Ann: Joint Development Agreement Signed With Bridgelux, page-2

I have been following BluGlass since the beginning of the year, primarily on the grounds of how big the size of the addressable market looks like, relative to the Company’s tiny Market Cap.

I see the possible upside as being best illustrated by the following slide (from a Feb 2019 Company presentation):

With an addressable market size that is expected to reach 40-50bnUS$ by 2024, and assuming by then:

1) A penetration rate of at least 5% for the deployment of the technology (i.e. 2.0-2.5bnUS$ in annual sales of RPCVD-based products), and

2) A royalty stream of 3%-6% of sales, in line with industry standards, upon commercialisation,

it does not seem unreasonable to envisage royalty revenues in the order of ~100mUS$ pa (or ~150mA$ pa) in five years time, in the event of success.

At that point, the Company could very reasonably be worth 5x its annual royalty revenue, or ~750mA$, which compares pretty well with its current Market Cap of just over 50mA$.

But, as for all other pre-revenue technology companies (and BluGlass is still essentially pre-revenue, save for the small contribution from its foundry services), the main risks that need to be factored in are:

a) The possibility of no commercialisation materialising within a reasonable time frame (this is a risk that should certainly not be underestimated, given that BluGlass has been listed on the ASX since 2006), and

b) The fact that the Company is currently underfunded, and will therefore need to raise more capital (possibly a lot more, relative to its current Market Cap) to get to the point of commercialisation.

To get a (conservative) sense of what sort of dilution might occur, over a five-year period, we can take the current cash burn rate of ~6mA$ pa and assume that a similar amount will need to be raised each year, for the next five years, at the current SP; this essentially assumes no incremental revenue from either BluGlass’s foundry services or the new Joint Development Agreement with Bridgelux.

Hence, 6mA$/0.130A$*5 = 231m new shares to be issued, in addition to 418m outstanding shares, for a cumulative dilution factor of 418m/(231m+418m) = 64.4%.

In other words, while a target Market Cap of ~750mA$ (in five years, in the event of success) would correspond to 1.79A$/share, relative to the current number of outstanding shares, that estimate goes down to 1.795$*64.4% = 1.155A$ per share once dilution risk is factored in.

Relative to the current SP of 0.130A$, that still looks like a pretty decent risk/reward to me (in the context of a high-risk investment proposition, to be clear); or, in probability terms, it looks like BluGlass is not currently priced for very much in the way of success.

Based on a similar reasoning, I had started accumulating a small holding (~1% of my portfolio) in BLG shares, over the past couple of months.

I am inclined to see today’s announcement of a Joint Development Agreement with Bridgelux as additional evidence that:

i) Despite previous inconclusive collaboration agreements, the RPCVD concept does still resonate with the global LED industry, potentially paving the way for commercialisation of the technology in the not-too-distant future (I also personally like the fact that Management reportedly do not want to have to strike a deal “at all costs”, even though I appreciate how frustrating that can be from a long-time shareholder’s perspective),

ii) Even in the event of failure to reach commercialisation at scale, it should still be possible to monetise some value for the existing portfolio of patents, with such “recovery value” potentially representing a meaningful portion of today’s Market Cap.

So, while I do see an investment in BluGlass at today's price as a high-risk proposition, with non-insignificant chance of permanent and substantial capital impairment, I personally do not view it as an “all-or-nothing” ticket.

Accordingly, I will be a buyer of dips in BLG for the foreseeable future (absent any negative announcements), up to a maximum portfolio size of perhaps 1.5%-2.0%, at this stage. A typical "high risk, high reward" situation, from what I can see, but with some positive catalysts starting to materialise.

IMHO & DYOR