A Tale of Two Small Caps (& One's a Tragedy)

This week has been an earnings parade for several small cap companies, including a couple of our own focus stocks. Some have done well, and some have not. We'll get to those details in a moment...just bear in mind these numbers not only affect shareholders, but may also have an impact on our official opinion of the companies.

Also, we've got some interesting fine print from Bio-Matrix's recent 10Q. The biotech company is pre-revenue, so we weren't looking for a top line. What caught our attention was some text that didn't have anything to do with the numbers (at least not yet). 
 

	Applied DNA Raises the Bar

The press release came out this morning, though some of you may have seen that Applied DNA's (OTCBB: APDN) quarterly numbers were filed last night. Here's a recap of the 10Q for their fiscal Q2...

Sales were up. The company pulled in $207K over the prior three months. There's no meaningful quarter-over-quarter comparison, since revenue didn't start until mid-2007. Just for reference though, in Q1 of this year, they did $123 million, and they did $122 million in sales in the quarter before that. In other words, they're making reasonable strides in the right direction. 

As far as earnings go, the cost of sales was $46K, leading to a gross profit of $161K. Not bad. The net loss shrank significantly - to 1 cent per share - on lowered operating expenses. 

I have to give credit where credit is due - they're growing the business. Annualizing this quarter's results means they're doing about $800K per year. I don't think profitability is too far down the road to think about. 

On the other hand, I don't know if we should be looking for profits three months from now either. These numbers are fine for a company that wasn't doing any sales at all this time last year, but it can sure make it tough for an investor to justify a $20 million market cap. 

I've always said own you stocks for where the company is going - not for where they've been. In light of the company's sales increase, the question here is one of time and value, not success or failure. The company is already successful. The question is, how successful?

When we first profiled Applied DNA we pointed out how counterfeiting cost legitimate companies up to $600 billion in sales per year. Clearly the market is there - the goal now is to capture a piece of it. How much could/should that mean for Applied DNA? We conservatively estimated revenues of $25 million per year for the company would more than justify the stock's price, and we're sticking with that basic framework.

You don't need us to tell you $800K is a far cry from something in the $20 million range. They are moving in the right direction. We even think they'll get there eventually. They need some bigger deals though, and soon...some million and multi-million dollar deals. I think they'll get them in time.

As a long-term investor, I like what Applied DNA brings to the table. I just don't know how inspired the short-term thinkers are going to be until they start turning all these partnerships (like Supima, PrintColor, & IIMAK) into revenue. Like I said, all in time. And who knows? Maybe this top line increase will end up inspiring some strength. The press release is below.
 

	Smart Energy Lowers the Bar

I confess I'm not sure if I'm shocked or not. I knew Smart Energy Solutions (OTCBB: SMGY) was struggling - quite a bit - to grow their already-anemic top line. However, I'm not sure I expected to see such a significant drop in sales. I did though - this quarter's revenue was 37.7% less than the same quarter a year earlier. They did $397K in Q1 of this year versus $637K in Q1 a year ago.

The reason they gave? "...sales of the Battery Brain product fell as a result of delays in receipt of purchase orders from key distributors and orders for private label products that are not carried in inventory and needed to be manufactured."

I'll provide a translation - the things aren't selling.

This company has just been a disaster. They're not bad guys - in fact. the management team seems quite intelligent. They're just not getting the Battery Brain on enough shelves, and then pushed through into consumers hands. They thought they could do it, but have yet to get any traction.

At this point I'm inclined to go ahead and dump the company from our watchlist; there's no sense in any of us wasting any more time on 'em. That's not an official decision yet, as I want to sleep on it for a day or two. I just don't see things getting any better for Smart Energy.
 

	A Bio-Matrix Tidbit

I didn't mention Bio-Matrix Scientific Group's (OTCBB: BMSN) 10Q they files a few days ago because they're pre-revenue ...there's nothing to talk about with the numbers. I did start combing through the fine print of the quarterly report though (where the good stuff usually is), and found an interesting tidbit.

I recalled hearing something about this early on in our due diligence process, but could never find anything official about it - until now. Apparently, Bio-Matrix is striking up some sort of deal with UCLA to develop a screening test for gestational diabetes.

There aren't a lot of details, but if the 10Q's brief description of actions-to-be-taken were indeed taken, the University of California and Bio-Matrix have at least filed for a patent, and will jointly use the patent if awarded. I don't know when or if we'll get more information about the partnership, but I do feel it could be big. Gestational diabetes affects about 135,000 women in the U.S. each year (3% to 10% of pregnancies). 

I'll see if I can find anything else, though the information may be minimal for a reason. 

Anyway, here's the Applied DNA press release.
 

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TGR Group, LLC has been paid a fee of $30,000 cash and 250,000 shares of newly issued restricted stock by Bio-Matrix Scientific Group, Inc. for coverage of the Company.

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