Question Marks at Valence Technology

“Trust, but verify.” – Ronald Reagan

Here is a short and sweet story that has been infesting Wall Street for over 15 years. Valence Technology (VLNC) is one of those “developmentally challenged” companies that never seems to get out of development stage. For 15 years, they’ve claimed to have a lithium battery that is promised to have uses from computers to aircraft to scooters to automobiles. Certainly, there has been a battery of press releases over the past 4 years …. But no meaningful business ever comes to fruition.

With the recent recharge in the stock, Citron thought we would offer investors our perspective.

Some things are better left non-editorialized. The finances at Valence Technology are enough for a report themselves. There is nothing more damaging that Citron can write than what we read in the company’s own filings:

• Market Cap — $500 million +
• Cash — $2.8 million
• Long Term Debt — $74 million
• Last Qtr revenue — $3.378 million
• Loss for Qtr — $5.7 million
• Accumulated Deficit — $531 million
• Historical Cost of Goods – 98% to 168%

Needless to say, all of these losses have brought Valence a well-earned “going concern” from their auditor.

The scheme

Running out of cash and fast, Valence decided to solve the problem in a standard Wall Street recipe which we have seen too often:

1. Put out some murky press releases that sound better than they are.
2. Invite a brokerage firm to put a buy rec on them.
3. Turn around and give that brokerage firm the business and raise money at a higher price.

Here is the scheme broken into pieces:

Tanfield

On February 7, 2008 the same day that Valence announced extremely disappointing quarterly results, they attempted to soften the blow by putting out the misleading press release of an order by Tanfield of “up to” $70 million. Reading the supply agreement between the two to see that nowhere does it state a minimum, nor does it ever say one word to affirm that the $70 million figure has even a remote chance of being realized as real revenue that investors can rely upon.

It is the opinion of Citron that the Tanfield agreement will turn out like every other agreement held by Valence … all fluff and no substance … and no real revenue.

If one wanted to bet on the future of Tanfield, Valence is surely no way to do so. There is a company on the American Stock called Enova (ENA) that develops hybrid drive systems that it is currently selling to Tanfield. It has significantly more revenues than Valence and 4x more cash. It has nearly zero debt, and currently sports a market cap of $66 million (just so you don’t think we’re only hard-line cynics).

Oemtek

On February 19, Valence announced that it was shipping additional units to Oemtek for its Toyota Prius add-on kit.

Note: the deal is not with Toyota (TM) but rather with a small startup company which is trying to sell add-on kits for the Prius … kits, which cost almost half the price of the entire vehicle — new. But here is where it gets funky. In the press release we read that previously they have shipped Oemtek 300 modules and this is a follow-on order. According to the information on the sites below, Oemtek was initially funded by none other than Carl Berg, the chairman and largest shareholder of Valence.

• Details on CalCars' Prius+/Escape Conversion Project
• How to Get a Plug in Hybrid

What makes this so bad is threefold:

1. If Oemtek was funded by Berg, then all revenue from this transaction has been improperly recognized and should be categorized as related party transactions.
2. It was never disclosed in the press release or in any investor presentation that Berg is financially involved in Oemtek.
3. Even though the value of the transaction isn’t sufficient to benefit Valence materially, the announcement alone is misleading because it induces investors to believe that Valence was chosen for superior technology, not because of the subsidy of an investor who stands to benefit by the transaction.
4. Whether or not this was an oversight of the company or done intentionally, investors have a right to full disclosure of Mr. Berg’s involvement in the funding of Oemtek.

WM Smith

Needless to say Valence is currently raising money. The investment bank du jour happens to be the only brokerage firm who covers them WM Smith….nothing else needs to be said on this.

History Repeating

Citron finds it amazing that history is so accurately repeating itself in Valence. Below are links to stories in Forbes and Dow Jones from 1993 expressing skepticism about Valence’s promises of “$500 million revenue in 5 years.”

Broken Promises (PDF)

Forbes Part 1

Forbes Part 2

For one thing, at the time Forbes was clucking about how Valence’s unproven products were commanding a market cap of over $300 million. Today that number stands in excess of $500 million. And fifteen years ago, Valence was essentially debt-free.

So what’s different now?

Cautious investing to all.

Disclosure: Author is short Valence.

Comments

[busjockey]

How badly have you been squeezed on VLNC lately?

[busjockey]

How badly have you been squeezed lately in VLNC?

[ubernerd]

Excellent article! Good work!
Getting rid of scammers like VLNC will help clean up the hi-tech and green-tech sectors.

[Simont]

Valence is in a red hot sector and has good technology. What they lack is management worth 10c. They should fire the whole top management. Had they not gone public prematurely many years ago the VC-s would have made the changes a long time ago. With competent people running the company they might become one day worth their outrageous market cap. Anyone investing any new money in VLNC with the present management in place deserves the loss of capital he will experience.

[Evil Dragon]

This article reminds me my investment in Akamai. I accumulated the stock when it was 0.9$. And boy, how many "experts" explained that this stock isn't worth even that money. When the price reached 10$ they went mad shouting that this is a scammers etc. And the it went 30$ and 50% ( 5000% ). I sold it at 17, by the way.
So keep wining, I'll keep doing money.
Valence has good technology (award winning) that at the moment is penetrating the market. Talk to you in couple of years.

[desperatedan]

Does anyone have a view of what is a reasonable SP for Valence?

[Evil Dragon]

There's no answer on reasonable price. Price always contains some kind of expectations. From my perspective the following has to be taken into consideration:
* the number of all-electric and hybrid cars (or say vehicles) is going to increase exponentially over the next decade, because of increasing oil prices and global warming prevention stimulae
* the market of batteries emerging now and there're no so many playes in it
* Valence has very good battery technology (high capacity, longer duration, ecologically clean, thermally stable, microcontroller manageable)
* even by relatively conservative estimation, Valence is capable to grab battery market share of hundreds of millions dollars a year. Given projected margins of 20-30%, it brings us to 100-200 M$ of profit in few (may be even a couple of) years.
This means that in relatively near future it stocks' market share should reach a 2-4 B$, i.e. stock price of 30-40$.