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History Repeats at Altair
By Seth Jayson (TMF Bent)
May 31, 2005
Enter Altair
Let me begin by admitting that, in some ways, I hesitate to write this article. It focuses on a very small company, Altair Nanotechnologies (Nasdaq: ALTI), which carries a market cap of only $165 million. But the flashy nano-name along with Altair's prodigious PR department have combined to make the loss-generating Nevada concern one of the most volatile issues around, able to swing 100% or more in a single day. When that happens -- and individual investors lose their shirts on the inevitable letdown -- well, stuff needs to be said.
To be clear, we've said "stuff" before. My opinion of the company has long been that its primary product is hype, and that investors should stay away. Insiders own very few shares, meaning they're asking those of us in the capital markets to fund their dreams alone. That's not a vote of confidence.
Our Rule Breakers nano team has had a very similar opinion -- and these guys not only know more about the sector than I do, but they're also a lot less crusty than I am. If they don't like Altair, that really tells me something.
The recent past
Altair is clearly trying to shed its reputation as a "colorful," as CEO Alan Gotcher put it, company. I'm not sure it's doing such a great job of that. Altair made news most recently when it put out a press release that looked, to me and many others, like a mere rehash of battery claims it has been making for years. The stock jumped more than 100% over the next couple of days. Altair benefited from this jackpot when it secured a private placement deal, putting cash on the balance sheet, but watering down current shareholders' take of any eventual profits and sending the pretty obvious message that prices around $4 a stub were about as good as it could get. Investors have seen the shares drop substantially since then.
This week, the drama came when the firm released a Securities and Exchange Commission filing containing a letter from Altair's ex-President Rudi Moerck. Among the letter's many interesting claims are allegations of excessive hype, misleading information regarding a key partner, staged photographs, and other unseemly behavior. Altair claims this is just the work of a disgruntled man, but I don't think truth and disgruntlement are always mutually exclusive.
Enter the suits
After our previous two articles, the folks at Altair decided it would be good to talk with us. Let me be up front. I've usually got a dim opinion of managers who waste time trying to sweet-talk me. Frankly, they ought to have better things to do, like make money for shareholders. And frankly, if they'd just put up some real results, I'd gladly give them the credit they would deserve.
So, while I appreciate CEO Alan Gotcher's time in presenting James Early and me with the standard "Altair is poised for growth" PowerPoint show and answering some tough questions, my opinion has not changed. In fact, I might be even more pessimistic now.
Fun with numbers
By the numbers, Altair's business is a continual money loser. The hope of management, and anyone who invests in Altair today, is that the numbers in the future will be a lot better, maybe even positive. I have big doubts about that, but even if it's true, it's very difficult to get any idea of what those numbers might look like, especially if you listen to management.
In the realm of its nano-battery material, concrete figures are difficult to come by. The press releases toss out figures in the billions as "total markets," without venturing to speculate how much, if any, of that market could become Altair's, and at what kind of margin. While telling us about Altair's phosphate-control product for recreational waters, Gotcher could get no more specific than telling us there are 7 million pools in the United States with owners who might want to use this.
In discussing RenaZorb, Altair's joint project with Spectrum Pharmaceuticals (Nasdaq: SPPI), which it says would be a competitor to Genzyme's (Nasdaq: GENZ) Renagel, Gotcher bandies about the sum of $100 million as a revenue target for the deal. That alone is an irresponsible guess, in my opinion, given the boatload of unknown variables, including Genzyme's leading position, the undisclosed nature of Altair's fee structure with Spectrum, and the important fact that we're talking about a pre-clinical project here.
Gotcher's math only got more confusing when he tried to explain the potential size of this market. Currently, he said, the market for Renagel is $350 million a year. In trying to give us his idea of the upcoming market, he began offering potential patient tallies that quickly ran into the millions. And that's at $4,800 per patient, per year, he added. The trouble is, dividing the current annual revenues for Renagel by his stated per-patient cost ($350 million/$4,800) to find the current tally of Renagel users yields a result nowhere near the millions. When I asked Gotcher to help me with the calculation, he said it's somewhere around 700,000. (It's actually 73,000, folks.)
I'm not an expert in this field, and the real figures of the potential market -- closer to 304,000 patients using some kind of phosphate-control therapy in the U.S., according to Genzyme's 10-K -- are of secondary importance here. What worries me is this: The CEO doesn't have the numbers straight. I find that very odd, given that he called us to make this pitch. If he's presenting us with confusing data here, what else are we supposed to believe, and when?
China Syndrome
The biggest problem I have with Altair -- the reliance on vague PR-- was not alleviated by our call. Dr. Gotcher and his team go to the well a bit too often to ladle out servings of "China and India." For instance, Gotcher describes Altair's new titanium-dioxide pigment-making technology as cost-effective and environmentally friendly. It's not targeted at the U.S. or Europe. Nope, the company is looking at new plants in China and India. If this is such a revolution, shouldn't U.S.-based companies like DuPont (NYSE: DD) or Lyondell Chemicals (NYSE: LYO) be all over it? The answer seems to be that Altair doesn't have the only nano-answer. DuPont -- the world leader in TiO2 production -- has already got its own nanoscale solutions, and it recently announced plans to build its own plants in China.
And how about that nano-battery technology? As far as I can tell, in the past, the promised partners who failed to materialize were unnamed Japanese. Today, the Altair team tells you the battery makers of the future are in China, and that management is working hard with several big or major companies to use its materials. There are two problems with this contention. First, the promise of multiple relationships with Chinese battery manufacturers is incompatible with Altair's description of its current partner relationship as "mutually exclusive." Next, Altair's current Chinese battery partner looks like a very small player, with even smaller prospects.
The big battery deal
Let's start with the obvious: The technology is real. But since electronics giant Toshiba has announced it will be coming to market with a range of nano-lithium rechargeables, Altair investors can draw two conclusions. Either Altair is not the only player in this market, as some investors might think, or Toshiba is working with Altair on the sly. I bet we can safely discount the second hypothesis for now.
In fact, there are other sources for nano battery material, as Altair admits. The question then becomes, "Does Altair's technology possess anything at all that makes it preferable to other battery makers out there?" The evidence suggests to me that the answer is "No." Exhibit A is Advanced Battery Technologies (OTC BB: ABAT), Altair's much-discussed Chinese battery partner.
The company you keep
I'm a firm believer that you can judge companies by the history of managers and board directors, along with the partner businesses with which they do business. In companies that promise to pay you Tuesday for that hamburger today, this kind of detective work is absolutely vital.
To follow up on Altair's Chinese battery prospects is to tumble down the rabbit hole with Alice, Neo, and a whole bottle of Morpheus' blues and reds. I'm going to take you with me down the hole, because you can learn a lot about Altair and its prospects by looking at the partners on which its fortune depends.
Advanced Battery -- I'm going to call it AB -- is a penny-stock firm with a three-tiered ownership structure. The real meat is a 70% stake in a Chinese battery maker, filtered through a Virgin Islands company called Cashtech. AB is the type of player that spices up its press releases with gems such as this: "The Company operates in the highest growth sector of the battery industry." AB puts its hopes for the future in -- get this -- electric cars. Its major contract, which looks like the one that had our Rule Breakers nano-team scratching its head, is with a Taiwanese outfit that's trying to market a car. The selling point is that it can be taken inside buildings, into the elevator, to be parked on the roof.
According to Gotcher, the AB team called shortly after the Feb. 10 Altair press release stimulated a 100% increase in Altair's market cap. AB asked for some number of kilos of the material for testing purposes, it appears, according to Gotcher's description of events. After news of this agreement was released, AB saw its stock shoot up almost 300%. I suspect that this kind of market action was very gratifying for the folks at AB and Altair, because AB needs capital.
I'm not kidding. The company says, on page 9 of its latest 10-Q, "We lack sufficient capital to fully carry out our business plan." (Let's give it an A for honesty, at least.)
In that same filing, it discloses that it has a $2.4 million deficit of working capital. But, it says, "Despite its negative working capital, ZQ Power-Tech [the Chinese manufacturing subsidiary] has sufficient liquidity to fund its near-term operations. The principal capital resource available is $12,202,008 in property, plant and equipment, construction in process, and real property rights...."
Call me picky, but I don't think the factory you're trying to run should count as a "liquid" source of capital.
In the United States, AB is working with a small company called ZAP (OTC BB: ZAPZ), another microscopic-sized billboard company with a slew of related-party transactions (consulting fees to cousins, renting property from the CEO, etc.) and a knack for losing money year after year. ZAP's notable accomplishment of late was giving observers a great laugh this week, when it -- with $4.6 million on the balance sheets -- attempted to generate a buzz by emailing Reuters a copy of what it describes as a $1 billion Smart Car purchase order it sent to DaimlerChrysler (NYSE: DCX)-- though it admits it has no official relationship with the manufacturer or the exclusive, official U.S. distributor, smartUSA.
The board
Don't even get me started on the proxy statement. Some of the board members have impressive-looking credentials, but the past and current affiliations of others (game companies, casinos, '90s startup tech firms, pink-sheet Canadian gold miners and energy penny stocks) give me grave suspicions. Frankly, when I read stuff like this, my instincts are to either run, or short like crazy.
The Foolish bottom line
Folks, I would love to believe that Altair's technologies were going to be successful. I love the promise that nanotechnology holds to change the world. But liking a technology and investing money in it are two entirely separate things. Unfortunately, Altair has proved for years that its primary products are stock and press releases. And as desperately as it would like to turn the page, it doesn't look like much has changed. There will be plenty of time to invest in Altair if or when it actually writes some sustainable, revenue-producing deals. Until then, watch your wallet.
For related Foolishness:
* I still say Altair is all air.
* Altair's nano-battery announcement: truth-challenged?
* What's the sound of music for Altair?
* Buying the pennies can be exciting.
If you're looking for a nano-play with real potential, take a free trial of Motley Fool Rule Breakers and see what our dedicated nano-team has to say.
Seth Jayson thinks good management should ignore the press and make a load of money for shareholders. At the time of publication, he had positions in no firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.
