Tom Konrad CFA
Last summer, I mentioned Balqon Corporation (BLQN.OB) as one of ten electric vehicle (EV) and hybrid vehicle stocks as part of my Best Peak Oil Investments series. At the time, I thought that Balqon’s short-haul electric trucks were a better fit for EV technology than electric cars, but that Balqon’s constant need for investor funds made the common stock a bad investment because of probable dilution. Overall, I thought the stock was worth watching, in case the funding situation changed.
At the time, Balqon was in desperate need of funds. Like many other small (and large) companies in the years following the financial crisis, Balqon had difficulty raising enough funds to execute their business plan effectively. According to the company’s third quarter filings, Balqon delivered only one EV during the first nine months of 2010, despite having a backlog of 11 (now 10) EVs under an existing contract with the City of Los Angeles for the Port of LA. Balqon was able to deliver nine EVs under the same contract in the 18 months leading up to December 2009, so working capital seems to be the most significant factor holding the company back in 2010.
On December 20, the funding picture changed. Balqon announced a $5M private placement of stock and warrants at $0.63 cents a share. That $5M is enough to eliminate the company’s working capital deficit, and allow the production of the remaining electric trucks for the Port of Los Angeles by the company’s March 31, 2011 target date, and also enable the company to begin work on the order of 10 electric yard tractors for Ford’s Michigan Assembly Plant.
This deal also brought Balqon distribution rights and a closer relationship with China-based Winston Battery Limited. Distributing Winston’s lithium-ion phosphate batteries and high voltage charging systems should not only give Balqon some valuable additional revenue, but it will probably also lower the cost of the batteries used in their EVs, which should significantly improve the economics of their vehicles.
Balqon designs and manufactures heavy-duty, short haul electric vehicles for the transportation of heavy loads at a variety of industrial and transportation facilities. Their technology includes electric drive systems and motor controllers suitable for extremely high torque applications. They’ve also developed a proprietary battery management system customized to their particular types of applications.
Balqon’s hardware and software works with existing internal vehicle communications protocols, which enables them to work with existing heavy-duty vehicle OEMs to fit their drive systems into vehicles that potential customers will already be familiar with, and allowing them to piggyback on the product development efforts of existing heavy-duty vehicle OEMs.
So far, Balqon has sold vehicles to the Port of Los Angeles (as discussed above), the Southern California Air Quality Management District, and has signed an agreement to provide them to Ford’s Michigan plant. The nature of these contracts makes it clear that, although Balqon’s EVs promise much lower operating costs and maintenance costs, their customers so far have been motivated at least in part by the non-monetary benefits of EVs. For Ford, the move helps them burnish the green image of a prominent consumer brand, while the Southern California buyers are primarily motivated by the need to meet strict air quality standards.
Heavy duty EVs make much more economic sense than electric passenger cars because the economics of EVs relative to fossil fueled vehicles improves the more frequently they are used, and the more they are charged. Further, the limited range of electric vehicles is not a significant issue for vehicles that operate in a single industrial facility or closely clustered group of facilities. Another large advantage for this sort of EV is idling reduction. Short haul trucks naturally spend a much higher proportion of their time waiting to be loaded or unloaded, during which time a fossil fuel vehicle will waste energy and incur wear idling, but an EV need not idle at all and will still be ready to move at a moment’s notice.
Perhaps the part of their business with the highest growth potential (due to relatively low working capital requirements) is providing their drive systems to other manufacturers of heavy duty electric and hybrid electric vehicles. Because of my long-term belief that buses will play a significant role on our response to Peak Oil, I was very interested when Balqon received a $490,000 order for drive systems intended for electric buses in China.
Balqon’s stock price has been slowly sinking with minuscule volume under the weight of successive rounds of dilutive financing for the last two years. Each financing was relatively small, and was only large enough to keep the company running (and looking for more financing) until the most recent financing in December 2010. That transaction consisted of stock and warrants at $0.64 a share, but did not receive immediate investor attention, most likely because of complete lack of coverage of the stock, and the Holidays.
This January, that lack of attention is going to change. An article discussing the financing on TheOTCInvestor began to draw attention on January 12th, and quickly moved the stock from the 70-80 cent range to the $1.40-$1.50 range. The article you are currently reading is the beginning of an attempt by Balqon to raise their profile (see disclaimer below.) Given the tiny market cap of the company ($36.6M at $1.42 today,) it will not take much additional interest to drive the stock significantly higher.
The $.64 price of the recent financing transaction was in the context of the company desperately needing money to restart production. Now that the company has sufficient capital for its medium term needs, Balqon will be in a much stronger bargaining position, and be able to raise funds on a much more advantageous basis.
However, given the company’s recent history of dilutive financings, I thought it wise to see if the outstanding warrants and convertible bonds might dilute the stock further at higher strike prices. The chart below shows the approximate number of shares that are likely to be created at various strike prices.
As you can see, nearly all the potential dilution is already locked in at 64 cents. This is because the most re
cent financing was by far the largest, and also because the outstanding convertible bonds contained an anti-dilution provision which reset their conversion price to $0.64 when that financing took place. Hence it makes most sense to analyze this stock as if 41 to 43 million shares were already outstanding, while the debt and derivative liabilities are removed from the balance sheet. Balqon can also reasonably expect to receive an additional $3M investment as warrants are exercised in 2012 and 2013, and an additional $7.25M in 2015 so long as the stock price does not fall back too much from current levels.
Balqon’s future revenues will have little relation to 2010 revenues because of the working capital deficit last year. Instead, I’ll look at the outstanding orders. If the company can deliver the balance of the Port of LA order in the first quarter as they expect, that will create approximately $2M in revenues. Assuming that they continue to operate at that capacity for the remainder of the year (some of which will go to supply the Ford orders and some of which must come from future deal flow), I arrive at a guess of $8M in revenues for 2011, but it could easily be twice that, if they find more customers and continue to ramp up production.
For comparison, their closest competitor, electric drive system supplier UQM Technologies (UQM), trades at about 8 times expected 2011 revenues. If Balqon were to trade at the same multiple on current shares, a fair value would be $2.50. If Balqon were to trade at a multiple of 8 with fully diluted shares, a fair stock price would be $1.50.
Balqon should be given a discount relative to UQM because Balqon trades over the counter, while UQM is listed on the AMEX, but I used a conservative 2011 revenue estimate, and did not check to see if there are significant outstanding UQM warrants which would dilute that company’s stock. Hence, I think a share price range of $1.50-$2.50 is a reasonable expectation for the coming year.
DISCLOSURE: This article is paid research. AltEnergyStocks.com was paid a flat fee by Balqon Corporation for the research, writing and publication of this article. The opinions expressed here are the author’s own, and neither payment nor publication could be withheld based on those opinions.
The author also holds a long position in Balqon stock purchased with his own funds before this article was commissioned.
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