Two SEC filings were submitted by APDN during the past 6 months giving details for the MDA contract submitted on 7/14/14 (filed 7/18/14) and the DLA 8/28/14 contract (filed on 9/8/14). Dr. H referred to these contracts during the recent 10K webcast. He stated: “together these contracts provide a predictable revenue base of approximately $500,000 per quarter which for us is a solid launching pointing to weight our continuous revenue growth.” However, I looked into these two documents to determine revenue expectations from each and it is noteworthy that both contracts have front loaded payment schedules. If I have analyzed the contracts accurately, $1.993M and $.781M (a total of $2.8M) should be paid to ADNAS by MDA and DLA, respectively, during fiscal 2015 which is 40% greater than what Dr. H has conservatively projected.
Let’s put this in perspective. First, the contractual guarantee of $2.8M exceeds the total company revenues from all revenue sources for fiscal 2014. Moreover, $2.8M is the minimal contractual arrangement – it does not limit the total amount of revenues that could potentially develop from these 2 agencies if these pilot studies somehow evolve into outside revenue producers. Dr. H emphasizes to his listening audience that the DLA agreement is “not a grant” but a “contract.” I believe he makes this differentiation because grants often try to determine whether good ideas can develop into pragmatic products while contracts are “aimed at commercialization. They are revenue amplifying contacts.” (Dr. H's description) In other words the intention for these government contracts are to amplify its useful DNA product menu and, if this is accomplished, the results will be a win-win for all parties. Dr. H reminds us that the DLA contract has given the company an “opportunity to participate in marking six new federal supply groups themselves containing 66 new federal supply classes for which DLA issues more than 100 million solicitations a year. Now the agency is implementing the program more fully in-house for its customer base, the armed services, army, navy, air force, marines and coast guard. The agency is also briefing across the DoD channel. It would also appear that inquiries coming from other non-DoD federal agencies are partially due to the DLA's approach.” This is a mind-boggling massive market exposure for DNA product marking as compared to the singular FSC 5962 that the company has tagged for the DLA in the past.
A critical question is how long will it take to create revenues from this grand opportunity? I believe Dr. H has given us some insight on a possible answer: “As Karol mentioned in her discussion a few moments ago, we currently have a number of funded pilot studies ongoing which if successful could generate revenues more in line with our current expenses. Some of these pilots could come to closure within the next 12 months…. And so pilots now are source of revenue and they are highly focused and move much faster.” When Dr. H spoke about progress for the optical DNA decoders, which is one of the goals mentioned in the MDA contract, he mentioned that one of the decoders is in the “testing” stage, one in the “evaluation” stage, and the most sophisticated decoder is in the “developmental” stage. I think this indicates significant progress is being made in this theater on several fronts and that some revenues will likely follow soon.
Less we forget, the August 2014 DLA contract should not be confused with the past and future revenue relationship that ADNAS has had with the DLA and FSC 5962 tagging. Although Dr. H did not articulate how the new payment deal will unfold after Dec. 15 other than to reveal that there will be “less revenue initially,” he did say “While solicitation will change as of yesterday, contracts already awarded must be honored. These contracts go out a year longer so the period of transition will be at least that long.” Thus, although we don’t know how much revenue the new DLA deal will pass on to ADNAS, there is no doubt that some amount of $$ will continue to flow due to the prior relationships that have been established. Also, even if revenues do contract, this does not necessarily translate into less net income, because “Centralized marking by DLA will streamline our operations, through an operation here at Applied DNA reducing redundant costs in areas of logistics, training, PUC support and even production.” Hence, more efficiency has been introduced into the process.
A recent announcement was made about ADNAS doing business with a Fourth government agency. My belief is that this verifies that the company’s products have arrived at a level of credibility and value where DNA tagging can be more easily adopted into the fiber of US government operations. There is no greater praise for anti-counterfeiting when the US government adopts and endorses your products so this makes for an easier introduction into other industries and businesses IMO.
The foregoing discussion has been centered upon government-centric business for ADNAS. However, we all know that the company has other revenue sources.
Recently, the company signed a deal with two European auto manufacturers. In reference to this project while talking to Swedish authorities, Dr. H stated: “Now initial orders could exceed $1 million per year, with the opportunity for growth in this and other markets.” Hopefully, this is a prescient remark.
From the 10K: “On March 31, 2014, we and Borealis AG, a provider of polyolefins, signed a term sheet for mutual development and cooperation regarding the supply of markers — and related additives — for polyolefin products. The cooperation between the parties will explore and test the feasibility of the project. The contract provides for initial payments to us aggregating $350,000, comprised of development and exclusivity fees. The payment of further installments is dependent on achieving specific performance goals over a defined period of less than one year.” Borealis AG, an Austrian company, had sales of nearly 5 billion euros in the first 6 months of 2014. This is a huge company that contracted with ADNAS. Since the global polyolefin market is about 140 billion kilograms per year, this is a potentially major revenue producer for ADNAS that could materialize soon as indicated by the one-year timing of the contract signed 8 months ago.
What about cotton? During the 10K webcast, Dr. H stated: “Textiles are a massive market for us in US and in Europe with rampant counterfeiting. As we just recently reported to several entities and companies, there are large American retailers who are as much as 80% of their textile product is counterfeit…. In late October, as shown on the slide, we signed an agreement with the large textile manufacture for whom we are marking a DNA mark in cotton in California today as we speak.” My guess is that the October deal is likely related to the Supima cotton deal that the company signed last December where 50 million kgs of cotton was marked. My point is that ADNAS continues to draw revenues from cotton producers.
Persistent revenues are also expected annually from Smoke Cloak DNA, cash-in-transit, copper tagging, and tuna tagging. As the CFO mentioned in the recent 10K conference, ADNAS has an international customer base and no singular customer has contributed more than 10% of the revenue stream.
Finally, both the CFO and CEO mentioned on separate occasions that there is a possibility that revenues could match expenses in the next fiscal year. Other than these loose comments, neither manager elaborated upon this possible event, but it is obvious that this is the sort of chatter that has happened at company board meetings and now it has been boldly reiterated at the 10K webcast. Is this irresponsible….or is the likelihood for this to happen high enough to share with its investors? I choose the latter. Since this company is starting with a guaranteed $2.8M in revenues from 2 government contracts plus known and expected income flows from repeat customers, I believe that it could add $millions from many of its multiple opportunities (perhaps from even a singular high-revenue ongoing pilot) that it is currently cultivating which could be enough to bridge the gap and match its expenses.
Like all of you reading and writing on this board, I have no idea what is going to happen. Most of the naysayers here will likely criticize some or all that I have written. I am simply presenting it as a point of view. I am not trying to be controversial and don't have the energy nor the time to defend these ideas other than to restate what I have already written, so don't be offended if I do not respond.
GLTA.
