Disclosures: I am long APDN. I wrote this article myself and it represents my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
- Short article by “The Pump Stopper” created false story line about the “hype” of Patronus deal and published false information about the facts of it’s cotton tagging business.
- APDN already recorded revenue through fiscal Q3 of $5M, more than the $4.8M The Pump Stopper said they expect for all of fiscal 2015.
- APDN sequential revenue is exploding as company books $4M in revenue through Q4 from cotton tagging sales since June 16th deal with Louis Dreyfus Commodities, a $64B company.
- APDN estimated to bring in $9M in sales for Fiscal 2015, nearly double what Pump Stopper claimed. Q4 set for revenue increase of 480% over Q4 2014.
Shorts usually sell a stock high and then buy to cover at lower prices. However, in this case, there is compelling reason to believe that the purpose of this short attack was not to cover a short position but to buy into a long position at a deep discount; perhaps after the opportunity was missed to purchase APDN as it rapidly appreciated in price from $3 to $9 on the backs of transformational changes which marked an inflection point in the company’s revenue growth trajectory as it advanced it’s cotton DNA tagging business to large scale commercial sales over this past summer.
Actual Revenue Numbers
Before delving into the booming cotton tagging business which was not only omitted in the short article, but which was lied about, it’s important to note that the revenue numbers listed for APDN in the short article were patently false!
The Pump Stopper claimed that full fiscal year 2015 (ending 9/30/15) revenues for APDN are estimated at $4.8M – however, through their 3rd fiscal quarter ending 6/30/15, they already reported $5M revenue for the year! Let me be clear. A simple review of APDN’s most recent 10-Q explicitly shows that revenue for the first 9 months of the fiscal year was $5,028,234. So why then did The Pump Stopper say his estimate for FULL YEAR revenue was just $4.8M?
What’s more, based on their cotton sales which were already announced for Q4, it can be derived that full year revenue for APDN will come in at roughly $9M – almost TWICE what The Pump Stopper published. Below you can see that revenue is on pace to rise nearly 1,000% over the past 5 years and 200% from 2014 alone!
Given the incredible amount of research that obviously went into the short article; it’s impossible to believe that these facts were overlooked; rather – everything regarding company revenue, revenue growth, and the cotton tagging business seems to have been purposely lied about – not misrepresented – but patently lied about! It’s important you keep this important fact in mind as we go through the truth about APDN’s business.
APDN’s booming Cotton Business
The short article painted a false narrative about the “Patronus” deal on September 17th being THE cause of the “hype” that drove APDN stock price to over $9. Nothing could be further from the truth. The real story as will be illustrated in a moment is APDN’s booming cotton tagging business. APDN stock price barely reacted to the Patronus news and a historical search across Yahoo Message Boards, StockTwits, Twitter, InvestorsHub, and StoryTrading shows exactly 2 comments about this deal across all 5 networks! There was no hype about this deal and zero expectations about revenue from this deal. Simply put, Patronus was never a story for APDN. So why then did The Pump Stopper claim that this Patronus deal was THE reason APDN stock rose so dramatically?
* Louis Dreyfus Deal (6/16/15)
The real APDN story began unfolding on June 16th this year when APDN announced an agreement with Louis Dreyfus Commodities (annual revenue of $63.6B and processes 80 million tons of commodities annually) to tag cotton using APDN’s SigNature T DNA technology when APDN was trading at just $3.04. In this agreement, APDN announced that together with Louis Dreyfus and two other pre-existing cotton processing partners, they already secured demand to tag 20 million pounds of cotton! This enormous start to the cotton-ginning season set in motion a bullish wave of buying of the stock which saw the stock rise from $3 to over $9 over the ensuing four months. On the day of the announcement, the stock moved up 7% on over 300K volume which at the time was the 3rd highest volume day of the year!
* Q3 Cotton Update (8/10 for period ending 6/30)
Subsequent to the Dreyfus Deal, APDN reported record quarterly revenue of 2.27M, a 170% increase from prior year and a 50% sequential increase from Q2 on the backs of cotton tagging sales. During the conference call (transcript/webcast), APDN revealed that 30 million pounds of cotton were tagged through June 30th resulting in $1.2M of revenue for the company. From this, we can derive that APDN receives $0.04/lb of cotton tagged.
* Vandalia Aquisition (9/11)
On September 11th, APDN announced the acquisition of DNA manufacturer Vandalia Research for $1.5M. According to the company, APDN’s previous manufacturing capability combined with Vandalia’s capacity results in APDN having the “world’s largest manufacturing capacity of DNA in bulk using PCR”. This acquisition signaled to investors that APDN was well on it’s way to shifting it’s business from pilot programs to large scale commercial sales. Investors cheered and the stock soared 9.1% on over 600K in volume. Looking at the chart, you’ll find that this day was the beginning of a massive run in the stock from $4 to over $9 in just one month’s time.
* Q4 Cotton Update (10/8 for period ending 9/30)
On October 8th, APDN announced they have tagged an astonishing 100 million pounds of cotton through Q4! The below charts illustrate just how quickly their cotton business has taken off:
Based on the $0.04/lb value derived above, one can estimate that Q4 revenue will come in at nearly $4M which will be a record 480% jump from Q4 2014 and result in total fiscal 2015 revenue of nearly $9M which would be 200% higher than 2014! It’s no wonder why Maxim Group, on the following day, raised their price target from $9 to $13. Just check out APDN’s quarterly growth rate here:
And if you annualize their quarterly numbers, you may be able to get a better indication of their current annual revenue run-rate:
By considering the above, you can see that APDN revenue has been exploding due to a breakout in it’s cotton tagging business. The cotton tagging business starting with the Louis Dreyfus deal is THE story and THE ONLY story here – not the Patronus deal as the short article would have you believe. Given the massive interest in APDN stock since the cotton story started developing, it’s obviously deliberate that the author of the short article completely omitted this entire story. He didn’t mention ANY of the deals above, didn’t mention the exploding sequential revenue growth, gave false information regarding cotton tagging sales, gave false information regarding their DNA technology, and most egregiously gave false information regarding 2015 revenue to-date (which can be pulled from the most recent 10-Q) and revenue estimates for the year.
Why would he do this?
As mentioned above, Maxim Group recently raised their price target from $9 to $13 and after the short article was published, they reiterated their $13 price target. Maxim Group isn’t the only analyst covering APDN. Zacks Small Cap Research has a $10 price target which has yet to be updated after the 100M pound cotton update and Vandalia acquisition. In addition to Zacks, Benchmark initiated coverage on May 26th with a $5 target. This price target was set before the cotton business took off on June 16th. The average price target of all analysts covering APDN is $9.33. These analysts were well represented on the Q3 conference call and almost exclusively focused on the booming cotton tagging business during the Q&A session.
Responsiveness of Investor Relations
It should also be noted, when the 100M cotton milestone was hit, I personally spoke to Debbie Bailey at length to gain a better understanding of the cotton ginning season in the United States and how exactly APDN’s technology works as it pertains to cotton tagging. I also received a phone call back from investor relations this past week regarding whether they would respond to the short article or not (although we played phone tag and never had a chance to speak). Based on this high level of responsiveness from the company and the other false information The Pump Stopper passed off as facts; it’s a good bet to doubt his claim of lack of IR responsiveness.
Fundamentals vs “Association” Arguments
It’s my estimation that 90%+ of The Pump Stopper’s article was focused on the history of individuals who were supposedly “associated” with APDN management. The other 10% was focused on publishing false information about the fundamentals of the company. Why would The Pump Stopper focus mostly on supposed “associations” from many years ago and misrepresent or patently lie about fundamentals? While you think about that, I will quickly address the lack of merit of the “associations” argument. First off – it should be clear to you by now that he spent so much time first talking about these associations so that by the time you got down to reading about fundamentals, you would be in so much fear, that you’d simply accept any “facts” he wrote about fundamentals. The article was designed to essentially pre-condition you (by showing mug shots of people and stock charts crashing) to assume that everything about APDN was criminal so that when he finally touched on fundamentals, you’d easily believe all the lies. Secondly, it’s important to understand that when microcap companies raise money in the early stages of their growth, they often have no choice but to do so from individuals who are less than honorable. Think loan sharks. This says nothing about the integrity of APDN management. If I needed to raise money for my company – but Goldman Sachs or Sequia Capital wasn’t available to me – I’d have no choice but to raise money from companies that would not give you the best terms. The fact that these outside and unrelated companies to APDN include management of their own who got in trouble with the law, has NOTHING TO DO with APDN.
Still not convinced? Let’s play a quick game.
CEO, Dr. James Hayward, previously worked for Estee Lauder (EL). Check out the EL chart!
If I dug a little deeper, I’m sure I can find 2nd and 3rd degree associations with people at Apple, Google, or any number of companies with stellar stock charts and people with pretty faces. Obviously – analyzing a company like this has no merit whether looked at from a bull or a bear perspective. The Pump Stopper’s strategy was to confuse, confound, and distract investor’s attention away from fundamentals and the booming cotton business. Period.
Before I wrap things up, I also want to mention something about management compensation. The Pump Stopper was gleeful to point out that over the last 13 years, 20 different executives received total compensation of $32.3M. Assuming PumpStopper’s numbers are correct, that’s an average of $124,000 in compensation per executive per year. When looked at from this perspective, it doesn’t seem so egregious. While R&D spend does look low; again, I cannot trust what The Pump Stopper posted. But even if he is right; why then has revenue grown 1,000% over the past 5 years and 200% from last year? Obviously APDN’s DNA-tagging technology has a competitive advantage in the market place and is taking off so I believe an average compensation of $124,000 per year per executive is warranted for such performance.
Lastly – before you worry about the supposed millions management is making here from the dishonesty that The Pump Stopper is pinning on APDN; just think of the MILLIONS he and his associates have either already made covering their short position; or will make by going long at these depressed prices. Just who is stealing from who here?
This brings me back to my original thesis. Most short articles have merit. They are based on fundamentals and as such; the authors have no qualms using their real names. However; this short thesis by an anonymous author obfuscated a tremendous bull story using deception and false information. This leads me to believe that the motivation here may not have simply been to profit overnight from creating panic but perhaps it was to buy cheap shares and profit even more over the long-haul. If you take a look at the short interest and trading volume over the past few months; along with how the stock traded since the short article came out; it’s apparent the stock is undergoing heavy accumulation at these depressed prices by big money investors. And how can you blame them? APDN has the fundamentals to deserve a $10+ stock price. Earnings will be released during the 2nd week of December and you should expect 480% YoY growth for the quarter and 200% annual revenue growth. Expect $4M revenue for the quarter and $9M for the year.
It’s clear The Pump Stopper does not want you to know any of these facts.
DON’T FALL FOR IT.