What’s Happening to Applied Graphene Materials?

We first highlighted  Applied Graphene Materials (LON:AGM) when they had their IPO just over a year ago, which was the first pure-play graphene IPO to take place. The offering was a success with shares closing up +40% on the first day of trading. In our last article, we emphasized the need for AGM to validate the commercial viability of their graphene through increased sales. While AGM has plenty of partners, there are other competitors who produce large amounts of graphene so there is no lack of availability. In the past three months, AGM has lost half its value for no noticeable reason. Perhaps investors are losing confidence in the ability of AGM to execute. Let’s look at 3 notable takeaways from AGM’s 2014 Annual Report which covers the fiscal year ending July 2014 (all numbers are in USD unless stated otherwise).

Costs are Rising and Revenues are Not

Since their IPO, AGM has tripled the size of their workforce which is significantly increasing costs. Since AGM doesn’t want to be a commodity seller of graphene, they have been focused on the development of products. During the year they have dispersed graphene in 20 different fluids, coated graphene on solid substrates, and produced sample films of graphene in both polymers and in a pre-impregnated format. Still, the company has only been able to generate $6,279 in revenues through fiscal 2014 from supplying trial sample of graphene. Losses, on the other hand, increased to $4.2 million leaving cash on hand of $13.3 million. At this rate, AGM has enough cash to survive another 3 quarters or so before needing to raise additional capital.

If/When Meaningful Revenues Arrive is Uncertain

The below statement from AGM comments on the success they are having with graphene samples (our emphasis is underlined):

Two customers have taken additional repeat quantities of material for follow up evaluation. This includes one customer who has also now taken a third quantity of material for evaluation. As expected for an industry in this early stage of development, the Group’s operations currently remain focused on sampling rather than the supply of commercial quantities of graphene, with the timescale to the achievement of the latter remaining difficult to predict.

This statement does not inspire a lot of confidence. Is it really notable that a customer requested a sample for a third time? This should not be news but rather a given that customers are making progress with commercial applications for AGM’s graphene which would finally lead to revenues. While AGM states that not all information can be disclosed about the progress of their partnerships, the above-quoted statements (and especially the statement underlined) implies that AGM has no certainty that their graphene will lead to commercial products that drive significant revenues.

AGM has Strong Institutional Ownership

As of November 4, 2014, just over 81% of AGM was held by institutional investors with renowned UK venture capital firm IP Group holding the largest stake with just over 20% ownership. Since IP Group discloses their positions in regulatory filings, investors will know if IP Group perhaps reduced their position in light of the recent price drop. Institutional selling, in general, could have been the cause of the price drop. At any rate, the stock price has lost -50% of its value in the last 3 months with the current market cap at $52 million. The last trading session saw a rebound of +12% for AGM, but with a great degree of uncertainty around when to expect revenues, this may not be the bottom yet.

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