IPO Review: CFOAM (ASX: CFO)

IPO Review: CFOAM (ASX: CFO)

 

ASX Code         CFO
Website www.cfoam.com
Status Complete (oversubscribed)
Listing Date October 26, 11am AEDT
Capital Raising $9m (min. $5m)
Float Price $0.20
Market Cap. $18.7m
Broker(s)

Jett Capital Advisors Pty Ltd

Peak Asset Management

Overview

CFOAM Limited (ASX: CFO) develops “a wide range of next generation carbon products” (CFOAM). On March 29 2016 its subsidiary, Carbon Innovations, agreed with Touchstone Research (and Brian Joseph) to acquire all assets required to manufacture and commercialise CFOAM products and end use applications. Previously, investment towards CFOAM exceeded $60m.

CFO notes “growing demand for ultra-high end performance engineering materials in the military, industrial, aerospace and commercial product markets”. CFO intend to focus on: composite tooling for the aerospace sector, energy absorbing applications and defence applications.

 

Offer Details and Use of Funds

To fund the acquisition (which involves cash consideration of US$7m), and provide sufficient working capital, CFO recently conducted an IPO to raise $9m. The company plans to improve its manufacturing efficiency and commercialise its product (Figure 2). Supporting the public offer were three secondary offers:

Offer Party Shares
Consideration for the acquisition Touchstone Research &/or Brian Joseph 9,187,500
Advisory services Advisors 1,800,000
Services rendered Daniel Placha (COO Carbon Innovations) 1,750,000

Figure 1

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Figure 2 – CFO’s intended distribution of IPO proceeds

 

Company Operations

Market

CFO has accumulated a portfolio of aerospace clients including: Northrop Grumman Corporation, Boeing, Orbital ATK, Sikorski San Diego Composites and ACT Aerospace. The company argues CFOAM is superior to nickel-iron alloys and monolithic graphite in this sector due to its low weight, identical (low) thermal expansion properties, and cost savings (5-10x).

For energy absorption uses (e.g. vehicle crush zones, lithium battery enclosures), CFOAM competes against high density foams, rubbers, plastics, steel and concrete. CFO contend their product weighs, and costs, less than steel and concrete, yet is fire resistant unlike foams, rubbers and plastics.

Among defence applications, the company claims CFOAM’s light weight and low cost make it suitable for missile defence agencies and exhaust stacks on navy ships.

Other potential applications include firewalls, thermal protection systems, EMI shielding and lightning protection.

Manufacturing

The business notes manufacturing inefficiencies, with machines that “need to be acquired” or “not currently operating at optimal efficiency”. They will invest capital (Figure 3) to remove bottlenecks, increase production, and lower operating costs.

Capacity output for CFOAM runs at 30,000ft3 p.a., with an individual run cycle of 100ft3. Operating supplies include: bituminous coal, liquid nitrogen, natural gas, and electric power.

figure-3
Figure 3 – CFO’s proposed capital outlay on manufacturing bottlenecks         

Sales

CFO intend to directly target existing customers and generate new leads through a dedicated sales and marketing team. The company’s initial production target is 10,000ft3 p.a., comprising 80% sales and 20% working inventory.

Touchstone Research will purchase 4,148.15ft3 of CFOAM in year one ($US1.4m), with a one year extension available at 90% of CFO’s lowest catalogue price. CFO will also hold one month’s inventory for Touchstone.

Assets

As well as plant and equipment, the company owns 27 patents covering CFOAM’s manufacturing process and end use applications. Additionally, CFO own 3 registered trademarks in the US, and 5 domain names.

A licensing agreement permits Touchstone to manufacture CFOAM for the sole purpose of R&D, with CFO having rights to use any technology or patents that are developed.

 

Company Management

CFOAM Limited will be led by the following key personnel.

Name Title Experience Salary
Michael Placha Managing Director and CEO Director New Horizon Coal; Senior VP Signal Peak Energy/Global Rail Group; President Sedgman Canada; Cyprus Coal (16 years) US$200,000 p.a.
Daniel Placha Chief Operating Officer COO DRA; Founder Sedgman’s US operations; 30 years in engineering and construction US$150,000 p.a.
Gary Steinepreis Non-executive Chairman Director New Horizon Coal, AVZ Minerals; Director Ascent Capital, Central Norseman Gold Corporation AU$48,000 p.a.
Toby Chandler Non-executive Director MD Structural Monitoring Systems; Co-founder & CIO Seal Capital Ltd; Partner & Portfolio Manager Seagate Global Advisors; MD Morgan Stanley, Citibank, HSBC AU$48,000 p.a.

Figure 4

 

Capital Structure

The business’ capital structure (Figure 5) and major shareholder composition (Figure 6) include seed investors and founders with equity acquired below the IPO price.

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Figure 5 – CFO Capital Structure

 

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Figure 6 – Major shareholders before and after the IPO

 

Performance rights and options set aside for Mr. Daniel Placha will be subject to the below conditions.

  Vesting Period Exercise Price Expiry
Performance Rights

*neither set may vest within a year of issuance

(1)  750,000: resolution of the CFOAM production bottleneck; and

(2)  500,000: upon post completion cumulative sales of US$3M

N/A 3 years
Options (1)  1,000,000: 31 December 2017; and

(2)  750,000: 30 June 2018

(1)     $0.30

(2)     $0.50

30 June 2021

Figure 7

At the time of the company’s float, 51.9% (48,500,000) of shares issued will be subject to escrow:

Stakeholder No. of Shares Escrow Duration
Directors, Initial seed capitalists, substantial shareholders 30,862,500 24 months from official quotation
Touchstone Research and/or Brian Joseph 9,187,500
Advisors 1,800,000
Unrelated shareholders 6,650,000 12 months from allotment of seed capital on 20/5/16

Figure 8 – Escrow arrangements

 

Financials

Given its limited operations, CFO is yet to accrue any revenue. The directors are unable to forecast future earnings given the company’s uncertain operations. Its assets and liabilities are depicted in Figures 9-12.

 

figure-9
Figure 9

 

figure-10-1
Figure 10

 

figure-10-2
          Figure 11

 

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Figure 12

Risks

CFO has highlighted numerous risks, including:

  • The ability to commercialise production and sales: within the capex budget and timeline identified; further capital to increase production and sales staff; uncertain future profitability
  • Competition: highly competitive market; no dominant player; emergence of new technology
  • Intellectual Property Risks: patent protected but unable to ensure they’re not infringed
  • Operational and Technical Risks: failure of plant and equipment, transport costs, weather, industrial action, material cost increases or shortages
  • Managing growth: failing to meet customer demands
  • Staff risk: information gap from turnover of knowledgeable staff
  • Regulatory: maintaining adequate product liability coverage, licensing and other requirements as set by the Committee on Foreign Investment in the United States
  • Economic: forex and taxation (US operations)

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IPO Review: CFOAM (ASX: CFO)

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