APDN: A Unique Anti-counterfeit Company Poised To Resume Growth In Second Half Of 2013

Zacks Small Cap Research

By Grant Zeng, CFA

First Quarter Financials Disappointing, but Top Line Growth Should Resume in 2H13 

On February 14, 2013, Applied DNA Sciences (OTC BB:APDN) reported financial results for the first fiscal quarter of 2013 ending December 31, 2012. 

For the fiscal 1Q13 ended December 31, 2012, APDN generated $317,670 in revenues from operations compared to $516,904 for the three months ended December 31, 2011, a 38.5% decline. The decrease in sales was primarily caused by the expiration of certain contracts and delays in transition to new contracts with products in target markets.

SG&A expenses were $2.5 million for the three months ended December 31, 2012, compared to $2.2 million for the three months ended December 31, 2011. The increase of $368,739, or 17.1%, is primarily attributable to higher professional and service fees incurred.

Research and development expenses increased from $78,473 for the three months ended December 31, 2011 to $147,666 for the three months ended December 31, 2012. The increase of $69,193 is attributable to additional research and development activity needed with current operations.

Total operating expenses for the three months ended December 31, 2012 were $2.7 million, compared to $2.4 million for the three months ended December 31, 2011, an increase of $360,554 which was primarily attributable to an increase in professional fees paid and in R&D expenditures.

GAAP net loss for the three months ended December 31, 2012 increased to $8,704,757 or $0.01 per share from a net loss of $2,409,905 or $0.00 per share for the three months ended December 31, 2011 primarily attributable to the factors described above.

Non-GAAP net loss was $2.4 million or $0.00 per share for the three months ended December 31, 2012, compared to $2.4 million or $0.00 per share for the three months ended December 31, 2011.

Apparently, revenue for the fiscal first quarter was disappointing to investors, but we believe revenue growth will accelerate in the second half of the fiscal year of 2013. We believe the Company has spent the time and resources to lay the foundation on which to properly build its business.

Business continues to grow in the past few months. New technology breakthroughs during the quarter strengthen the Company's position in verticals such as textiles and in optical reading (scanning). Meanwhile, contract with military electronics offering continues to have strong momentum.

APDN opened new cash-in-transit business in Sweden for the Company's anti-theft product, smartDNA, in that country. A new patent was awarded for the APDN's linkage of SigNature® DNA marks to optical reporting (scanners), while new breakthroughs in SigNature DNA marking for textiles strengthen the Company's offerings in the vertical.

In the military electronics area, APDN built new contractual relationships with firms that will provide third-party SigNature DNA marking on electronics, including in this effort the first test house in the program, Premier Semiconductor. The Company also pointed to expansion of its capacity in volume and speed in the authentication process, and hiring of new personnel in sales, scientific, and quality areas.

Based on all these developments, we model the Company’s top line will resume growth in the second half of this fiscal year. Total revenue for fiscal 2013 will reach the mark of $2 million. 

 

Balance Sheet Boosted by Recent Financing

On January 10, 2013, APDN closed on an additional $5.5 million (second closing) financing, bringing the total amount of financing to $7.5 million with institutional accredited investor, Crede CG II, Ltd.

In November 2012, the Company closed on the initial $2 million in financing with Crede for restricted common stock priced at $0.186/share.

The additional $5,500,000 was invested by Crede in convertible preferred stock of the Company. The closing, on January 7, 2013, was at $1,000 per share of preferred stock which was subsequently fully converted into 25,462,963 shares of common stock by the Company on January 8, 2013 at a conversion price of $0.216/share.

Series C Warrants to purchase 26,881,720 shares of Common Stock become exercisable for six months after the eleventh trading day following the second closing. It is the Company's intention to exercise its right to repurchase these Series C Warrants for $50,000 at the close of trading on the tenth trading day following the second closing.

The investor is limited to 9.9% ownership at any given point in time. The investor is in a "passive" position and will not occupy a Board position.

APDN intends to use the additional capital to take advantage of developments in its business verticals in recent months, including in electronics, textiles, and anti-theft products. The company has already expanded its plant and staff in order to accommodate this progression, and aims to continue and broaden that expansion.

This financing comes at an excellent time. It greatly boosted balance sheet of the Company.

Further, on Dec 20, 2012, APDN was named a recipient of an Empire State Development Corporation (ESDC) Consolidated Funding Application (CFA) Round II grant award. Applied DNA Sciences was awarded $229,957 for their "Rapid Growth and Expansion Project." This money will be used to purchase new laboratory equipment to complement the new hires necessary for the rapid growth project. This new equipment will enhance the company's DNA formulation menu especially in defense and law enforcement applications. 

As of December 31, 2012, APDN had $0.98 million in cash. With the proceeds from the financing, the Company should have cash at the neighborhood of $4.5 million at the end of March, 2013. Current cash can last into 1Q14.  

APDN is at a crucial stage in the development of Applied DNA Sciences. Access to this capital enhances its capacity to respond to growth opportunities.


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