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California Nanotech Report and Updates
CALIFORNIA NANOTECH
(CNO-TSXV / CANOF-OTC)
ORIGINAL RESEARCH REPORT AND 2024 UPDATES
California Nano’s business has done great, after landing a big manufacturing contract for a green steel company for one of their parts—which should last 1-3 years or more—but the stock has done even better—from 15 cents to $1.92 recently. I’ve put my 3 most important subscriber letters on this company together in one note for you to review, so you can see my research and decide for yourself if this is a company you want to follow.
CALIFORNIA NANO – (CNO – TSXV)
LOOKING FOR THAT ONE BIG ORDER
Six years ago, California Nano (CNO – CSE) was on the verge of bankruptcy. The CEO was on the way out. There was no money in the bank. There was no direction.
It was at that time that the current CEO, Eric Eyerman, who was an employee at the company, took over. Shortly thereafter the turnaround began.
Since then, Cal Nano has been putting in years of sneaky, under-the-radar growth. This included a significant inflection up over the last two years and that continued in the recently released quarter (Q2 2024) – where Cal Nano announced 152% year-over-year revenue growth.
Source: Cal Nano Financial Disclosures
Today Cal Nano boasts a customer base that is EXTREMELY unusual for a company this size. TSMC, Adidas, Boeing, Raytheon. These are all companies that are ordering manufacturing R&D services from Cal Nano – we’re not talking about MOUs or LOIs or other hopes and dreams. This is real revenue.
Even more impressive, unlike a lot of growth companies, Cal Nano is not sacrificing margin to grow the business. Both EBITDA and operating cash flow have been even stronger.
Source: Cal Nano Investor Presentation
That continued in fiscal Q2, which was released October 30th. Cal Nano announced $686,000 of revenue. Net income came in at $213,700, which was up from a loss the previous year. EBITDA came in at $279,000.
The results boast a very impressive 40% EBITDA margin, which signals how profitable Cal Nano has made the business.
Growth is so rapid that Cal Nano is expanding. According to Eyerman, they are “evaluating several options to facilitate the expansion of our manufacturing facilities”. They need a new facility to house recently purchased equipment.
Cal Nano just completed a $1.5 million financing at 15c that includes 25c half warrants. The financing included their biggest shareholder, Omni-Lite, which took 1.2 million units in exchange for canceling $180,000 of debt and raised their position in Cal Nano to 7.2 million shares, or 16.6% of the company. Management put in $333,333; this was CEO Eric Eyerman’s first big purchase of stock.
This should set the stage for the expansion and, if all goes well, further growth. Cal Nano has a very unique set of capabilities that can produce better materials, and a big base of customers to build on. These are capabilities that are UNIQUE – in fact, Cal Nano may be the only company in North America that can offer their specific set of services.
THE BUSINESS
Cal Nano uses cutting-edge technology to produce materials with high performance characteristics: stronger, lighter, more conductive, and better heat absorption. A wide range of improvements can be achieved.
The company operates two high-tech manufacturing technologies.
- Spark Plasma Sintering
Both these technologies are advanced powder processing technologies. They take the powder form of a material and transform its structure. They reduce the size of the material particles and/or change its microstucture—which changes the way the material behaves. Thermal, electrical, and strength characteristics can all be improved.
Cal Nano offers these processes…
- As a manufacturing service
- Selling the equipment outright (for SPS only at this time)
They also provide after-market services and support.
CRYOGENIC MILLING
Cryogenic milling is a grinding process done at an extremely low temperature – negative 190 degrees Celsius.
A powder form of the material is submerged in liquid nitrogen and milled at a high speed. The powder is ground inside the mill, which with the combination of the low temperature changes the structure of the powder. Below is a microscopic picture of how the material changes as it is milled.
Source: Cal Nano March Presentation
From there the newly structured powder can be mixed with other powders to form new alloys or it can be reconstituted into a new form of the material, one that is stronger or less temperature sensitive.
For example, Cal Nano was able to turn standard aluminum into something 2x stronger.
SPARK PLASMA SINTERING (SPS)
With SPS, heat and pressure are used to take a powder form of the material to press it into a solid part. This is similar to additive manufacturing (3D printing) but unlike 3D printers there is no melting of the material involved. That helps conserve materials’ properties that are lost when it melts and re-solidifies.
Operating these two manufacturing techniques leaves Cal Nano with a unique business. In fact, I searched through the last 12-month filings of every publicly listed company in the world, and I could find a mention of the manufacturing techniques that Cal Nano uses.
Cal Nano is the only company to provide a full suite of service offerings for these processes.
Source: Cal Nano Investor Presentation
The SPS process is ideal for creating parts of a desired density. It is also much faster than more conventional sintering techniques. It allows bonding of dissimilar materials that otherwise would not bond, creating unique alloys. And it works on virtually any material: metals, ceramics, intermetallic compounds and organic materials.
Most of Cal Nano’s projects involve toll services of R&D programs for large and small companies. Cal Nano boasts a very impressive list of customers.
Source: Cal Nano Investor Presentation
Many of these are VERY big firms for such a small operation. They are using Cal Nano’s technology because it is the best technology to create the advanced materials that they need.
There is a wide range of parts that Cal Nano can develop materials for. Consider a few examples:
Cal Nano has worked with Adidas innovating a new track spike for the adiZero prime running shoe.
Source: ProDirect Running
They have worked with TSMC to create a complicated, high-performance material for a semiconductor application.
They have collaborated with energy companies on formulating high-performance thermo-electric materials for nuclear reactors.
Cal Nano’s customer applications include:
- Aerospace – high temperature alloys (Boeing)
- Defense – advanced ceramics for high temperature applications (Raytheon)
- Green Energy – next gen battery tech (Sandi National Labs, Ambri)
- Space – high temp ceramics for shielding/engine components (NASA)
- Auto – high performance brake pads, soft magnets for EV (SIC Brakes,)
The last piece of the puzzle is scaling. This has really been the focus since Eyerman took over. Evolving Cal Nano from an R&D company to one with production capabilities that can handle the big order.
Cal Nano is hoping to make that leap by increasing battery life cycle.
They are working with Ambri, a burgeoning battery manufacturer, to use their SPS capabilities to manufacture components of a new liquid-metal battery design. The components are expected to help Ambri achieve better battery life.
Source: Cal Nano Investor Presentation
If all goes well, Ambri would be scaling up their battery to production levels and Cal Nano would as well.
Ambri is a start-up battery manufacturer themselves, so the timeline to a true production-scale ramp may be long.
While finding the right partner to ramp to production capabilities will take time, Cal Nano has been working on their end to make sure they are ready.
On the Cryogenic milling end, Cal Nano has patented a process for large-scale commercial cryomilling that can handle 100s to 10,000s of kilograms per week.
With their SPS process they have future plans to implement a tunnel system that can run 15 minute cycles with 10s to hundreds of parts per cycle once scale up is needed
A MINISCULE MARKET CAP
COULD BE A BIG OPPORTUNITY
Cal Nano is a tiny company.
With 46 million shares outstanding and a 30c price, the market cap is a little over $12 million.
The stock is tightly held by insiders, which own 37% of outstanding shares.
Source: Cal Nano Investor Presentation
With a production-scale order still elusive, the increase in revenue has been from R&D programs for both new and existing customers. The growth even without that order – over 150% this last quarter, is still very impressive.
Annualizing the Q2 results puts EBITDA at over $1 million. With around $1 million of debt, the enterprise value of Cal Nano sits at $13 million – meaning the stock is trading at about 13x EV/EBITDA.
That is a bargain if Cal Nano can keep the growth train going.
What will that take? More R&D projects will create incremental growth, which has been their bread and butter.
But the big score is going to happen if one of these projects go into production.
A production scale order on a $12 million market cap company has the potential to create a multi-bagger out of the stock.
That is the reason to own Cal Nano stock here at 30c. One announcement from one customer is all it takes. If it happens, the stock will go much higher.
But be aware—one of my mantras in junior companies is—the cheaper the stock, the longer you have to wait. This is a patient investment. It could take months to quarters for them to increase revenue enough to move the needle on the stock.
CALIFORNIA NANO Q1 RESULTS
California Nano (CNO – TSXv) recovered from a weak Q4 with a MONSTER Q1. They delivered a big, big increase in the top line – nearly double the previous quarter.
Source: Cal Nano Q1 2024 MD&A
The results were helped by significant equipment orders in the quarter. Cal Nano has two sources of revenue: manufacturing revenue for their production contracts, and large equipment purchases for their SPS machines. These equipment orders are lumpy but can really boost revenue for any given quarter.
That is what happened in Q1. Cal Nano said they saw a “ramp-up of manufacturing programs and two SPS equipment deliveries to University of Connecticut and Embry-Riddle University”. Equipment orders in Q1 amounted to $551K.
Source: Cal Nano Q1 2024 MD&A
Even without factoring these orders, Cal Nano still had a very strong quarter. Their manufacturing revenue was $1.2M, 22% higher than their Q4 revenue.
Adjusted EBITDA for the quarter came in at $750K. With 42M shares outstanding and today’s pop in the share price to 80c, Cal Nano has a market cap of $34M. Annualizing that $750K to $3M, 11x EBITDA seems like a fair valuation with more upside to be had if Cal Nano can continue to show this performance for a few more quarters.
If there was a sour note it is cash generation. Cal Nano ended the quarter with $484K of cash, which is significantly less than they had at the end of last quarter.
The culprit was working capital, which consumed over $1M of cash.
Source: Cal Nano Q124 Financial Statements
One of my concerns has been Cal Nano’s reliance on a single green steel cleantech customer. That reliance appears to have continued in Q1.
Backing it out from the MD&A, Cal Nano noted that 3 customers accounted for $1,541K of revenue, or 88%. Subtracting the two University orders for equipment, that leaves about 82% of manufacturing revenue coming from their green steel cleantech customer. They remain heavily reliant on this customer.
We may see some diversification soon.
Cal Nano is positioning themselves for growth. They committed $1.5M for their new facility in Santa Ana including: two used cryomills, two SPS machines, a system enabling 3D material printing using SPS technology, and supporting infrastructure.
They are “in the pilot production stage with several customers in the aerospace, industrial, and automotive markets who have the potential to grow their manufacturing programs from pilot scale ones.”
Production scale deals are what I’d love to see announced. Cal Nano continues to see both revenue and EBITDA move up and to the right. Now they need a few more production scale deals to keep the momentum going.
SUMMER 2024 UPDATE
CALIFORNIA NANO—CNO-TSXv—CANOF-OTC—we had a great chat with Director Roger Dent yesterday. Roger is ex-sell side analyst, and has been with both CNO and the company it was spun out from years ago, Omni Lite Canada (OML-TSXv) for over a decade. (OML owns 7 M shares of CNO)
He had four bits of color on the company that I thought very relevant:
- He thought it was fair to assume that the current run rate – US$1.7 M per quarter – was sustainable. It’s a new level of run-rate. He could be wrong, but he said that.
- Former CEO Chris Melnyk returning to the company last year went unnoticed and under-appreciated. I saw the PR about Melnyk returning to the board, but Dent said he is basically co-CEO, working with Eric Eyerman and helping drive the business forward. I think this is a big deal. Investors now have TWO of the brightest lights in the sintering and cryo-milling world working for them.
- These are ODDBALL technologies that can manufacture parts quickly and cheaply. CNO does not own the tech; but they are world leaders in them. Highly experienced and proven mgmt in this area is rare as hen’s teeth
- While CNO is very reliant on the one unnamed private green steel client, they think this client has legs, ie. Long duration—at least 2-4 years—and it could be longer
- There is NO sales staff. All revenue is coming from in-bound calls
Overall conclusion—this stock is going higher. I want to be patient here—more than normal. I don’t expect to sell any stock for a long time now—unless the stock gets really stupid, in a good way. As I said last week, the stock is now trading 11x EBITDA, which may be generous but not unheard of for a fast growing somewhat unique sexy technology that needs no sales staff.
