COMMITMENTS AND CONTINGENCIES

12 Months Ended

Sep. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE K – COMMITMENTS AND CONTINGENCIES

Operating leases

The Company leases office space under an operating lease in Stony Brook, New York for its corporate headquarters. 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. The Company also has operating leases for a laboratory in Huddersfield, England, which is currently inactive and Calverton, New York. The Huddersfield lease is currently on month to month. The Calverton lease is from February 1, 2014 through October 31, 2014, with the option to renew for additional one year periods. The Calverton lease is currently month to month. The base rent during the initial lease term is $2,850 per year. Total rent expense for the years ended September 30, 2014, 2013 and 2012 were $505,520, $352,867 and $244,192, respectively.

Future minimum rental payments (excluding real estate tax and maintenance costs) as of September 30, 2014 are as follows:

2015	$	468,548
2016		300,803
Total	$	769,351

Employment and Consulting Agreements

Employment agreements

On July 11, 2011, the Company’s Board of Directors approved the terms of employment for Dr. James A. Hayward, the Company’s Chief Executive Officer (“CEO”).

The agreement provides that Dr. Hayward will be our Chief Executive Officer, and will continue to serve on the Company’s Board of Directors. The initial term of his employment was from July 1, 2011 through June 30, 2014, which automatically renews for one-year periods subject to ninety days’ prior notice of non-renewal by either party. Dr. Hayward’s employment agreement was automatically renewed for one year. Dr. Hayward received an initial annual salary of $225,000, subject to annual review. On November 30, 2012, the Company’s Board of Directors increased Dr. Hayward’s annual salary to $350,000. The agreement provided that Dr. Hayward’s annual salary will be increased to $350,000 per annum after the first quarter in which the Company’s revenues exceed $1 million for such quarter. The Board of Directors, acting in its discretion, may grant annual bonuses to Dr. Hayward. Dr. Hayward will be eligible for a special cash bonus of up to $750,000, 40% of which will be payable if and when annual revenue reaches $6 million and 10% of which would be payable for each $2 million of annual revenue in excess of $6 million. On November 30, 2012, the Board granted a cash bonus of $150,000 to Dr. Hayward payable upon the closing of an additional financing of $5.5 million by an investor. Dr. Hayward will be entitled to certain benefits and perquisites and will be eligible to participate in retirement, welfare and incentive plans available to our other employees.

Dr. Hayward was granted options to purchase 666,667 shares of our common stock at an exercise price per share equal to $3.51. The options vested as follows: 25% on the grant date, and 37.5% on each of the next two anniversaries of the grant date, subject to Dr. Hayward’s continuous employment. If the Company’s revenues for any fiscal quarter increased by more than $1 million over the prior fiscal quarter, then the vesting date for the next 37.5% tranche would be accelerated. The Company also granted 250,000 shares of its common stock to Dr. Hayward.

The agreement with Dr. Hayward also provides that if he is terminated before the end of the initial or a renewal term by the Company without cause or if Dr. Hayward terminates his employment for good reason, then, in addition to previously earned and unpaid salary, bonus and benefits, and subject to the delivery of a general release and continuing compliance with restrictive covenants, Dr. Hayward will be entitled to receive a pro rata portion of the annual bonus he would have received if employment had continued through the end of the year of termination; salary continuation payments for two years following termination equal to the greater of (i) three times base salary or (ii) two times base salary plus bonus; Company-paid COBRA continuation coverage; continuing life insurance benefits (if any) for two years; and extended exercisability of outstanding vested options (for three years from termination date or, if earlier, the expiration of the fixed option term). If termination of employment as described above occurs within six months before or two years after a change in control of the Company, then, in addition to the above payments and benefits, all of Dr. Hayward’s outstanding options and other equity incentive awards will become fully vested and Dr. Hayward will receive a lump sum payment of the amounts that would otherwise be paid as salary continuation. In general, a change in control will include a 30% or more change in ownership of the Company.

Upon termination due to death or disability, Dr. Hayward will generally be entitled to receive the same payments and benefits he would have received if his employment had been terminated by the Company without cause (as described in the preceding paragraph), other than salary continuation payments.

Effective June 21, 2014, Dr. Hayward’s annual salary was voluntarily reduced by $50,000. This salary reduction will be accrued and repaid when the Company reaches $3,000,000 in sales for two consecutive quarters or the Company has net income at the end of any fiscal year.

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.

SmartWater, Ltd. v. Applied DNA Sciences, Inc. (Civil Action No. 12-05731-JS-AKT, Eastern District of New York)

On August 24, 2012, SmartWater Limited (“SmartWater”) filed a complaint for patent infringement against the Company in the United States District Court for the Southern District of Florida. It alleged that the Company infringed two of SmartWater’s patents. Upon the Company’s motion, the case was transferred to the United States District Court for the Eastern District of New York. On June 26, 2013, SmartWater moved for leave to file an amended complaint. By memorandum and order dated September 27, 2013, the Court held that SmartWater had adequately stated claims for direct infringement, but dismissed the claims for contributory infringement with respect to both patents and induced infringement with respect to one patent.

On June 11, 2014, SmartWater filed a motion for an order dismissing its remaining patent infringement claims against the Company with prejudice. On July 18, 2014, the Company filed a request for an award of attorneys’ fees. On September 29, 2014, the Court dismissed SmartWater’s claims with prejudice and denied the Company’s request for attorneys’ fees. As part of the dismissal, the Court ordered that SmartWater is permanently barred from suing the Company or any other entity with respect to the patents at issue as they relate to the Company’s products or services. SmartWater recovered nothing from the Company as a result of its suit.