In our initial report on Zentek (NASDAQ:NASDAQ:ZTEK), we discussed why the company was an attractive short in our view. We uncovered a lawsuit filed by a former partner who alleges Zentek stole its graphene-based antimicrobial coating technology. We discussed the waning demand for surgical face masks in a market flooded with supply and competition. Zentek news flow since then has increased our conviction.
Sales for face masks coated with Zentek’s ink have been abysmal: for the quarter ended June 30 Zentek recorded revenue of $33k and $5m in net losses (all figures in CAD). Demand was so underwhelming that Zentek’s manufacturing and sales partner was forced into receivership in July, not even ten months after entering the agreement. We find evidence that Zentek’s subsequent partner may be even worse, with minimal or no ongoing commercial operations.
In the last 7 months Zentek has produced almost nothing of commercial substance in our view. The company has entered partnerships with obscure counterparties, issued press releases reporting banal day to day business activities, and trumpeted testing “results” of early stage, pre-commercial projects in unattractive markets, in our view.
Although the Canadian patent application for ZenGUARD was recently allowed, we think a patent is economically insignificant because demand will remain trivial.
Even the most loyal shareholders will ask questions when another highly touted partnership sputters, or commercialization of a glorified product is yet again delayed and/or a spectacular failure. We believe the stock’s $250m valuation is unjustified with Zentek’s uninspired pipeline and quarter after quarter of inconsequential revenue and heavy losses. We think time and investor patience is running out.
Face Masks Sales Atrocious, Partner Goes Bankrupt
Zentek had high hopes for ZenGUARD ink in the surgical face mask market. Investor slides last year touted gross margin scenarios between $28m and $2.8b [8:45]. CEO Greg Fenton claimed the company was “seeing a tremendous amount of demand and interest in [ZenGUARD]” [11:00]. Considering covid fears were receding and the glut of domestic and Chinese PPE supply, it wasn’t surprising that management severely misjudged demand and actual results were nowhere near this range.
In four quarters of ZenGUARD sales, Zentek recorded sales of only $380k against net losses from continuing operations of $15m. As poor as is it, the revenue figure overstates run-rate demand since it includes initial inventory stocking. Same for revenue of $33k for the quarter ending in June since that number includes an initial order from Mark’s, a Canadian clothing retailer offering Zentek’s masks in 50 of its stores, a tiny deal which the company touted as “important exposure through a top Canadian retailer.”
The business was so poor that Zentek’s partner Trebor Rx was forced into receivership in July. Legal documents related to the receivership show Trebor was apparently targeted by Ghanian scammers who dangled $8m in purchase orders to extract a $1,250 “registration fee”:
That Trebor is Zentek’s most substantial commercial partnership to date, literally and figuratively a “mom and pop” operation run by a couple with two children, is indicative of how little commercial progress Zentek has made in our opinion. However, at least Trebor was conducting business and transacting with Zentek even if in meager amounts. We don’t think the same can be said for Zentek’s next face mask/PPE partner.
Another Face Mask Partnership Signed with No-Name, Possibly Defunct Company
In April, Zentek announced an agreement with EkoMed Global, a Turkey-based entity it called a “highly competitive player in the PPE space”. Under the agreement, Zentek was to supply ZenGUARD coating to EkoMed for use on EkoMed’s masks, and purchase masks from EkoMed that Zentek would treat with the coating and resell.
Zentek has provided no updates on the partnership since, only mentioning EkoMed once – in an August press release, in which Zentek disclosed Trebor’s receivership and stated it does not expect material losses from Trebor’s dissolution because of its commercial agreement with EkoMed.
However, we believe little if any significant commercial activity has resulted from the EkoMed partnership and we wonder if EkoMed is even operating at all.
Neither Zentek nor ZenGUARD are mentioned anywhere on EkoMed’s social media accounts or its website, and EkoMed’s e-catalog hasn’t been updated since September 2021. Moreover, security certificates for EkoMed’s poorly functioning website have expired:
EkoMed hasn’t posted anything to its social media accounts in at least six months: its last Facebook and Instagram posts were in March, LinkedIn activity stopped in February, Twitter in March 2021, and the most recent YouTube video is from September 2021.
Voicemails left on EkoMed’s phone number in Turkey have not been returned. The phone number for the “US Headquarter” is not functioning. Emails sent to email@example.com and firstname.lastname@example.org were unreturned.
EkoMed’s CEO at the time, John McKendry, left in May, the month after the agreement was announced after only serving 7 months total.
The press release announcing the agreement quoted Annette Mitchell, partner at EkoMed. Mitchell’s LinkedIn profile shows she was a partner before becoming CEO in July. We attempted to contact Mitchell or anyone at the Canadian office, but voicemails left at the listed number have not been returned and the email address is not functioning.
Concurrent to her role as a partner at EkoMed, Mitchell was CEO of CC Global Solutions which appears to be defunct as its website does not function. At CC Global and EkoMed, Mitchell worked with Serge Zarrabian, who was account director at CC Global and an EkoMed partner. A video on Zarrabian’s Instagram account from June 2020 shows CC Global and EkoMed were partners. Zarrabian’s only other employment history on LinkedIn is as owner of 3 clothing companies that appear to be defunct: TNIGonline (website not operating), forcement Inc (deregistered), and Persicus (website not operating).
EkoMed’s founder, Cemal Harun Aral, was CEO or founder of 13 companies according to his LinkedIn profile. Most appear to be defunct. The more recent examples include COINSTOCKX (Twitter account with 3 followers and 1 tweet) and GoodMiners (Twitter account with 0 followers and 0 tweets), defunct entities associated with cryptocurrencies. Aral is currently CEO of Phoenix Immersion Cooling Technology which has neither a website nor an internet footprint, and whose only employee seems to be Aral. He’s also CEO of AMSTEL SCIENCE which purports involvement with “payments solutions, immersion cooling, blockchain development, and artificial intelligence”. AMSTEL’s website has not been updated since 2018:
EkoMed apparently shares a building in Istanbul with at least 3 entities: EKONet, Dr. LOVE, and troyamoda.com. We found no corporate records or evidence of business activity for Dr. LOVE and troyamoda.com although the domain troyamoda.com is registered but unused. For EKONet we found Florida corporate records which list Aral as registered agent and an empty Walmart seller webpage. EKONet and EkoMed’s US office share the same address in Miami which is also an event space that has hosted concerts and art shows.
The other companies on Aral’s LinkedIn profile, all seemingly defunct, purportedly operated in a wide range of hype heavy areas: gambling software, electric vehicles, nanotechnology, social media advertising and online shopping.
We have serious concerns regarding the legitimacy of EkoMed and the commercial prospects of the agreement. We emailed Zentek asking for an update on the EkoMed partnership and what if any activity has occurred under the agreement but have received no reply at the time of publishing.
Latest Face Mask Agreement Terms a Significant Downgrade
In September, Zentek announced an agreement with Viva Healthcare Packaging to manufacture and sell face masks coated with ZenGUARD. We believe Zentek could fare even worse with Viva than it did with Trebor.
First, whereas Trebor paid for ZenGUARD upfront guaranteeing Zentek at least some revenue, Viva is not purchasing anything from Zentek. Rather, Zentek is providing fabric to Viva pre-coated with ZenGUARD. Second, Zentek’s costs may grow considerably under this arrangement since it will purchase fabric and coat it with ZenGUARD using equipment it must purchase, maintain, and operate. Third, Viva is primarily a packaging company in the Health and Beauty Industry – surgical masks are incidental to its business.
Lastly, Zentek may be paying Viva to manufacture masks, significantly increasing its financial risk. We asked Zentek management for clarification but have yet to receive a reply at the time of publishing.
Pivot to HVAC Filters Will Flop
After realizing negligible commercial traction in its core face mask business, Zentek is selling investors on a new opportunity – HVAC filters coated with ZenGUARD.
As announced in November 2021, Zentek was awarded funding from Innovations Solutions Canada (ISC) to test ZenGUARD coated HVAC filters. ISC is an organization within the Canadian government that provides funding for start-ups and small businesses. The funding contract was for two phases of tests. Zentek is in phase 2 and according to CEO Greg Fenton if it successfully passes these tests Zentek will be awarded a multi-year contract with the Canadian government.
… we hope to have [phase 2 test] results in the coming weeks. If we’re successful then the government of Canada becomes an immediate client of ours, they will procure from us for a period of 3 years minimum.” – CEO Greg Fenton, July 2022 [2:30]
If we are successful in Phase 2, as part of the reward for demonstrating that, the government of Canada becomes a client of ours so we’re very happy about that…” – Fenton, September 2022 [19:00]
We believe these statements are not accurate. If Zentek passes this phase of testing, it’s not automatically awarded a contract. Rather, departments in the government of Canada have the option of arranging a contract to procure filters. This was confirmed over email by Ryan Shacklock, VP of Strategy, Business Development, and Investor Relations.
However, even assuming Zentek passes testing and secures a contract we think it’s likely to be commercially insignificant in the context of Zentek’s $250m valuation. Consider that the test contract was only worth $206k and the Canadian government is testing hundreds of similar “innovations”.
At least 136 businesses have completed ISC or similar testing and subsequently been awarded contracts. A cursory search reveals most of these businesses are obscure start-ups. Among them is CleanAir AI, a producer of antimicrobial HVAC filters currently on the market. CleanAir AI’s LinkedIn profile only shows one employee.
At the most basic level, we think Zentek’s HVAC will fall flat because antimicrobial HVAC filters already exist. A Google search produces dozens of results like CleanAir AI. Filters incorporated with the generic antimicrobial chlorhexidine digluconate have been tested onboard the UK rail network, showing “excellent” antimicrobial efficacy and durability and no negative effect on airflow. Kentucky-based Koch Filter manufactures anti-microbial filters proven to be effective.
Graphene Composites, the former partner suing Zentek for allegedly stealing its antimicrobial ink technology, is already selling its ink known as GC Halo to Sun Filter, an HVAC filter manufacturer based in Thailand.
We don’t think Zentek is addressing an unmet need in HVAC. We expect Zentek will generate inconsequential HVAC-related business in a repeat of the face mask debacle.
Bizarre Loan to Undisclosed Third Party: Unpaid at Maturity Date and Borrower Renegotiating
Although Zentek professes to be an IP development company, it will apparently consider loaning funds to undisclosed third parties at rates typically offered to investment grade corporates.
In its 2021 annual statement filed in March, Zentek disclosed it loaned $2.95m (roughly 10% of the company’s cash) to an undisclosed party at a 6% annual rate for three months. The borrower had the option to extend the loan for an additional three months at 8%. In its June quarter filing, Zentek disclosed the borrower did not pay off the loan on the original three-month maturity date and was renegotiating the loan.
That the borrower did not simply extend the maturity date and is instead forcing Zentek to renegotiate is a huge red flag in our view. So is the disclosure in the last MD&A as it implies Zentek may have to pursue the borrower’s collateral:
The Company assessed the non-payment of the loan receivable at July 1st and performed an analysis of collectivity based on the collateral against the loan and determined that no provision was required.
We asked management why it would make such a loan, and who the borrower is. We have not received a response at the time of publishing.
Zentek Claims Graphite Deposit, Written Down to Zero, Provides Floor Valuation
Struggling commercially and with its shares near multi-year lows, Zentek is now alleging that its stock has downside protection. The company has revised the latest investor presentation to assert its shares have a “significant floor valuation” based on the Albany Graphite Deposit.
The last time we saw a public company make such a bold claim regarding its stock was Mountain Valley MD (OTCQX:MVMDF) whose CEO called it the “most undervalued stock on the planet” (MVMD is trading 95% lower since publication of our report). While promotional, the comment could be excused as typical management puffery.
However, Zentek claiming that its graphite deposit, which it has owned for over a decade and from which it has produced no revenue, is not only promotional, but it also contradicts its financial statements. In December 2021, the Ontario Securities Commission forced Zentek to write-off the deposit from its balance sheet – from $26m to $0.
Zentek has filed an annual statement and two quarterly reports since then – all appropriately record no value for the deposit because its recoverable value is negligible.
Since the write-off in December, the only development related to the graphite deposit occurred in April. Zentek announced the hiring of a brokerage to “review strategic alternatives” for the deposit. There have been no official updates since.
Over email we asked Zentek to explain why it’s asserting the deposit provides a significant floor value for its stock when it’s not recorded as an asset. Management responded:
The graphite deposit still has similar economic value today as it did before the accounting change. The write down was a bookkeeping entry required by the regulator given our change of business. The Albany deposit is still a long-term strategic asset of the company, with the same intrinsic value. We can’t provide an estimate of what the market value might be in today’s market.
While we agree that the deposit still has the same economic value as before the write-off, we believe that value is near $0. The argument that Canadian regulators would require a company to completely write-off an asset with “significant” value simply because of a change in business classification is unconvincing in our view. Recall Zentek had to reprice its November 2021 offering lower after the write-off.
Flurry of Inconsequential Press Releases
We think Zentek’s other announcements have mostly been impotent reporting of what for most other companies is day to day business: hiring a clinical research organization, hiring a US-based consultancy, and filing patent applications for early developmental stage products in unattractive markets with little unmet need.
Early-Stage Patent Filings in Research Projects
Zentek announced provisional patent applications for graphene-wrapped silicon anodes, a fire-retardant additive, and an anti-inflammatory agent. All are early-stage filings for early-stage research projects years away from being practically contemplated as commercial products in our view. Moreover, research in these areas has been ongoing for years – for instance First Graphene (OTCQB:FGPHF) had developed a graphene-based fire retardant by 2017:
Zentek also announced the publishing of a patent application for a ZenGUARD-based topical to treat infections, perhaps unaware of the pitfalls of antibiotic development in a market full of effective generics (note in October 2021, Fenton said Zentek “hoped” the treatment would be in human trials in early 2022) [18:15], and the filing of an application for producing ZenGUARD ink at industrial scale, which even if granted we think is likely of little value considering demand.
Icephobic Coating: Nowhere Near Commercialization, Competitor Products Already on Market
In 2021 Zentek announced the development of an icephobic coating for which partnership opportunities were being explored. In March 2022 the company provided an update on testing results while Fenton said, “We’re very, very confident we should be able to get something into the market later this year” [5:00].
In September Zentek issued a press release providing minor updates to testing results previously shared, noting that preparations were being made for real-world testing this winter, which would mean commercialization would in all likelihood not occur this year.
Considering management’s history of misjudging commercial opportunities and timelines, we don’t believe Zentek will be commercializing an icephobic compound in 2023, let alone by the end of this year. Investors should also bear in mind that effective products are currently on market:
Disease Detection Device: More Missed Timelines
In June, Zentek press released the hiring of a consultancy to help explore development of its aptamer-based disease detection platform. Further in the announcement, Zentek noted its device for detecting COVID in wastewater would not be moving to phase 2 with the ISC. Although Zentek has not disclosed the reasoning, we believe the concept failed phase 1.
The month prior Zentek announced McMaster University, from whom it licenses the disease detection technology, received $1m in grants from the National Science and Engineering Council (NSERC) to help further the technology’s development. Note that McMaster’s project was one of 680 to receive NSERC grants totaling $187m for the 2021 competition year, hardly an exclusive group.
The funding will be disbursed over two years, indicating commercialization is at best several years away in our view. Yet management again severely misjudged timelines: last summer Fenton said the aptamer-based test for covid would be on the market by that fall [4:10], and in October 2021 he said the test would be commercialized in early 2022 [14:20].
Fenton predicted the testing device would be expanded to detect “almost any disease” including viruses, bacteria, sexually transmitted diseases, tuberculosis, HIV, and cancer. We expect Zentek will never successfully develop and commercialize a detection device for covid or any other disease.
We recommend investors exit long positions and/or initiate short exposure. We have high conviction that Zentek stock is overvalued and would recommend risk tolerant investors hold short exposure via stock (Zentek does not have listed options) The borrow rate on Interactive Brokers was recently 33% for shares traded on the TSXV. Risks to the upside include better than expected face mask sales and positive developments with ZEN’s developmental stage efforts.