As we stated in our first article (here), we don't believe that CVD Equipment (NASDAQ:CVV) has unique capabilities in graphene. Instead, investors should look past the graphene hype and focus instead on CVD's rapidly declining backlog, revenues, and profitability in order to value the company. Interestingly, CVD Equipment came out and essentially corroborated our claims in a press release (here), and that is just one of the many reasons we believe CVD is a compelling short and have a price target of $5.
Nevertheless, we wanted to share our extensive due diligence on CVV's graphene capabilities, which made us conclude emphatically that CVV has no unique capabilities in graphene and should be shorted aggressively.
Joint IP Development Agreement with Pre-Development, Lab Stage Start Up
CVV recently signed and touted a "Joint Intellectual Property Development Agreement" with Graphene Batteries AS. While the press release (here) is positive and sounds exciting, it contains very little information about Graphene Batteries. Our due diligence unveiled that Graphene Batteries is a newly formed startup that is less than one and a half years old, comprised of only 3 people, and, so far, Graphene Batteries' only source of funding is a $1 million grant from the Norwegian government, which may have run out already.
To see how undeveloped Graphene Batteries is, one only needs to visit the website (here), which only has 7 total pages and contains little substance, such a research papers, information about R&D accomplishments, and an overview of its product development milestones.
Moreover, Graphene Batteries only has 3 development stage products, none of which have progressed beyond lab scale. This means they are years away and face significant challenges to ever see the light of day.
CVD's Graphene Equipment Can Be Purchased From Dozens Of Others
As part of our due diligence, we also consulted with a leader in the graphene space. The consultant was emphatic that CVD Equipment has no proprietary graphene know-how. First, the acronym "CVD" stands for "chemical vapor deposition." Put simply, CVD Equipment sells chemical vapor deposition equipment, which we found can be purchased from at least 42 other manufacturers, as seen here.
Specifically, what CVD Equipment sells for graphene is a tube-shaped furnace that deposits a layer of graphene onto a surface using heat. The same exact product is also sold by much larger and better competitively advantaged public companies such as Aixtron (OTCPK:AIXXF) and Thermo Fisher (NYSE:TMO), as well as leading private players such as Moorfield (here) and MTI Corporation (here).
CVD's furnace is a commoditized product that one can purchase from dozens of manufacturers. This further explains why CVD has such low commodity-like margins.
Insignificant Patent Portfolio and Less Than 5 PhD's
In our first article, we also touched upon CVD's insignificant patent and IP portfolio, which CVD carried on their balance sheet at a cost of $18,287 and $23,327.
We searched for CVD's patent portfolio on the United States Patent and Trademark Office website and found only 3 patents. One can find CVD's patents by searching for "CVD Equipment" under Assignee Name. The results can be found here.
Click to enlargeTwo of the patents are from 1985 and 2003, which is well before graphene entered the mainstream in 2010, and are about an automatic valve shut-off system (unrelated to graphene!) and a compartmentalized oven (again, unrelated to graphene!). The 3rd patent concerns a high-throughput chemical vapor deposition system, which, as we showed above, is manufactured by dozens of other companies and has little to do with graphene in particular.
Why does CVD have no patents? The obvious answer is because CVD has no intellectual property, as explained in our first write up (here) where we highlight CVD's miniscule R&D spending. But why does CVD spend so little on R&D? Based on our diligence, as of June 30th, we believe CVD does not have more than 5 employees with PhDs on their payroll currently and may have as few as 2. While our due diligence has been exhaustive, we may be wrong on this figure. If CVD wishes, the Company can clarify the number of employees it has with PhD's. Nevertheless, this is not indicative of deep know-how about an emerging technology such as graphene.
Conclusion - CVD's Graphene Hype is All Smoke and Mirrors
We have done extensive due diligence on CVD and believe investors should be wary about the Company's promises on graphene development. It is all hype. Instead, investors should be alarmed by CVD's rapidly declining backlog, revenues, and negative cash flows.
CVD is a compelling short, and we have set a price target of $5 based on its historic earnings, which is a generous valuation for a company that has since turned unprofitable and is now shrinking.
Disclosure: I am short CVV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.