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Spending six figures on bee school means you get to do cool things like networking (begging for an internship) and working on case studies (solving problems with no correct answer). Analyzing a case study trains you to make decisions with conviction based on limited facts. That’s how we often approach investment decisions. For example, consider a business model where a company acquires their way to success. It’s more prevalent since the invention of the special purpose acquisition company (SPAC) which opened the floodgates of capital for companies to acquire growth. Here are some examples:
We need to be careful about companies that acquire other companies because their original promise fell flat on its face. What you’re investing in is a management team that failed the first time around and is merely trying to survive. That’s another thing MBAs learn – the ultimate goal of every business is to simply survive.
Our recent piece on Graphene Stocks Continue Going Nowhere Fast failed to include a company we’d talked about before, NanoXplore (GRA.TO), for no other reason than a simple oversight. Critics were quick to point out that this “graphene company” had meaningful revenues and therefore our comments about graphene failing to commercialize were false. So, let’s tackle this case study by looking at why revenues suddenly jumped in 2019 for NanoXplore.
The reason why revenues spiked appears to be related to the acquisition of Sigma which had an effect on revenues that NanoXplore describes as follows:
Between the acquisition date and the year ended June 30 2019, revenues of $59,454,752 have been recognized in the consolidated statement of loss and comprehensive loss.
We’re now able to explain over 85% of the increase in 2019 revenues which comes from a single acquisition. So, who is Sigma? NanoXplore tells us:
Sigma is a manufacturing company specializing in the manufacture of composite products, has three wholly-owned operating subsidiaries and employs 275 people. It operates in the markets for heavy trucks, buses, public transit, machinery and wind energy.
NanoXplore also provides us with this additional piece of information:
If the combination had taken place at the beginning of fiscal year 2019, Sigma revenues would have been $74,558,239
So, what they appear to have purchased is a composites manufacturing company with revenues that peaked in 2019 and has since stalled in terms of revenue growth. And that’s not the only company they acquired. In 2017, NanoXplore purchased a Swiss-based injection molding company called CEBO, which they made the following statement about.
If the combination had taken place at the beginning of fiscal year 2018, CEBO revenues would have been $8,320,346
So, let’s review what we know so far. If Sigma Labs had 2019 revenues of $74.5 million, and CEBO had revenues of $8.32 million in 2018, then why isn’t NanoXplore able to show us 2020 revenues of at least $82.82 million (this would assume that both companies had flatlined revenue growth)? That’s because whatever they’ve acquired is not collectively showing organic revenue growth over time. To make matters worse, the intent of NanoXplore was to introduce graphene to these acquired companies to give them a competitive advantage. If that’s happening, it’s sure not apparent based on overall revenue growth.
In 2021, NanoXplore’s revenues would have declined were it not for the acquisition of another company called CSP – employing nearly thirty people and operating mainly in the markets of composite products for heavy trucks and machinery – for which the company makes the following statement:
Between the acquisition date and the year ended June 30, 2021, revenues of $8,029,578 and loss of $200,848 have been recognized in the consolidated statement of loss and comprehensive loss.
So, we see that the small amount of revenue growth shown for 2021 wasn’t organic. When can we expect this company to start showing us organic revenue growth from selling graphene-enabled products? You know, like the ones they show us on the annual report cover page.
Investors may optimistically point to the joint venture announced with Martinrea regarding developing batteries for electric vehicles. Let’s hope that turns out better than the Two Carbon footwear venture that they exited in 2018.
There are inevitably any number of stories being told by management as to where the organic revenue growth will come from in the future, but promises of growth and $4.50 CAD won’t get you a cup of coffee at Tim Horton’s these days. And while investors wait for growth, shareholder dilution marches on.
NanoXplore acquired several companies with the intent of introducing graphene as a competitive advantage. We’re provided no insight as to whether or not graphene enabled products are driving growth, but it’s pretty clear that holistic revenue growth isn’t happening here. So, do NanoXplore shareholders own a disruptive graphene company or a basket of stagnating manufacturing companies? Yes, we know that the Rona dulled their prospects for the last several years, but you can only use that excuse for so long. You may say that they need more time for this to happen, but how long do we have to wait for organic revenue growth?
The purpose of acquiring a company, and then making their products superior using a miracle nanomaterial, is that you can achieve a competitive advantage that translates into revenue growth. We’re not seeing that happen here. Is NanoXplore a graphene company that dabbles in manufacturing, or a manufacturing company that released some graphene-enabled products that their customers don’t care about? We don’t know because the company doesn’t tell us, so we can only look towards the most important metric for any disruptive technology company that demonstrates traction – revenue growth. NanoXplore can continue growing revenues by acquiring companies, and that’s fine and dandy, but let’s not pretend that the graphene thesis is finally maturing when that doesn’t appear to be the case.
Numerous readers pointed out that NanoXpore stock had increased by +105% since the last time we looked at the company in our piece on A Guide to Investing in Graphene Stocks which was published on June 14th 2020. That return needs to be compared to the S&P/TSX Venture Composite Index which appreciated by +45% over the same time frame. Another way to look at this is that NanoXplore stock has fallen by 59% over the past 6 months vs an index drop of only 16.5%. You can always torture the data to provide a performance result that suits your prerogative, which is why we don’t focus on short term price performance.
Some financial pundits brag about speaking with company management as if that actually adds value. Some who read this will say, “why didn’t you ask the company for answers?” as if these media trained executives will offer up anything of value other than the usual marketing spiels. Always pay attention to regulatory filings as that’s where you’ll find ground truth. This entire piece was written solely based on the company’s annual reports which contain very little color as to what progress they’re actually making with their graphene technology. What’s obvious from these annual reports is that organic revenue growth isn’t happening.
We focus on long-term potential for companies, and NanoXplore isn’t a firm that we would be interested in investing in at any price. The business model is opaque, they appear to be acquiring manufacturing firms that aren’t growing, and we can’t see how NanoXplore provides us with exposure to graphene which is why we came sniffing around in the first place. Should revenues increase in the coming years, investors are best served to do some digging and find out where that growth is coming from.
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