Applied DNA: -92.69% Downside On Fraud Partners, Opaque UK Shell Deal And Paid Stock Promotion. Strong Sell. by The Pump Stopper

Summary

  • Applied DNA partnered with multiple people facing jail time, fraud allegations or shut down by regulatory agencies. Tellingly, APDN has spent 6.6x more on insider compensation than R&D.
  • APDN’s much-hyped DLA deal has now failed as APDN set to lose -61.2% of revenue next year. With just ~6 months of cash APDN is now facing imminent insolvency.
  • Registry docs show APDN hyped UK Petronus is opaque Limited Partnership apparently started by “directors for hire,” no website and no material financials. Is this “Valeant-esque”?
  • APDN’s 1999 era Chinese technology hopelessly obsolete as superior Synthetic DNA and competitors dominate pharma, cotton and banking. APDN endless dilution is egregious, with shares outstanding +6,600% so far.
  • Valuation temporarily inflated with paid stock promotion to obviously unsustainable 48x revenue level while superior peer companies trade for 1.5x. Imminent -92.62% downside in “best case” scenario.

“The Truth Will Set You Free”

I believe Applied DNA Sciences (NASDAQ:APDN) is one of the worst retail-shareholder wipeout machines I have ever seen, with insolvency risk and immediate -92.62% downside. APDN is involved with penny stock wipeout artists including Robert DePalo, indicted for defrauding investors out of $6.5m which DePalo spent on Bentleys and a $22k lawn jockey statue. APDN co-founder Richard H. Langley Jr. was charged with “conspiracy to commit securities fraud” in a nationwide FBI stock fraud sting. APDN CEO James Hayward also associated and partnered with Michael Morris and Ronald Heineman, who were barred by FINRA in October for engineering a “fraudulent scheme”, among many other questionable insiders.

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(picture credit to APDN)

With a recent “Valeant-esque” relationship with questionably opaque UK entity “Patronus” full of red flags, Applied DNA faces serious accounting and financial integrity questions with confusing CFO and auditor turnover, as their latest auditor w found to have “audit deficiencies”. Perhaps clarifying APDN’s true reason for existence, APDN insiders have cumulatively paid themselves $33.36m which, is 6.6x total amount invested in R&D while consistent cash burn has been funded with endless dilution as shares outstanding have ballooned 6,600%. Concerning related party transactions abound where APDN CEO loaned money to his own company and then converted it into stock 2 months later at ridiculously favorable terms, turning a swift $1.41m profit for himself while apparently also deciding to have APDN acquire assets from a company he and another APDN board member were investors in.

Further research shows APDN’s 1999 era Chinese product, acquired for stock over 10 years ago, is hopelessly obsolete in the face of superior competitors with modern Synthetic DNA and integrated nanotech products already established with pharma, cotton and cash customers.

Meanwhile Applied DNA’s primarily retail shareholder base is missing APDN’s desperate financial situation. With less than 6 months of cash burn left, APDN is now imminently facing near term insolvency as business results are set to implode. The one time nature of two non-recurring US government grants, apparently mostly pulled forward into 2015, and the failed DLA contract imploding, means APDN will lose ~61.2% of their revenue in year 2016 with no legitimate way of making it up I can find.

As a result of paid stock promotion alongside unfounded DLA, Pharma market, Textiles and “Patronus” hype, APDN stock has temporarily inflated to the valuation of 48x forecasted sales, which is clearly ridiculous for an obsolete reverse merger based on old Chinese technology lead by a group of self-enriching wipeout artists. Even assuming APDN is a “real” company and using optimistic estimates, APDN stock has immediate -92.62% downside similar to CEO James Howards other company Q-RNA.

A Brief Applied DNA History Lesson: 1999-era Chinese Technology, Reverse-Merged Into Penny Stock Shell

In 2002 APDN was born as a reverse merger into an OTC penny stock with a $2.5m equity raise based on a 15 year licensing deal with Chinese company “Biowell” for a DNA marking and authentication product created in Biowell’s lab in 2001. Biowell made an unsuccessful global push to commercialize this product themselves in the 2000s when landed some US government deals while attempting to advance relationships with multibillion dollar Asian companies. While Biowell even seems to have generated some small amount of revenue, with company guidance of $10m in annual revenue back in 2004 on the back of a large scale, international advertising campaign, ultimately Biowell sales appear to have been miniscule at best.

http://www.biowell.com.tw/cn/images/logo.gif

(pic credit google images)

At the time Applied DNA licensed Biowell’s technology for limited regions and APDN forecasted a “very conservative” $5m of US revenue in 2004 (reality was $638k) with the CEO stating he expected $500m+ of revenue, with “big markets” in oil/gas, textiles and microchips (sound familiar?). APDN announced lots of supposed pilot programs, partnerships with the USgovernment, including the DOE and Hologram companies, while Biowell announced deals with the USDA. Ultimately though it seems shareholders received repeated failure while APDN insiders used the stock to issue massive amounts of dilutive equity to keep the gravy train going as meaningful revenue never materialized. As one APDN insider apparently put it: APDN had “no product, no sales and no hope of signing any customers”.

As Biowell and APND both failing, Biowell decided to give it up and sold the DNA product outright in a stock swap deal to the failing penny stock APDN in 2005. As a result, APDN has been in the business of trying to sell this Chinese, daisy-DNA product to companies as an authentication mark ever since.

The fundamental estimated economics of APDN’s tiny business are that it sells a “license” to customers in order for the right to use their DNA marking product and for APDN to create the customer’s DNA mark. This license cost has apparently been about $35-49k historically with an extra $500 per additional DNA mark any customer may need. Curiously, this price appears to have possibly increased for the DLA deal with the US government to as muchas $68k for some reason? The ~$50k estimated license ARPU can be further corroborated with the total $1.45m of 2014 DLA revenue APDN disclosed divided by the estimated ~28 DLA customers they had, for another way to estimate arpu of ~$50k. Customer cost for auditing can be another $5-10k per year and there are some modest customer setup/training costs, I estimate to be another ~$5k per initial installation. Since only the tiniest miniscule amount of ink is used per item, there is potentially a very small amount of revenue from ink used per year plus some low margin equipment which I estimate APDN has other companies manufacture and then primarily resells to its customers with minimal profitability. As you can see above, the actual unit economics for Applied DNA depend almost exclusively on up front license revenue, which is based on the number of new customers, as that is the only revenue they have with meaningful margin. I don’t think any of the investment banks or retail shareholders have built out their own individual models based on

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