Abakan (OTCQB:ABKI) is a public venture company that is trying to enter the metal cladding business, initially for oil pipelines. In the venture world, pre-revenue start-ups that are able to get funding carry a low-profile to protect their technology. They are initially funded at pre-money valuations of $5M, with reasonably valued follow-on rounds if milestones are achieved. Most importantly, they concentrate their resources on commercialization. Nanosteel (see here) serves as an example of a commercially-focused, venture-backed company in the metal cladding and coatings field. In the OTCBB public venture world, entrepreneurs instead solicit retail stock market investors to fund their start-up. This creates problems. First, entrepreneurs still need initial support to get started, including a reverse takeover into an existing public shell company, and an initial promotional program to market this start-up to investors. The money and time required for reporting, fundraising, and stock promotional support, drains the resources of a small public venture company. These activities distract management from commercialization.
Second, there is a timing mismatch between the several years required for this public venture company to become a sustainable, profitable concern, and the quarterly expectations of investors. The OTCBB and Pink Sheet companies that survive the longest are the ones that have the largest stock promotion budgets, creating an aura of a very attractive company, which unfortunately, misleads retail investors into overpaying for their shares. Abakan epitomizes this kind of OTCBB public venture company.
I would like to give management and their supporters an "A" for effort. Hiring Jeff Kraws, a biotech analyst that I used to collaborate with at H&Q, to promote ABKI shares was a step in the right direction. Jeff's 76-page report was quite thorough, despite the absence of financial projections, a recommendation, and key competitors.
Please note that this article is an update. Readers should review our more extensive Abakan articles (see here and here) from June 2012, which gives a less promotional picture of the company and its management. Since our June article, nothing much has changed in terms of actual results. Commercial revenues for the quarter ended August 2012 was a paltry $19k. Net loss was -$1.4M. These figures were slightly worse than previous quarterly commercial revenues and losses. In terms of real news, the most significant piece was that the company obtained a collateralized $1M loan from the state of Ohio. The company intends to use that loan to help build a long-awaited production facility in Euclid, Ohio.
The above-mentioned loan was important because it temporarily staved-off a financial shutdown of the company. But this $1M loan plus $0.6M in recent equity private placements will be burned away by the end of the current fiscal quarter. It is impossible for Abakan to build, stock and run the Ohio production facility in the first-half of 2013 as claimed by management, with a quarterly operating burn rate of at least $1M (including this year's $150k salary increase for CEO, Robert Miller), and $4M in just capital costs to build one production line. In the meantime, the company continues to default on interest payments to creditors, which has increased to an accrual of $221k as of August 2012.
ABKI shares were at $2.30 in June when the previous Seeking Alpha articles were published. The stock swooned below $2 in August and September probably due to insolvency fears. ABKI has bounced back to $2.80 currently, mainly due to obtaining the Ohio state loan and the initiation of a heavy stock promotion program. Management's recent slide presentation to potential investors had such exaggerated claims in terms of market potential and revenues (skyrocketing from nothing to just under $1B in 4½ years), that it smacked of desperation. But how else can management justify a fully-diluted market cap of $207M with virtually no commercial product revenues after several years of trying, a LTM net loss of -$3.2M, and net debt of over $3M that it cannot afford to pay back.
Zero percent of $1 is the same as zero percent of $32B. If after five years with current management, Abakan has not generated visible commercial product revenues with its technology and supposedly enormous market opportunity, it is very hard to believe that the next quarter, year, or five years will be much different. In sum, Abakan is a glaring fundamental short, that has been overpromoted to investors, and is reaching the end of its financial life line.