Small Cap Network Blog

It ain’t millions and millions yet, but I have to give credit where credit is due - Applied DNA (APDN) just posted their third quarter numbers. We saw their fourth straight increase in sales. They pulled in revenue of $252K. There were no revenues at all for the same quarter a year earlier, since - as you probably know - the company really didn’t get a revenue-bearing product to the market until about a year ago.

My take? It’s proof of life. I’d love to have more (who wouldn’t?), but considering they literally started from scratch not too long ago, I give their progress-to-date a thumbs up.

It’s also worth noting gross margins remained high. Their cost of sales was only $50K last quarter, leading to a gross profit of $202K. Again I’d rather have net profits, but with a positive gross margin we can at least assume more volume will eventually mean profitability.

It’s also worth noting the majority of the expenses booked in this most recent quarter were related to professional fees and the reorganization of its capitalization…converting notes to equity. I’m not one of those people who disregards the bottom line when those kinds of things are booked; a loss is a loss. Again though, it points back to viability…those things won’t last forever.

What didn’t get said in the 10-Q may be even more important. In talking to the people at the company, I learned a big chunk of Q3’s sales were from repeat customers. That’s encouraging, in that it tells me getting this product out the door isn’t going to be a constant battle. The more new customers they add each quarter, the more customers they’ll have coming back with orders in hand, leaving their rain-makers to cultivate more business.

Here’s the 10-Q for Applied DNA. There’s no press release…at least not yet. However, I suspect there will be one tomorrow. I’m going to be publishing an edition tomorrow (Friday) afternoon anyway, so look for some more thoughts on Applied DNA then - maybe with more details from a news release. I just wanted to get you the news as soon as possible.

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OK, they probably weren’t long-awaited, but I mentioned they were on the way. So, here’s what I’ve got to say about Stockhouse’s (STKH) second quarter, and more importantly, my thoughts on what they had to say about their Q2.

If you heard the call from yesterday, and if you heard any of the other recent calls, you were probably wondering (as I was) if it was a re-run. The same stuff they were saying then was the same stuff they said in the two prior calls.

No big-deal…boilerplate banter is the norm. The problem is, it was the third call in a row where they’ve said ‘next quarter will be better, once these expenses are out of the way’. (I paraphrased.)

So what? Not only have the quarters not been getting better, they’ve been getting worse. Last quarter was the most expensive quarter ever for Stockhouse, and sales saw their second consecutive decline. Cost of revenue was higher too. So, my question is, what constitutes ‘better’?

Don’t hear me wrong; most small caps have to spend money now to make more money later. I can deal with that. I just wish they had told me that. Instead, we got pretty much the opposite.

The reason this blog is so late today was simply because I wanted to go back through some recent company statements to see if it was just me remembering things that weren’t true, or if they truly did fail to deliver.

Here are some quotes from the press release that came out with their Q3 (2007) numbers, on November 14th of last year. Bear in mind we just heard about Q2 (2008), so this was three quarters ago…

Stockgroup completed its major development goals for Stockhouse during the third quarter and launched the beta version of the site on October 2nd.

In the third quarter, Stockgroup continued to make substantial progress in changing its back-end architecture to a Microsoft(R) .net platform, but due to the late launch of Stockhouse, this goal will not be fully achieved by year-end. We expect completion of this goal during our first quarter ending March 2008.

Joe McWilliams joined as VP Monetization.

Editor’s Note: The beta didn’t turn into the ‘live’ site until the end of Q1, the architecture change was still going on during Q2, and McWilliams left a few weeks after he started. 

We got these nuggets with the Q4 numbers on April 1st….

Our transition to the new Stockhouse was completed on March 28, 2008.

The Company’s focus is:…Increase traffic to Stockhouse…During Q4, the Company averaged over 1 million unique visitors per month to its flagship media property Stockhouse.com, an increase of 42% over the same period in 2006.

The Company entered into an agreement with Yahoo! in which Stockgroup distributes editorial content from Stockhouse to Yahoo! Finance Canada.

Inventing and building a sophisticated analytics system to act as an editorial filter for user generated content also took longer than we expected, and delayed the completion of the new Stockhouse web site from 2007 to 2008.

“In 2008, Stockgroup will start to leverage the unique media platform that has been two years in the making. We are now positioned to execute on our detailed plans to accelerate both the number and engagement of Stockhouse users while adding new content distributors and licensing partners,”

Editor’s Note: The Yahoo! Finance Canada link is buried to the point of being unfindable unless you know exactly where to look, and traffic (and engagement) was way down in Q2…delay or not. Engagement was still down. The delays mentioned, however, were accurate,

On May 14th, when the company released Q1’s (2008) results, we heard… 

“Advertising was impacted in Q1 due to having Stockhouse in beta which caused confusion for advertisers and advertising delivery problems caused by delivering to two sites. We feel these issues are now behind us. Going into Q2, we have a growing Stockhouse with one of the most lucrative demographics and the best engagement statistics in our category for advertisers, a new VP of Advertising Sales, and a new ad trafficking role filled.”

The company also added Dana Stetson as Vice President of licensing/subscription sales.

Editor’s Note: Huh? Maybe it’s just me, but wouldn’t you have the ad service thing figured out before you got paying advertisers involved in it?  

On August 13th, we heard this about Q2… 

During Q2, the Company reports an average of 700,000 unique visitors and 7.6 minutes average time spent per user. At the beginning of the second quarter, the Company launched the new Stockhouse.com.

This quarter, Theresa McVean joined the Company as Vice President, Advertising Sales. Ms. McVean brings more than 10 years experience in online advertising sales.

“We are disappointed with our Q2 advertising results which were significantly impacted by a gap in staffing and stock market conditions,”

Editor’s Note: Engagement was down though the new site was supposed to improve it. What gap in staffing? They’ve hired at least three marketing and sales (or monetization) VPs in the last three quarters. If it’s non-managerial sales reps they were low on, why would you not replace them ASAP? They’re you’re lifeblood. All three new marketing/sales managers were in place before Q2 started. If you were on the call, they also said an ad server was put into use in Q2. Again, why would you not have that ready months ago?

My bottom line is the same now as it’s been for three quarters….enough talk, and enough excuses, and enough ‘new’ one time expenses. You’ve made the promise - now start delivering.

They’re looking for profitability in Q4. A year ago I may have had faith they could do it. Now I want them to prove it to me first. I just can’t help but be skeptical after all the shortfalls and unfilled promises we’ve seen.

Just my two cents.

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Geez, that didn’t last long. After yesterday’s mid-day rebound (almost back to break-even levels), I was somewhat expecting a little follow through today…particularly when Wal-Mart (WMT) gave us some surprisingly good new. Then WHAM! Inflation grows at its fastest pace in 17 years. The market futures went from pretty positive to quite negative.

But, here’s my question….does the data still apply? Or, perhaps the better question to ask is if CPI is calculated using end-of-month prices, or the average prices throughout the month. (If you know, leave a note below.)

If it’s the latter, then I don’t care about today’s announcement. Why? Oil peaked at $146 in mid-July, but closed out the month at $124. That’s a big difference, and using the average price could really inflate the month’s numbers.

Don’t get me wrong - even with the best-case scenario, inflation is still too high for me. I just don’t want to make this more than it is. The ‘real’ inflation pain may actually be less than implied.

Nevertheless, I hope like crazy this is finally going to get the Fed and Bernanke off their duff. They just need to grow a collective pair, and do something….as in raise interest rates.

I know, I know….it’ll kill the housing market. Folks, here’s some bad news. - the housing market is dead anyway. Higher rates will benefit us more than harm us.

The next ‘anti’assumption is that rising interest rates are bad for stocks. It feels right to say it, but the math says it’s wrong.

Take a look at the chart below, which compares the S&P 500 to the Fed’s reserve rate. All the major directional changes in interest rates are marked on the SPX chart with an up or down arrow.

Conventional wisdom says falling rates should coincide with a bullish market, and rising rates should coincide with a falling market. Does it?

The only thing is see that’s even close to a correlation is this… rising rates are more bullish than bearish, and falling rates are more bearish than bullish. (I don’t make the data - I just pass it along.)

Counter-intuitive, isn’t it? Yeah, well, add it to the list of things your broker or your favorite media guru probably got wrong.

Anyway, back to today’s point….I sincerely hope this data will finally force the Fed to do something. Higher interest rates I can deal with; expensive gas and food, I can’t deal with. The irony is, we’d all be fiscally better off paying a slightly higher interest rate than paying significantly more at the gas pump. Ben still hasn’t called me to chat about it though.

As for my take this is likely to have on stocks in the near-term, check in later this morning….I want to see how deep this wound is.

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