More information and answers to your questions.
>1. You explained the basis for your estimate of 80-90% probability of mass production by September is personal experience in start up manufacturing processes together with comments from Dawson. Anecdotal evidence can be instructive and useful but in this case there are two issues that mitigate greater reliance on anecdotal testimony. First, the balance sheet as it concerns cash flow and working capital. Assuming your instinct is right about mass production in September, it simply doesn't follow that the CFO and CEO would allow short term liabilities to exceed liquid assets unless they had no choice. But the implications of having no choice are wholly inconsistent with high probability of mass production in September. Especially if one considers your opinion w/r/t supposed line capacity and productivity. Second, because Dawson and the company have made comments before and (giving them the benefit of the doubt for sake of argument) been wrong, one of the pillars for your probability estimate - Dawson's comments - must be considered suspect. That by the way, must be a big reason - along with liquidity problems - why the stock price is as low as it is. The street considers the pillar suspect as well, as noted by Dawson himself. The point is that there is good reason for it.
My response: Mark, is there a difference between management reporting historical events, and making forward looking statements? In the past, its the forward looking statements that have been off target. Management said that they expected mass production start-up in the first quarter of calendar 1998, and missed that target. This is a forward looking statement, based on their plans, but subject to all kinds of events that could result in the future not turning out in the way they predict.
Lev made some forward looking statements in the conference call, that may not pan out. I've already admitted that I believe there is a 80-90% chance that they will be mass producing in NI by the end of September. I'm not using 100%, because this is a forward looking statement, and could be wrong.
I based my probability partly on statements in the call where Lev said every piece of equipment for the line in NI has been run satisfactorily at production rates, but not all at the same time in continuous operation yet. I am assuming this to be true, because it is historical information; to say it without it being true, would be illegal. To me, this is a significant statement. It means that all of the unit operations have been debugged, and now the major task is to get all the units to operate in a coordinated continuous manner. In my experience, most manufacturing managers, can more accurately forecast the eventual mass production start-up, once all the units have been debugged and run at production rates.
I will agree, that the Street is discounting Lev's forward looking statements at this time in a huge way.
>2. You admitted that your capacity estimates stem in part from other internet posts and in part from extrapolating information concerning ULBI. Fair enough. For a speculative company with VLNC's history in a highly competitive industry, the derivation of capacity numbers is too fragile for me to accept for the reasons I've stated in prior posts. It is a point on which reasonable people can differ.
My response: The capacity numbers for 3-4 lines is greatly in excess of my own projected run rate of 3M notebook batteries a year by the end of 1999. Some of these production capacity numbers were discussed in conference calls last year. Even if we reduce the capacity discussed here by half, the capacity is still more than sufficient to produce 3M lapotop batteries a year. I really believe that market acceptance and ramp-up will be the limiting factor for the next two years, not capacity. (Although we have the statement by Gateway representative in a recent news article, that implies that limited supply capacity is restraining their plans to use the batteries.) I know Fred continues to use 4.5-5.0 M notebook batteries per year as an average run rate for next year, whereas I feel 3M is a suitable run rate for the end of calendar 1999. And I think the ramp could be even slower, because I am unsure of the actual market for spare and replacement batteries. If we ran a worst case of 1.5M notebook batteries per year (consistent of annual revenues run rate of $112M), then the capacities listed here are about 5 times this run rate. We know that Valence has provided sample batteries to over a dozen OEMs for testing and design purposes, and that the OEMs had not yet recieved all the samples they had requested by the June 30 conference call. Incidentally, Henderson is probably producing batteries at a rate of 300-500 per day based on the info released in the conference calls.
Bottom line is that if Valence can actually make spec batteries, the production capacity they have will easily support the production rate of 3M laptop batteries per year.
>3. Your estimates are based on laptop battery prices. What is the current wholesale price in the laptop battery market. Are you using the wholesale price or retail price?
My Response: Wow, Mark I can't believe you haven't priced the batteries this company is planning to produce. Here's some information on Li-ion batteries being sold at Fry's here in the Silicon Valley as an examples of retail pricing.
Fry's is selling Li-ion batteries for Compaq Presario 1000 series notebook computers for $250 retail. These are Nesco batteries (off-brand name), and would sell for less than brand name batteries from Compaq themselves. They provide 14.4v with 2700mAh (equals 2.7Ah). This is four cell battery.
If you multiply the voltage by the Amp-hrs, you can get the battery capacity in watt-hours; this is a useful unit to calculate pricing. These batteries hold 38.8wh. So at retail, the price is $250 divided by 38.8wh for a price of $6.44 per watt-hour. Fred has been using about $1.65 per watt-hour for the the cells in a Li-poly battery produced by Valence. We are not only talking wholesale, we are talking manufacturer's pricing.
The Valence battery will hold at least 45wh based on the old specs for a 3 cell battery, and at least 60wh for a four cell battery. The new specs show an improvement, and Valence has been manufacturing the cells with a thickness of 6mm versus 4mm, so we are looking at probably 60wh for a 3 cell battery and 80wh for a 4 cell. These batteries will provide more capacity than existing Li-ion batteries, but I believe the additional capacity won't have the same pricing per watt-hour as the base capacity. The 80wh battery will have more than twice the capacity as the 38.8wh Li-ion battery I just quoted.
My pricing of $75 assumed a 45wh battery at $1.65 per watt-hour.
>4. Regarding stock research on a company in R&D and no earnings, the investigative research you describe is valuable. My observation in this case thoguh Paul is that it seems its caused a tendency to get mired in detail and gloss over some more obvious and fundamenatl issues. All of the steps you cite have to contribute to a more complete picture. That is indisputable. The problem is the financing issue, specifically what I allude to above in point 1, seems to have
been lost in your analysis.
My response: I do not agree that studying the market, unit pricing, analyst forecasts for possible competitors, etc are details. From your posts, you only seem to quote the 10K, and don't seem to have addressed the key questions I discussed in my posts #3333 and 3336, with the exception of financing.
In my post #3242 I project 5M shares as a conservative case dilution impact, based on the kind of preferred share issuance Lev implied in his last conference call. I have no reason to change this estimate. This is 20% dilution.
I think your dilution numbers posted on Yahoo are way too high. You ignored the payment from Delphi, ignore any payments from NI gov, assumed a 2.0 quick ratio instead of a more normal 1.5 for a company like this, and thus came up with capital requirements much higher than the $30M I think they will seek. And I think there is a substantial probability that they will seek to raise less than $30M. You view 35% dilution as almost certain. We should see which view is right within the next 3 weeks.
Paul |
