Valence Technology, Inc.: A Decade of Expectations
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Background
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In the dynamic world of portable electronics the demand for better energy
storage devices has been increasing dramatically. Nickel Cadmium (NiCd) and
Nickel Metal Hydride (NiMH) battery technologies are struggling to meet
consumer demands for longer running time and lower weight. Lithium based
battery technologies offer the promise of increased energy storage with
small volume batteries. There are three lithium based options: Lithium
Metal, Lithium Ion and Lithium Polymer. Lithium Metal was the original
configuration first launched in the 1980?s and suffered from some early
safety issues. Lithium Ion can be found in cylindrical cells and prismatic
(rectangular) shapes and uses a liquid electrolyte. Lithium Polymer uses a
solid polymer as an electrolyte and can be constructed in flexible prismatic
flat shapes. The portable electronics industry is investing heavily in
evaluating a number of lithium based battery options. Valence Technology,
Inc. (NASDAQ: VLNC), located in Henderson, Nevada, has developed a lithium
rechargeable battery that incorporates various facets of lithium Ion and
polymer technologies.
The Technology
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Lithium is an element that has always held the interest of battery
developers. It has an electrical potential of 3.8 to 4.0 volts and exhibits
excellent energy density on both a gravemetric and volumetric basis.
Development of lithium based batteries was recorded in 1912, but
commercially viable products were not available in the form of primary
(non-rechargeable) batteries until the early 1970?s. Early attempts at
secondary (rechargeable) lithium batteries in the 1980?s met with failure
because of safety problems. Considerable research was conducted since the
1980?s culminating in a number of lithium based commercial products.
The lithium technology developed by Valence is considered a ?hybrid?
approach. It uses internally developed proprietary technology, coupled with
licensed technology from Bellcore, to create what it believes is a unique
approach. The Valence technology uses no metallic lithium, but employs a
design that moves lithium ion from an anode to a cathode on discharge and
from the cathode to the anode on charge. In the industry this is referred
to as a ?rocking chair battery?, because the lithium ions are shuttled back
and forth between the anode and the cathode. It is classified as a lithium
ion battery because the lithium is always in an ionic state rather than
metallic.
The resultant Valence batteries are relatively thin and flexible. Valence
reports, once the basic technology is perfected the Valence lithium
batteries can be ?molded? to fit specific product requirements. It is not
clear from the available testing that Valence enjoys a significant advantage
over other companies that are manufacturing lithium polymer battery
products. Valence has invested heavily in intellectual protection of its
technology with 180 related patents granted and an additional 48 pending.
The Company
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Founded in 1989, Valence Technology, Inc., sought to develop and
commercialize some research and development started by Mead Corporation of
Dayton, Ohio. Mead, a major supplier of paper products, had developed some
thin film technology applicable to batteries. Valence was able to obtain
the rights to this technology and developed an aggressive plan to develop a
range of rechargeable lithium batteries.
In 1991 Valence entered into a research and development agreement with the
Delphi Automotive Systems Division (known at that time as Delco-Remy) of the
General Motors Corporation. The initial contract was for a multi-year
effort scoped at $20M. Delphi was seeking advanced battery technology for
vehicle and load leveling applications and was familiar with the previous
development completed by Mead.
Armed with an R&D commitment from GM, and support from the portable
electronics industry, Valence completed an initial public offering in 1992,
and was quite successful, raising more than $90M. It was considered a hot
stock by many investors based on the representations of the company
concerning its technology and potential applications. In 1993, Valence
signed an agreement with the Industrial Development Board of Northern
Ireland to locate an automated production line in Mallusk, Northern Ireland.
Early in 1994, Valence announced that there would a delay in the
commercialization process. This announcement, and subsequent press releases
on production schedules, resulted in a class action lawsuit being filed in
May 1994. The suit alleged violations of the federal securities laws
against the company and several of its present and former officers and
directors, and the underwriters of the public stock offering. Specifically,
the suit alleged the defendants issued a series of misleading statements
concerning the business and future prospects. In 1996, there were a series
of court rulings in favor of Valence and the other defendants. The
plaintiffs have appealed and the case is still pending.
In June 1995, Valence obtained a license from Bellcore for its plastic
lithium battery technology. The goal was to incorporate the Bellcore
technology with the proprietary Valence technology to produce a more
competitive product. The Bellcore license was non-exclusive, at last count
more that 12 other licenses have been granted. Bellcore received a minority
equity position in Valence as well as a cash payment.
Valence has also entered into a number of joint ventures with companies in
various global markets. They include the formation of a Caymans Island
subsidiary; Valtron Technologies (with Goldtron Ltd., a Singapore based
firm); Alliant/Valence L.L.P (with Alliant Techsystems, Inc., of Horsham,
Pennsylvania); Hanil Valence Co., Ltd. (with Hanil Telcom Co., Ltd., a
Korean manufacturer); and a joint development and license agreement with
Eveready Battery Company. These agreements were designed to add
manufacturing partners, open new markets or cross license technology.
The original research and development contract with Delphi was extended in
1994 with an additional $900K added to the contract. In 1994 a new
agreement was signed between Delphi and Valence which resulted in an
additional $1.85M of R&D funding for Valence. Over the course of 1991 to
1998, Delphi invested nearly $23M in Valence. On May 15, 1998, Valence and
Delphi issued a joint press release stating that they had successfully
completed their technology development effort and would separately develop
applications for different markets. One could read from this announcement
that the venture was successful ð or that Delphi had finally decided not to
invest any further in Valence.
The history of Valence has been marked with missed schedules and production
delays. When the company was chartered, indications were that the
technology was relatively mature and emphasis would be on perfecting the
manufacturing techniques to quickly bring the product to market. Valence
even entered into an agreement with the Industrial Development Board of
Northern Ireland to set up a volume manufacturing facility in 1993.
Multiple sites were identified and plans were developed to hire a
significant technical staff. These locations remain at a very low level of
activity, with very limited staff until 1998.
It appears that even if Valence is successful in starting commercial
production in the last quarter of 1998, it will have been a decade from when
the company was formed.
People in ð People Out
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Successful companies require four balanced elements: a viable technology; a
timely market demand for the product; sufficient capital and people.
Missing any one of these elements will result in failure. With the R&D
contract from GM Delphi, and its very successful IPO, Valence had the cash
to attract a very talented staff. The latest report from the company
indicated a staff of 95 with 10 PhDs. There have been some disquieting
departures over the last year.
When Valence was founded in 1989, the first President was Lev Dawson. He
remained in that position until 1991, when he stepped down in favor of Cal
Reed. Mr. Reed served as President, Chief Executive Officer and Chairman of
the Board from 1991 until the end of 1997. In December 1997, Cal Reed
announced his resignation. Lev Dawson, who assumed all three positions,
replaced him, effective December 4, 1997. What followed could be termed a
rapid exodus of senior staff members.
After the departure of Cal Reed, the next to leave was William Masuda,
Executive Vice President, Worldwide Operations, in January 1998. Several
Valence press releases and securities documents identified Mr. Masuda as
having direct responsibility for setting up the production facilities in
Northern Ireland. "Personal Reasons" were sited for Masuda?s departure and
no replacement was named.
The next to go was Bradley Perkins who was listed as a Vice President and
General Counsel. He departed Valence on January 16,1998, and there does not
appear to be a press release with reasons for his departure or any
announcement of a replacement.
Finally, in June 1998, Dr. Tibor Kalonki-Kis, Chief Technical Officer
announced his departure, citing "Personal Reasons." Dr. Kalonki-Kis was
hired in February 1997, coming to Valence from Gould Electronics and had
more than 20 years of battery experience. In the press release announcing
his hiring, it was state that Dr. Kalonki-Kis would "take charge of all
research and development activities associated the Valence?s
commercialization program as well as direct all future R&D programs in
support of Valence?s efforts to continuously improve its products." In the
announcement of Dr. Kalnoki-Kis?s departure, it was stated that Lev Dawson
would assume responsibility for Product Development, again no replacement
for a senior staff member.
Counting Cal Reed, Valence experienced the departure of four senior staff
members at a very critical phase of initial product certification with key
customers and the establishment of the initial high volume production line
in Northern Ireland.
Status
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Valence appears to have committed to commercial production. They have
consolidated equipment and staff at their Henderson, Nevada, facility to
turn out a small volume of pre-production batteries that have been shipped
to a number of customers for testing. Volume production is to be carried
out in their Mallusk, Northern Ireland, facility. The initial volume
production line is reported to have capacity of 1.2 million batteries per
year, with additional lines being planned. According to company releases,
all of the volume production will be carried out in Northern Ireland.
Valence appears to be targeting the laptop computer market for its initial
product.
>From a competitive perspective, Valence has some formidable opponents for
the emerging market, some with very deep pockets. Ultralife Batteries, Inc.
is in production and shipping commercial lithium polymer batteries. W. R.
Grace & Co., is involved in a commercial lithium development project as are
Ray O Vac and several Japanese battery companies. Moltech Corporation, a
Canadian company with more than a decade of commercial lithium production
has recently announced a lithium polymer product. Lurking in the background
is 3M Corporation. With a history of successful commercialization efforts,
3M has received significant R&D funding from the US Advanced Battery
Consortium and is reported to be having significant success in testing a
lithium polymer battery. The field is moving fast with a couple of
competitors already in the market.
The key challenge facing Valence at this point in time is achieving positive
test results from potential customers and converting those results into hard
orders. From the filed security documents it appears Valence has spent
$125+ million over the past ten years to perfect the technology and
manufacturing processes. Recent filings indicate that Valence has obtained
additional investments (reported at $15M) and credit lines that would
sustain operations for another two to three quarters at the present spend
rate. The question remains: is this sufficient resource to carry Valence
through early production, product certification and significant customer
orders? A production delay or an extended customer certification process
could seriously deplete current reserves.
Outlook
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It appears that the fate of Valence Technology and its investors rest solely
on the shoulders of Lev Dawson. He has taken personal control of the
company and presided over the departure of several key members of the
technical and operations staff. At this time there have been no
announcements that these key people were replaced. Instead, Mr. Dawson has
assumed a number of this vacated positions and is directing all phases of
the company?s operations. This includes the initial product for customer
testing and certification from the Henderson, Nevada, facility and the
initial high volume production line in Northern Ireland. |
