Motley fools Hidden Gems
Zen Graphene Solutions (TSXV:ZEN)Full disclosure:
This story starts with a friend of mine telling me that another mutual friend of ours who owns a laboratory testing company, which he’s been scaling back in recent years, had recently leased a goodly portion of his lab space to Zen.
Taking a quick look at the company’s historical financials and business description via our licence to financial database S&P CapitalIQ, I texted back to my friend, “Zero revenue in last decade. Zero. Has never made a penny of free cash flow in its entire existence. Stuck in the “raise money/burn money” cycle. This is not a serious company.”
Well, someone must have been talking to someone, and that mutual friend reached out a couple of days and suggested that I look again.
I did, and what I found was very interesting. Start with that history of zero revenue and cash burning. That’s true, but it’s arguably irrelevant at this point, since that history provoked an activist proxy fight a couple of years back that resulted in the prior management (who had been living high on the hog at beleaguered shareholders’ expense) getting bounced by the activist faction led by now Executive Chairman Dr. Francis Dub (he’s a trained optometrist—for reals) and now CEO Greg Fenton.
Zen Graphene was formerly known as Zenyatta Ventures, and its seemingly only asset of note was a 100% interest in a graphite deposit (can’t yet call it a mine) in northern Ontario. The graphite deposit owned by Zen is claimed to be of a unique nature (related to how it was laid down over geologic eons) that will allow, when developed, a low-cost raw material source for the real business that Zen is now in: graphene.
What’s graphene? It’s the lightest and thinnest material known: a “carbon nanomaterial with extraordinary properties” with applications in a host of areas—composite materials, alloy additives, corrosion-resistant coatings, batteries, and other areas where improved thermal conductivity or electrical conductivity is desired.
That said, all of this is still years away and primarily in the realm of the theoretical, if not fanciful.
What isn’t is that graphene can also form the base of a viricidal “ink” that can be applied to things like masks or HVAC materials to knock out things like the COVID-19 virus. The graphene production method has a patent pending, and Zen has already signed a binding letter of intent with a Collingwood-based company to purchase the viricidal ink for the purposes of coating a minimum of 100 million masks/filters. It’s also signed a lease for a manufacturing space in Guelph to begin production of this ink early in 2021. I expect the company to start reporting revenue in the next quarter or so.
Understand, this is very much a “call option” type company, and I’d still call the present price “frothy,” even as it begins to implement and scale its business plan. Much of the potential use of graphene remains viable only at “bench level” and won’t contribute to the bottom line any time soon. The company will also require additional capital in the next couple of years (I’ve been told this would be the expected last time it’d need financing). Sales and cash flow will need to come near term from already patented (or soon to be patented) applications like the ink/coating for masks.
I admit, I’m a sucker for well-executed activist investor coup d’tats. The activist leaders here have only been buyers since taking control (albeit at prices significantly lower than today’s price), and I have a reasonable expectation they’re here for the next decade or so. I’ll be educating myself more on the company and potential applications in months ahead and reserve the right to revert to my original assessment of the company. For now, however, I’ll admit that I find the company and its story interesting in the sense that I had my initial impression subverted, which is something I truly enjoy.
Disclosure: Jim Gillies owns shares of Costco Wholesale. The Motley Fool owns shares of Booking Holdings and Costco Wholesale. The Motley Fool has a disclosure policy. |
