. In the event Landlord applies or retains any portion or all of the security deposited, Tenant shall forthwith restore the amount so applied or retained so that at all times the amount deposited shall be the sum stipulated above.
 
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In the event of a sale or assignment of Landlord’s leasehold interest in the Building, Landlord shall have the right to transfer the security to the assignee. Landlord shall thereupon be released by Tenant from all liability for the return of such security, and Tenant agrees to look to the new landlord solely for the return of said security. It is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance.
 
9.     Rules and Regulations . Tenant shall comply with established Landlord and SBU regulations (including, but not limited to, SBU environmental rules and regulations) and policies provided that same are not discriminatorily applied within the Facility and copies thereof shall be delivered to Tenant in advance of the enforcement thereof, and all laws, rules, orders, regulations, and the requirements of federal, state and municipal governments applicable to Tenant’s use of the Premises. Tenant shall obtain and keep in force at its sole cost and expense any permits or licenses which may be required in this jurisdiction for conduct of its operations and shall exhibit same to Landlord or SBU upon request.
 
10.    No Relationship Between Tenant and SBU or NYS . Tenant specifically agrees that, notwithstanding anything contained herein to the contrary, this Lease does not create a relationship of landlord and tenant between the State of New York or the State University of New York and Tenant regarding the use of New York State controlled property including the Premises to which this Lease relates.
 
11.    Conflict Between Lease and New York State or SBU . Tenant specifically agrees that any portion of this Lease which relates to the use of New York State controlled property and which is inconsistent with the laws of New York State or which in any way conflicts with the purpose or objective of the State University of New York or SBU shall be void and of no further force and effect.
 
12.    Condition of Premises . Landlord shall deliver the Premises to Tenant broom clean, free of all tenancies and in compliance with all applicable laws. Except as set forth in the preceding sentence or as specifically set forth elsewhere in this Lease, Tenant agrees to accept the Premises as-is and, except as set forth above, specifically agrees to pay all additional costs related to any alterations of the Premises during the term of this Lease. Landlord shall not be required to provide furnishings, fixtures or decorations in the Premises. At Tenant’s sole cost and expense, Landlord will permit Tenant to install equipment, furniture and furnishings in the Premises and the removal of Tenant’s equipment, furniture and decorations at the end of the term of this Lease, or upon any extension or earlier termination thereof. In the event Tenant fails to so remove any of its equipment, furniture and decorations, same shall be deemed abandoned and Landlord may do so at Tenant’s expense. Landlord shall ensure that the plumbing, electric, heating and cooling systems and the elevators are fully operational and in good working order before the Commencement Date.

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13.            Use. Tenant shall use and occupy the Premises for purposes of developing technology related to DNA encryption, biotech security, counterfeit protection, and authentication and for any other related and lawful purpose, which uses (those expressly set forth herein and any related thereto) are consistent with the Program Policy Statement set forth in the Ground Lease (“Permitted Use”). Tenant shall have the right, so long as this Lease shall remain in effect, to enter upon the SBU campus for the purposes set forth herein. However, if, in the reasonable judgment of Landlord, any activity of Tenant or its personnel or clients is deemed incompatible with the purposes contemplated by this Lease, then such activity shall constitute a default by Tenant under this Lease if the same is not altered within thirty (30) days after Tenant’s receipt of Notice from Landlord of such incompatibility or such earlier time period as may be provided under the Ground Lease.
 
14.            No Representation. Tenant specifically agrees not to hold itself out as representing the State of New York, the State University of New York, The Research Foundation of SUNY, SBU or Landlord in connection with the use of New York State owned property to which this Lease relates, if any, nor shall the name of the State of New York, the State University of New York, The Research Foundation of SUNY, SBU or Landlord be used by Tenant for any purpose without prior, specific written approval of the party whose name is to be used.
 
15.            Indemnification and Hold Harmless. Tenant assumes all risks incidental to its use of the Premises, appurtenances and surrounding grounds. Tenant shall be solely responsible for any and all accidents and injuries to persons (including death) caused by the acts or omissions of Tenant, including to Tenant’s agents, employees, licensees and invitees. Tenant shall be solely responsible for property damage caused by the acts or omissions of Tenant, its agents, employees, licensees and invitees. Tenant hereby covenants and agrees to indemnify and hold harmless the State of New York, the State University of New York, The Research Foundation of SUNY, SBU or Landlord and their respective directors, shareholders, members, contractors, managers, principals, trustees, officers employees, agents, contractors and assigns (collectively, the “Indemnified Parties” ) against and from (i) any and all claims against the Indemnified Parties of whatever nature arising from any acts or omissions of Tenant, its contractors, licensees, subtenants, agents, servants, employees, invitees or visitors, (ii) all claims against the Indemnified Parties arising from any accident, injury or damage whatsoever caused to any person or to the property of any person and occurring during the term of this Lease in or about the Premises, and (iii) all claims against the Indemnified Parties arising from any accident, injury or damage occurring outside of the Premises but anywhere within or about the Facility, where such accident, injury or damage results or is claimed to have resulted from an act or omission of Tenant or Tenant’s agents, employees, subtenants, invitees or visitors (collectively “Claims” ) . This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, reasonable costs and expenses of any kind or nature incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. Tenant further agrees, upon request, to assume the defense of and to defend, at its own cost and expense, any such Claims brought at any time against the Indemnified Parties.

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16.           Insurance. During the term, Tenant shall maintain with responsible companies reasonably approved by Landlord:
 
                                   (i)               Intentionally Omitted;
 
(ii)             Commercial General Liability Insurance against all claims, demands or actions for personal injury to or death of any person in an amount of not less than $1,000,000.00 per occurrence liability limit, umbrella liability coverage of $4,000,000.00 and not less than $1,000,000.00 general aggregate liability limit for damage to property made by or on behalf of any person, arising from, related to, or in any way connected with the conduct and operations of Tenant’s use or occupancy of the Premises, or caused by actions or omissions to act, where there is a duty to act, of Tenant, its agents, servants and contractors, which insurance shall name Landlord, the State of New York, the State University of New York, the Research Foundation of SUNY and SBU, the State of New York, and Landlord’s managing agent as additional insureds, and such insurance shall be endorsed to provide that the insurance shall be primary and not contributory to any similar insurance carried by Landlord;
 
(iii)            fire insurance, with such extended coverage, vandalism, malicious mischief and sprinkler leakage endorsements attached as Landlord reasonably may, from time to time, require, covering all fixtures and equipment, stock in trade, furniture, furnishings, improvements or betterments installed or made by Tenant in, on or about the Premises to the extent of at least 90% of their replacement value, without deduction for depreciation, but in any event in an amount sufficient to prevent Tenant from becoming a co-insurer under provisions of applicable policies;
 
(iv)             worker’s compensation insurance covering all persons employed by Tenant or in connection with any work performed by Tenant; and
 
(v)             business interruption insurance.
 
Nothing shall be construed herein to limit any of Tenant’s contractual obligations under the terms of this Lease except as otherwise expressly provided hereinabove, and the minimum limits of liability set forth in (ii) above may be achieved by including Tenant’s primary coverage and Tenant’s excess liability (umbrella) coverage allocable to the Premises.
 
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All of Tenant’s insurance may be provided under blanket policies and shall provide that it shall not be subject to cancellation, termination or change except after at least thirty (30) days prior written notice to Landlord. All policies required pursuant to this Article or duly executed certificates for the same shall be deposited with Landlord not less than one (1) day prior to the day Tenant takes occupancy. Renewals of said policies shall be deposited with Landlord not less than fifteen (15) days prior to the expiration of the term of such coverage. Notwithstanding anything in this Lease to the contrary, Landlord and Tenant mutually agree that with respect to any loss which is covered by insurance then being carried by the party suffering a loss, or being carried by another party under which the party suffering the loss is an additional insured or loss-payee or required to be carried by such party, or as to any coverage which Landlord waives Tenant’s obligation to provide insurance, the party suffering a loss, releases the other of and from any and all claims with respect to such loss to the extent of such insurance; and they further agree to evidence such waiver by endorsements in their respective insurance policies. In the event that an extra premium is payable by either party as a result of this provision, the other party shall reimburse the party paying such premium the amount of such extra premium. If, at the written request of one party, the requirement that this release and nonsubrogation provision be contained in the other party’s insurance policy or policies is waived, then the obligation of reimbursement shall cease for such period of time as such waiver shall be effective, but nothing contained in this Article shall be deemed to modify or otherwise affect releases elsewhere herein contained of either party from liability from claims.
 
During the term, Landlord shall maintain, and Tenant shall pay to Landlord as Additional Rent the premiums therefor, insurance against loss or damage by fire (and against such other risks as would be covered by “SPECIAL-FORM” insurance to the extent that such insurance is reasonably available), in an amount not less than 100% of the then full insurable value of the Building and building equipment. The term “full insurable value” shall mean the actual replacement value (excluding foundation and excavation costs) and said “full insurable value” shall be reasonably determined by Landlord or Landlord’s insurance carrier. Tenant shall pay to Landlord as Additional Rent the premiums for such insurance within thirty (30) days after bills therefor are mailed to Tenant.
 
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17.            Notice . Any notice (“ Notice ”) to either party hereunder must be in writing, signed by the party giving it or such party’s attorney, and shall be served either by (i) hand delivery, (ii) certified mail, return receipt requested, or (iii) nationally recognized overnight carrier and addressed as follows:

TO LANDLORD:
TO TENANT:
Long Island High Technology Incubator, Inc.
Prior to the Commencement Date:
25 Health Sciences Drive
Applied DNA Sciences, Inc.
   
Stony Brook, New York 11790
25 Health Sciences Drive
 
Stony Brook, New York 11790;
   
Attn: Anilkumar- Dhundale, PhD
Attn: Chief Financial Officer
   
 
thereafter:
 
Applied DNA Sciences, Inc.
 
50 Health Sciences Drive
 
Stony Brook, New York 11790
   
 
Attn: Chief Financial Officer
 

WITH A COPY TO:
WITH A COPY TO:
Farrell Fritz, P.C.
Fulbright & Jaworski L.L.P.
1320 RXR Plaza
666 Fifth Avenue
Uniondale, NY 11556
New York, NY 10103
Attn: Robert E. Sandler, Esq.
Attn.: Merrill M. Kraines, Esq.
 
or to such other addresses as may be designated by the party giving it in writing. All Notices become effective upon (i) receipt, if delivered by hand, (ii) delivery, if delivered by overnight carrier, and (iii) three (3) days after posting, if delivered by certified mail.
 
18.          Renewal Option. Provided that Tenant is not in default hereunder past all applicable notice and cure periods at the time of the election of the respective renewal term or the date of commencement of same, Tenant shall have the right to renew this Lease at its option for two (2) additional three (3) year periods, commencing at the end of the then current term (the “renewal term” ), by providing written notice of its intent to renew to Landlord at least one hundred and eighty (180) days prior to the expiration of the then current term of this Lease, time of the essence. If the option to renew is exercised by Tenant, the renewal period shall be upon the same terms and conditions as set forth herein except that the Rent for the renewal term shall be subject to increase but not decrease, based upon the percentage increase, if any, in the Consumer Price Index during the initial term of this Lease as more fully set forth below:
 
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(a)
The term “Consumer Price Index” or “CPI” shall mean the Consumer Price Index published by the Bureau of Labor Statistics of the United States Department of Labor, all items, relating to New York, New York - Northeastern New Jersey, for Urban Wage Earners and Clerical Workers with 1982/1984=100, as the basis of calculation.
 
 
(b)
The term “Base Price Index” shall mean the CPI for the month of May, 2013.
 
 
(c)
The Rent for a renewal term shall be calculated by increasing the Rent in effect during the initial term of this Lease by that amount derived by multiplying $449,142 by a percentage equal to a fraction, the numerator of which shall be the excess, if any, of the CPI for the month immediately preceding the commencement date of the renewal term over the Base Price Index, and the denominator of which shall be the Base Price Index.
 
 
(d)
In the event that the Consumer Price Index ceases to use 1982/1984=100 as the basis of calculation or if a substantial change is made in the terms or number of items contained in the CPI or if the CPI is altered, modified, converted or revised in any other substantial way, then Landlord and Tenant shall agree upon the use of an alternative and reliable governmental publication evaluating substantially all the information used in determining the CPI and which most closely resembles the CPI in order to effectuate the intent of the parties as set forth above.
 
19.            Additional Terms and Conditions. In addition to those otherwise set forth herein, this Lease is subject to the following terms and conditions:
 
 
(a)
General institutional services provided to the Tenant by SBU at the request of Tenant must be paid for promptly after receipt by Tenant of a bill for the same.
 
 
(b)           Tenant may provide employment opportunities for SBU students during the academic year subject to student employment policies.
 
 20.            Subletting and Assignment. Tenant shall not sublease, assign, mortgage, pledge, encumber the Premises or in any manner transfer the Lease or part thereof without the prior written consent of Landlord, which consent may not be unreasonably withheld, conditioned or delayed unless such sublease shall be in conflict with the stated purposes in the January 22, 1986 Resolution of the State University of New York Board of Trustees “Use of University Facilities by Emerging Technology Enterprises” (SUNY Document Number 5604; furnished upon request), and the Incubator Guidelines and Procedures of the State University of New York at Stony Brook (furnished upon request). Landlord may assign this Lease in accordance with existing mortgage and loan agreements or otherwise, provided that any assignee delivers to Tenant an assignment and assumption agreement and any new mortgagee delivers to Tenant a subordination and non-disturbance agreement in the customary form of such mortgagee. This Lease shall not constitute a partnership or joint venture agreement between the parties hereto.
 
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Except where Tenant is a publicly traded corporation, any assignment, transfer, disposition, sale or acquiring of a controlling interest in Tenant to or by any person, entity or group of related persons or affiliated entities, whether in a single transaction or in a series of related and unrelated transactions shall be deemed to constitute an assignment of the Lease. For purposes of the immediately preceding sentence, a “controlling interest” of Tenant shall mean fifty (50%) percent or more of the aggregate issued and outstanding equitable interest (whether stock, partnership interest or otherwise) thereof.
 
Notwithstanding anything to the contrary herein, Tenant shall have the right, without the consent of Landlord, to assign its interest in this Lease or sublease the Premises to a parent, subsidiary or affiliate of Tenant, any entity under common control with Tenant or any entity which is a direct or indirect successor to Tenant either by merger or consolidation, or in connection with the transfer of all of the business and assets of the Tenant or a public offering of Tenant’s stock. No such assignment or sublease shall be valid unless, within ten (10) days after the effective date thereof, Tenant shall deliver to Landlord (i) a duplicate original instrument of assignment or sublease in form and substance reasonably satisfactory to Landlord, duly executed by Tenant, and (ii) in the case of an assignment, an instrument in form and substance reasonably satisfactory to Landlord, duly executed by the assignee, in which such assignee shall assume observance and performance of and to be personally bound by, all of the terms, covenants and conditions of this Lease on Tenant’s part to be observed and performed. Nothing herein shall be construed to release assignor from any of its obligations under this Lease in the event of any assignment of this Lease.
 
Notwithstanding anything to the contrary herein, Landlord shall not unreasonably withhold its consent to any assignment or subletting of all or a portion of the Premises provided that the following further conditions shall be fulfilled:
 
1.           Tenant shall not then be in default hereunder beyond the time herein provided, if any, to cure such default;
 
2.           The proposed assignee or subtenant shall be engaged in a business, and propose to use the Premises for the Permitted Use and in accordance with the Ground Lease; and
 
3.            In Landlord’s reasonable judgment the proposed assignee or subtenant shall have a financial standing acceptable to Landlord, taking into consideration Tenant’s obligations under this Lease, and is engaged in a business on the Premises or the relevant part thereof, which is limited to a use substantially similar to the use expressly permitted under this Lease. Nothing shall be construed herein to release assignor from any of its obligations under this Lease in the event of such assignment of this Lease. Notwithstanding anything to the contrary herein, if Landlord has not responded to Tenant’s request for Landlord’s consent to any assignment or subletting within thirty (30) days, Landlord’s consent shall be deemed given.
 
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Nothing in this Lease or any assignment, subletting, encumbrance or transfer of this Lease or any part thereof shall be deemed to permit the use of the Premises in any manner other than that authorized by Article 13 of this Lease without the prior consent of Landlord, which shall not be unreasonably withheld, conditioned, or delayed.
 
 21.          Default. Each of the following is a “Default” by Tenant under this lease: If Tenant (i) fails to pay any the Rent, any additional rent or other charges as herein specified and such failure continues for ten (10) days after Tenant’s receipt of written notice from Landlord specifying such failure, (ii) fails to fulfill any of the covenants, agreements or obligations of this Lease and such failure continues for thirty (30) days after Tenant’s receipt of written notice from Landlord specifying such failure, or, if such default cannot reasonably be cured within thirty (30) days, so long as Tenant has undertaken and is diligently pursuing a cure for such default, the same shall not be considered a Default, or (iii) if Tenant fails to comply with any laws, rules, regulations or requirements of the Federal, State or local governments or of SBU applicable to Tenant’s use of the Premises and such failure continues for thirty (30) days after Tenant’s receipt of written notice of the same (or such shorter notice if necessary due to any event of emergency), or (iv) if Tenant shall file, or there shall be filed against Tenant, a petition in bankruptcy or insolvency and such petition is not withdrawn within one hundred twenty (120) days of the filing of the same, or (v) if Tenant shall be adjudicated a bankrupt, or make an assignment for the benefit of creditors, or take advantage of any insolvency act.
 
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In the event of one or more of such Defaults, Landlord shall have the right to terminate this Lease upon fifteen (15) days written Notice to Tenant (the “Termination Notice”) and this Lease shall terminate on the fifteenth day after receipt by Tenant of such Termination Notice. In such event, (i) Rent and Additional Rent under this Lease up to the date of termination shall be immediately due and payable, together with such reasonable expenses as Landlord may incur for reasonable attorneys’ fees, brokerage fees and/or putting the Premises in good order or for preparing the same for re-rental; (ii) Landlord may re-let the Premises or any part or parts thereof, either in its own name or otherwise, for a term or terms which may, at its option, be shorter or longer than the period which would otherwise have constituted the remainder of the term of this Lease and may grant concessions or free Rent, to such extent as Landlord in Landlord’s reasonable judgment considers advisable and necessary to re-let the same; and (iii) Tenant or its successors shall also pay the Landlord as liquidated damages for the failure of Tenant to observe and perform its covenants contained herein any deficiency between the Rent and Additional Rent hereby reserved and the net amount, if any, of the rents collected on account of any lease or leases of the Premises or parts thereof to a third party in an arm’s-length transaction, for each month of the period which would otherwise have constituted the remainder of the term of this Lease. In computing such liquidated damages, there shall be added to said deficiency such reasonable expenses as Landlord shall incur in connection with such re-letting, such as reasonable attorneys’ fees, brokerage, advertising and for restoring the Premises to or keeping same in good working order. Any such liquidated damages shall be paid in monthly installments in the manner specified in this Lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Landlord to collect the deficiency for any subsequent month by a similar proceeding. Upon Landlord’s permitted entry hereunder, Landlord, at its option, may make such alterations, repairs, replacements and decorations in the Premises as Landlord in its sole judgment considers advisable or necessary for the purpose of re-letting the Premises, and the making of such alterations and decorations shall not operate or be construed to release Tenant from liability hereunder. Landlord shall in no event be liable in any way whatsoever for failure to re-let the P