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Actionable news in APDN: APPLIED DNA SCIENCESInc,

APDN Paid Stock Promotion and Questionable Stock Touts

APDN 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 Patronus 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.

(picture credit to APDN)

With a recent "Valeant-esque" relationship with questionably opaque UK entity "Patronus" full of red flags, APDN 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 APDN'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 APDN 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.

(pic credit google images)

At the time APDN 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 US government, 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 much as $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 APDN 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 the individual unit economics for each of APDN's products. This is why it is critical you understand these dynamics in order to understand how APDN's business is now imploding, as I will explain later on in this report.

Note that my opinions, research based on publicly available info and estimates are all shared below free for the public good so you can form your own views. But I think the evidence presented here is strong.

APDN Partners and Insiders: Multiple Fraud Allegations and Stock Market Disasters

As with any investment of any kind, we all agree the quality of the management and insiders involved is of paramount importance. Unfortunately with APDN we have perhaps the worst collections of stock market wipeout artists and convicted fraudsters I have seen in quite some time.

I believe this mess started with co-founder and major APDN supporter Richard H. Langley in the ProHealth Medical reverse merger. At the age of 33, Richard H. Langley Jr. was charged with "conspiracy to commit securities fraud" and was a part of "the largest single set of arrests ever made in the securities industry" where he was named as one of "45 penny-stock promoters, brokers, and company officers [that] were charged with securities fraud after a nationwide [FBI] sting" leading to Langley's arrest.

For example, a schedule 13D apparently filed by Langley shows he owned 6% of Swiss Medica, Inc. (OTC:SWME) which has a suspicious looking stock price chart….

(picture credit capiq)

Another schedule 13D filed by Langley shows he owned 3% of Collaborative Financial Network Group Inc. (OTC:CFNF)

(picture credit capiq)

Bad Habits Die Hard: Applied DNA CEO Continues the Penny-Stock Legacy

James A. Hayward is Applied DNA's current Chief Executive Officer and has been at the helm since 2005 where it seems to me he has apparently decided to carry on the Langley legacy with a twist: striking incredibly unfavorable (to shareholders - dilutive) deals with some of Wall Street's worst financiers and convicted fraudsters.

Why is Applied DNA's CEO Associated with These Kind of People?

It turns out Hayward also has experience as a penny-stock investor. Hayward is the general partner of the Double D Venture Fund and although I originally had high hopes for this entity, it turns out the "Double D" could have stood for "Double Digit" losses as the Double D Venture Fund invested in a company called Q-RNA which lost nearly all of its value since going public. To make things worse, Hayward was also apparently a Director at the company.

(picture credit capiq)

Hayward's longtime business buddy, Sidney Braginsky was also on the Board of Q-RNA and serves as the managing director of the Double D Venture Funds LLC. Braginsky's seemingly close business relationship with Hayward is highly concerning for a number of reasons not the least of which is Braginsky's history of also being involved with numerous penny-stock wipeouts and also as color on the quality of Hayward's relationship with the "Double D" entity. Below are a list of not very high quality companies that were blessed with Braginsky's presence:

BigString Corporation (OTCPK:BSGC) - Member of Advisory Board (2006-Present)

(picture credit capiq)

Braginsky was the on the Board of Directors of Response Biomedical Corp. (TSX:RBM)

(picture credit capiq)

Bragisnky was involved with SensiVida Medical Technologies, Inc. (OTC:SVMT)

(picture credit capiq)

Braginsky was on the Board of Directors Mela Sciences, Inc. (NASDAQ:MELA) from 2001 to 2011

(picture credit capiq)

Unfortunately this doesn't conclude the Braginsky saga, as from 1994 to 2000 he served as the President of Olympus America Inc. Olympus lawsuit (Case No. 11-cv-7103) alleged "financial fraud and decades-long cover-up" and Olympus admitted an "accounting fraud going back to the 1990's". The Olympus Scandal, as it came to be known, was a national disgrace in Japan in a similar scope as Enron or Worldcom in the US, described as "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history." According to Wikipedia, "Despite Olympus' denials, the matter quickly snowballed into a corporate corruption scandal over concealment of more than 117.7 billion yen ($1.5 billion) of investment losses and other dubious fees and other payments dating back to the late 1980s and suspicion of covert payments to criminal organizations."

Is it more likely that a key executive of the company like Sidney Braginsky (who was, in fact, President during a significant portion of the time period in question), was completely unaware of a large amount of fraud occurring right under his nose or, that he was in some way a part of it? I'll let investors decide. The question here is why does James Hayward feel so compelled to have seemingly close relationships with people like this in the first place?

Applied DNA CEO Strikes Lucrative Deals with Wall Street's Worst Financiers and Fraudsters

In 2007, Applied DNA CEO James Hayward agreed to a ridiculously dilutive financing arrangement with Arjent Limited that allowed the bridge loan to be converted into stock. Below are the details of the arrangement:

"The Bridge Loan shall be convertible, at the investor's option, through the first anniversary of issuance, into shares of Common Stock at a price equal to 50% of the average closing price of the 10 days prior to the date of the conversion notice, not to be less than the "automatic conversion" price (30% discount to the average volume, weighted average price of the Common Stock for the ten trading days prior to the closing date of this Bridge Loan…)"

***These terms essentially guaranteed that Arjent Limited would make money at the expense of other shareholders***

Furthermore, Applied DNA made the following payments to Arjent Limited:

"On May 2, 2006, we closed on the first tranche of the Offshore Offering in which we sold 20 units for aggregate gross proceeds of $1,000,000. We paid Arjent Limited $375,000 in commissions, fees and expenses from these gross proceeds. On June 15, 2006, we completed the second tranche of the Offshore Offering in which we sold 59 units for aggregate gross proceeds of $2,950,000. We paid Arjent Limited $442,500 in commissions, fees and expenses from these gross proceeds. Additionally, on July 10, 2006 we issued 2.4 million shares of our common stock to Arjent Limited at $0.001 per share as partial consideration for its services in connection with the Offshore Offering."

Robert DePalo is the Chairman of Arjent Limited. A lawsuit filed in 2015 by the SEC charged Robert DePalo, Joshua Gladtke and Arjent Limited with allegedly employing a sophisticated "scheme to defraud investors." DePalo, Gladtke and Arjent Limited all appear in Applied DNA's filings under the name Vertical Capital Partners, Inc. or other affiliated entities.

Court documents revealed that DePalo transferred millions of dollars of investor funds to his own personal bank account and proceeded to spend the money on 3 Bentleys, a lawn jockey statue worth $22,000, a Rolex watch worth $10,000, thousands of dollars for men's clothing and other lavish personal expenses. Furthermore, Joshua Gladtke, was "charged with grand larceny, money laundering, criminal possession of stolen property".

Robert DePalo - Applied DNA Financial Partner in Court

Unfortunately, this does not appear an isolated event for Applied DNA. According to Applied DNA's 10-K, the company has also executed several financing arrangements totaling $15,000,000 with an entity by the name of Crede Capital Group, LLC controlled by former junk bond salesman Terren S. Peizer.

Mr. Peizer seems to have an extensive history in high profile financial debacles and is apparently the protégé of convicted felon Michael Milken

Terren Peizer

In 2003, Peizer founded the Prometa Treatment Program and took the company public through a reverse merger in 2004. According to SEC filings, Peizer was the Chief Executive Officer and significant shareholder of the parent company Hythiam, Inc. Peizer raised $150 million from investors and rushed Prometa to market without the usual medical research and government approvals. One doctor suggested that Peizer had exploited a loophole in the system. CBS News reported that "Terren Peizer is selling hope to the desperate" and others viewed Peizer as "snake oil salesman".

The company claimed that it's cocktail of medications benefitted people who were addicted to methamphetamine. A study apparently paid for by Hythiam touted 80% of patients "experienced a significant clinical benefit" from the treatment but the scientific journal Addiction found that Prometa "is no more effective than a placebo in reducing methamphetamine use".

Medical experts and the media expressed "sharp criticism" and doubt that the treatment worked as advertised alleging that it lacked sufficient scientific evidence. That didn't stop Peizer from being excessively promotional about the enormous plans he had for the company and claiming "the results are positive" in an upcoming study that had not been published. The chart below says it all: Prometa was a wipeout for investors.

(picture credit capiq)

Prior to the Prometa tragedy, Terren Peizer was the president of Hollis-Eden Pharmaceuticals, Inc., another company that came public through a reverse merger. Peizer apparently became some sort of AIDS guru, hyped its anti-AIDS drug (Immunitin) and went as far as to suggest that there might be a partnership deal ahead. It seems that through press releases and hopeful comments, Peizer was able to spin a tale that sparked the imagination of investors who thought this could be a potential cure for AIDS. The stock soared to be worth hundreds of millions of dollars and ultimately the stock collapsed as one doctor rightly pointed out "You can see the pseudoscientific language this is couched in. It's gibberish, gobbledygook." The shares now fetch a fair "gibberish and gobbledygook" price of just $0.09 (now known as Harbor Diversified).

(picture credit capiq)

Closing the Terren Peizer wipeout saga, is his involvement with another small cap stock called Urethane Technologies. Peizer was the Chairman of the company that touted it had a bicycle tire that wouldn't go flat. Peizer acquired 50% of the company and managed to "dump his shares at a profit before the company eventually limped into bankruptcy in 1997".

(picture credit capiq)

Crede Capital Group shows the recent financings they have been a part of, but as far as I can tell these companies appear to perform terribly over a longer time horizon. Let's review some of Peizer's transactions that are proudly displayed on the company's website.

Transgenomic Inc. (OTCQB:TBIO)

Amedica Corporation (NASDAQ:AMDA)

ZaZa Energy Corporation (NASDAQ:ZAZA)

Net Element, Inc. (NASDAQ:NETE)

Plethora Solutions Holdings PLC (AIM:PLE)

22nd Century Group, Inc. (OTC:XXII)

FreeSeas Inc. (NASDAQ:FREE)

Orbite Technologies Inc. (TSX:ORT)

Aussino Group Ltd. (NYSE:AUO)

Navidea (NYSEMKT:NAVB)

The Terren Peizer story doesn't end here, one of his associates, Michael Wachs, a principal at Crede Capital Group, LLC (formerly known as Socius) is a convicted felon and apparently a confessed embezzler barred by FINRA in 1998 for "stealing approximately $20,800,000" (direct quote) and served 11 months in federal prison for his crimes. This lawsuit shows Crede/Socius are closely associated with CEOcast, a website "shilling penny stocks in exchange for hundreds of thousands of dollars in cash and shares", according to Barron's.

Another Peizer associate, Richard Josephberg, a "commissioned salesperson" of the Crede/Socius entities was sentenced to prison for 50 months for not paying taxes for 29 years. Josephberg's own children apparently testified against him in court and jury convicted him of all 17 charges.

Two of Applied DNA's financiers while at Arjent, Michael Morris and Ronald Heineman, were barred by FINRA in October of this year for engineering a "fraudulent scheme" involving private placements. Remember that both Michael Morris and Ronald Heineman were employees of Arjent which participated in a private placement with Applied DNA according to Applied DNA's own SEC filings where both of the sanctioned individual's names appear (emphasis mine):

"Arjent, a registered broker-dealer; Michael Morris, Susan Diamond and Ronald Heineman, all of whom are employees of VC Arjent, are an "underwriter" as that term is defined under the Securities Act, the Securities Exchange Act of 1934"

And just when things couldn't possibly get any worse, Craig Josephberg, a registered representative of the company Morris and Heineman are involved with, was named by the SEC as a defendant in a "fraudulent scheme" . According to the Wall Street Journal prosecutors indicted 7 individuals including a Craig Josephberg whom they specifically accused for his participation in engineering $300 million "pump-and-dump" schemes. In my opinion, the following excerpt is especially important in regards to Applied DNA: Prosecutors accused the defendants of using "misleading news releases and hidden and illegal trading to dupe investors into believing companies with essentially no assets or activities were worth hundreds of millions of dollars."*

(As a side note APDN has essentially no assets and is temporarily trading with 9-figures of market cap)

And for the grand finale tying this whole nightmare together the FINRA complaint said the following about fraudulent kickback scheme (emphasis mine):

"In May and July of 2012, Cell Therapeutics issued convertible preferred stock in two private placements that raised $20 million and $15 million, respectively. The investor in each was a fund managed but Los Angeles-based Crede Capital Group LLC, formerly known as Socius Capital Group LLC[the] deal was coordinated by Michael Wachs, a partner at Socius"

So not only are several Applied DNA financiers who are tied directly to APDN's CEO Hayward being accused and/or convicted of fraudulent wrongdoing but some of them actually join forces? With this many alleged and convicted fraudsters involved with Applied DNA this simply cannot be disregarded and I think at the very least Applied DNA's CEO, James Hayward, owes APDN shareholders a thorough explanation of why he repeatedly chooses to enter into agreements with these individuals over a multi-year time horizon while also engaging in egregious self-enriching related party transactions.

Applied DNA's History of Hiring Questionable Investor Relations Individuals

Over the years, Applied DNA has also engaged several individuals to supposedly provide investor relations services and often times suspiciously appear to be excessively compensated in cash, stock and/or warrants. According to Applied DNA's own filings, it already has several internal employees that are supposedly focused on providing investor relations services. So why would APDN need additional outside investor relations support from these individuals who at best have questionable penny-stock backgrounds and lackluster track records?

Furthermore, why does a company that was recently trading for just pennies per share on the OTC market need 3 investor relations people at all?

In 2009, Applied DNA engaged Crystal Research Associates, LLC to prepare an executive informational overview more commonly known as a research report. For their services, Crystal Research Associates received 200,000 warrants at a price close to the then market price of APDN, a whopping $0.07 per share. Even more bizarre, is the following disclosure contained in Applied DNA's SEC filing:

Crystal Research Associates, LLC v. Applied DNA Sciences, Inc., Docket No.:L-7947-04

"On April 29, 2005, Crystal Research Associates, LLC obtained a default judgment against us for $13,000 in the Superior Court of New Jersey, Middlesex County. We intend to move to vacate the default judgment on various grounds. We dispute the allegations of the complaint and we intend to vigorously defend this matter."

Why would Applied DNA engage Crystal Research Associates to provide services to the company AFTER Crystal Research Associates took them to court a few years prior? Furthermore, Crystal Research Associates, LLC has provided research products for other companies that happened to be "not so great" long term investments:

· XOMA Ltd. (XOMA-NASDAQ)

· Unilife Corporation (UNIS-NASDAQ)

· Provectus Pharmaceuticals, Inc. (PVCT-OTC)

· Advaxis, Inc. (ADXS-OTC)

· Neonode...


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