John Petersen
The greatest truth in micro-cap corporate finance is that small
companies have a lot in common with small children in third world
countries – they rarely die of starvation but they frequently die of
dysentery. In hard times, small companies that need cash can usually
find badly needed capital if their management has enough humility to
accept the price the new financiers are willing to pay. The problems
can quickly become life threatening, however, if management fails to
adjust spending to accommodate business realities or rejects available
financing because the terms seem predatory. My advice to clients has
always been “take the money when it’s available, even if you don’t like
the terms, because shareholders adjust quickly to sensible decisions
but they rarely forgive failure.”
Last December a former client Axion Power International (AXPW.OB)
found itself with a Hobson’s choice
because it needed substantial financing to pursue its development plans
and the price the new financiers were willing to pay was painfully low.
Management made the right decision and sold 45.8 million common shares
at $0.57 per share, which didn’t compare well with the prevailing
market price of $1.58 per share, but worked out to roughly 5.7x the
company’s adjusted pre-financing book value of $0.10 per share.
Earlier this week, ZBB Energy (ZBB)
filed an SEC
registration statement for an offering of up to $10 million in
common stock. Concurrently, it added going concern language to the
footnotes in its quarterly financial statements. The market’s
reaction was violent and shares that closed at $0.80 on March 31st
closed at $0.28 yesterday, or 1.27x its book value of $0.22 per share.
There’s no way to predict what ZBB’s final offering price will be, or
for that matter whether the offering will be successful in a tough
market, but given the very small spread between the current price of
ZBB’s stock and its book value per share, I tend to think the market
reaction was overblown and ZBB’s shares are attractive at current prices
in spite of the uncertainties. In any event I have to admire a
management team that’s willing to bite the bullet and take appropriate
steps to insure their company’s survival.
While Axion and ZBB each followed a rational path and got punished by
the market for a good business decision, all the companies in my “cool
emerging” category have comparable if not greater problems that seem to
be complicated in some cases by an unwillingness to bite the bullet on
financing terms or slash spending to accomodate current realities. The
following table provides summary information on the six companies in my
“cheap emerging” and “cool emerging” categories in ascending order of
unsatisfied funding needs for the balance of 2010. Comments on each
company follow the table.
Axion has enough cash and working capital to support a couple years of
operations at historic levels. Now it’s all up to the PbC battery. If
ongoing
testing by first-tier European and American automakers leads to
significant purchase orders, Axion
will be able to begin plant expansion with existing capital and, if
necessary, go back to the market with a proven value proposition
and a solid book of business. If it encounters delays or
disappointments, there
will be enough cash to weather the storm for a couple of years and
solve the problems
without going to the market in a position of weakness. Either way the
stockholders win because there is no reasonable prospect of dilutive
financing for the foreseeable future. Cash is a great
thing and I’m delighted that management made the right decision
even if the market reacted badly.
Altair Nanotechnologies (ALTI)
has a reasonable market capitalization ratio of roughly 2x book value
and modest capital spending plans for this year that will be contingent
on increases in customer demand for its products. Altair believes its
working capital together with revenue from product sales will be
sufficient to support its operations for approximately six
months. Consequently, Altair will seek stockholder authorization
for a reverse split at its annual meeting next week and plans to raise
an undisclosed amount of new capital during 2010. There’s no way to
predict what the terms of a future Altair offering will be, or
for that matter whether the offering will be successful in a tough
market, but given the reasonable spread between the current price of
Altair’s stock and its book value per share, I tend to think Altair’s
shares are attractive at current prices in spite of the
uncertainties. Altair’s planned financing and reverse split may prove
to be unpopular with some stockholders, but they seem likely to insure
the company’s survival and that’s ultimately the only thing that
matters.
Beacon Power (BCON)
has a reasonable market capitalization ratio of roughly 1.8x tangible
book value and more rigid capital spending plans that represent its
share of PP&E spending that is not provided by DOE loan
facilities. Beacon believes it will need to raise $18 – $20
million in 2010 to continue the orderly implementation of its business
plan and will seek stockholder authorization for a reverse
split at its annual meeting in July. There’s no way to predict what the
terms of a future Beacon offering
will be, or
for that matter whether the offering will be successful in a tough
market, but given the very small spread between the current price of
Beacon’s stock and its book value per share, I tend to think Beacon’s
shares are attractive at current prices in spite of the
uncertainties. Beacon’s planned financing and reverse split may prove
to be unpopular with some
stockholders, but they seem likely to insure the company’s survival and
that’s ultimately the only thing that matters.
Valence Technology (VLNC)
has always baffled me because I can’t understand how a company that’s
under water to the tune of $75 million maintains a $120 million market
capitalization. As near as I can tell Valence owes its survival to
loans from a principal stockholder and occasional open market sales of
its common stock. In a case like Valence, all I can do is paraphrase
the late Billy Holliday, “papa may have, and mama may have, but god
bless the company that got its own.”
Ener1 (HEV)
has consistently carried a market capitalization that’s way out of line
with its tangible book value. It also has a very high burn rate and
aggressive capital spending plans that will require huge amounts of new
financing in the immediate future. Ener1′s most pressing problem is a
$15 million note to Credit Suisse that matures in late June, but its
capital spending plans are critical to an ARRA battery manufacturing
grant the DOE awarded in August of last year. Ener1 plans to finance
its operations and capital spending from open market stock sales and
other sources. While Ener1 believes it has access to sufficient capital
to continue its planned operations, I’m left with the nagging question
“at what price?” In connection with its IPO, A123 Systems (AONE)
sold stock for 5.75x its pre-offering tangible book value before.
Unless Ener1 can convince investors that it’s a better company than
A123, I have a hard time imagining a substantial equity offering priced
above $1.50 to $2.00 per share.
As a younger man I spent some time in the oil business and learned you
don’t start drilling a well without enough cash to reach your target
depth, complete a successful well, build pipeline and storage
facilities and provide for reasonably anticipated contingencies. That’s
a tall order in corporate finance where the cost of reaching the next
milestone is very uncertain. A123 raised enough cash in its IPO to
build a U.S. plant and begin production. As painful as its December
financing was, Axion’s in the same position. All of the other emerging
companies on my tracking lists will have to endure some pain over the
next few months, but those that make solid decisions will emerge
stronger for it. Those that don’t will fail.
Disclosure: Author is a former
director of Axion Power International (AXPW.OB)
and holds a substantial long position in its stock.