Description

Raser has a promotional management which has caught the hype surrounding hybrid vehicles; however its current and future products almost certainly have little value. With near zero revenues, cash burn of $6-8M/yr vs. $20 M in assets (cash), and a $670M market cap vs. a likely value of at most $100M, this is a great short.

Raser is a startup which claims to have a breakthrough technology that produces high performance electric motors and motor controllers. They have mainly been targeted for the vehicle market although it is billed as a solution for many markets and applications (i.e. hybrid electric vehicles, race cars, industrial applications, snowmobiles, etc). As shown below, they likely do not have a commercial product, and even if they did it would not cover a broad range of applications.

Raser does have four Notice of Allowance for patents.
A search of U.S. patents issued since 1976 show 33,057 patents have the word motor in the title (i.e. electric motor, torque motor, stepping motor, DC Motor with brushes, etc). Now, not all of these 33,057 were really motors, but many of them were, which shows that many patents get issued yet, as one expert told me, 99% of current motors are running on technology that hasn’t changed much in 100 years.

Writeup contents
I. Quantitative
II. Company history
III. Company’s promotional activities
IV. Raser’s motor
V. Electric motor industry
VI. Comparables
VII. Downside valuation
VIII. Recent events

QUANTITATIVE
51M shares * 13.1 = $668M Market cap
$20M in cash with little no other assets/ liabilities ($648M EV).
Cumulative lifetime R&D: $5M, although this seems to include items such putting in-laws on the payroll and a $43K motorcycle.
*Future value in the “downside valuation” section


COMPANY HISTORY
Formed via a 2003 reverse merger with Wasatch Webmasters, which got 5% of the new shares. Wasatch was an internet hosting business which formed in 1999, issued shares which traded near a penny, and by 2003 had zero revenue.
-Raser’s $20M in cash comes from a convertible PIPE offering in April 2005, priced at $24/share when the stock (on April 6th) closed at $38. The three investors were all well-known PIPE outfits.
-Also very interesting is the stock price spike in April 2005 from $20 to $40 and back, which the convertible was sold into. I found evidence of stock promotion blasts from two firms in late March 2005, which I concede could be a coincidence.


PROMOTIONAL ACTIVITIES
Raser has shown up on many penny stock blasts: Stockguru, Talking Stocks, OTCResearch, istockdaily.com, bullstox.com. One “sell-side” analyst from Howlett Research Corp. wrote up Raser very positively in 2004. That research was paid for by Investors Stock Daily. Conveniently, the President of Investors Stock Daily (istockdaily.com, a penny stock promoter) is also on the Raser payroll and was the Raser investor relations contact on older press releases (see Nov 15th press release which has the contact as [email protected]). For fun, I looked at the 10 other tech companies written up by Howlett, and they have a -14.3% average return from the date of write up (2003-2004) to today.


In addition, the press has reported on Raser’s promotions
Oct 4, 2005 WSJ:
Shares of Raser Technologies Inc. fell as much as 30 percent on Sept. 26. The next day, Jody Janson sent out an e-mail newsletter with soothing words for investors.
"I spoke with the company, and there is no intrinsic reason for the volatility," Janson wrote. "All is well despite the ridiculous activity by 'assorted market players.' "
Janson certainly has good access to Raser management: He's the company's investor-relations contact, a job he has in addition to being the president of Investors Stock Daily Inc., a Rochester, N.Y., company that distributes unsolicited and subscriber-based electronic newsletters on mostly over-the-counter stocks.

Dow Jones News Wire May 16, 2005:
Some of that information apparently includes very recognizable people appearing on a promotional video that was posted on Raser's website but has since been edited after Dow Jones started asking questions about it.
In an original version of the video which has now disappeared from the Raser website, Dennis Wend, the executive director of the U.S. Army National Automotive Center, or NAC, could be seen talking about "two great things the Army is doing with Raser". Wend described a long term cooperative research and development agreement between the Army and Raser and a short-term project to develop an integrated starter alternator.
Later, an Army spokesman said that it doesn't have a long-term agreement with Raser. Wend's comments on the video were first trimmed down after Dow Jones inquired about them. And a few days later, Wend's appearance was entirely edited out of the video.

Also, Raser implies it has the endorsement of top executives. Dow Jones said this:
Former GM Chief Executive Officer Bob Stempel didn't know that his comments would be used "that way" by Raser, a spokesman for Stempel said. The spokesman said Stempel was not there to endorse Raser's technology. Earlier, Stempel said in a telephone interview that he attended the test at which the Raser video was shot because "we wanted to be sure Raser knew about our technology."


Dow Jones Newswire May 16, 05:
In a press release on Feb. 10, the company told investors that "the U.S. Department of Energy (DOE), has selected Raser for award of an Energy Conversion Science grant under the State Technologies Advancement Collaborative (STAC)." Raser said in the release that it "is the primary recipient of the award" and that it will be joined in the project by Advanced Energy.
A little digging shows that it's kind of the other way around. The grant was awarded to Advanced Energy, a North Carolina independent non-profit corporation. Raser is a subcontractor to Advanced Energy which will serve as an independent tester of some of the new technology being developed by Raser. Testing isn't scheduled to start for months, and the bulk of the almost $250,000 in funding coming from the DOE won't be forthcoming until Raser produces a prototype for Advanced Energy to evaluate. "We are the primary contractor and they (Raser) are subcontracted," said Advanced Energy's Ward Lenz when asked about the project. "I wish that we could have reviewed (the Raser press release)," Lenz said.


RASER’S MOTOR
Raser is smart enough to not actually show its product to anyone who could publicly disprove their claims. From Raser public filings:
It is our practice to disclose the details of our innovations to a manufacturer only after we have entered into a license agreement with such manufacturer. To date, we have not entered into any such license agreements, and all of our discussions to date have been focused on the improved performance of the machines rather than on the nature of the innovations involved.

DATA POINTS ON RASER'S MOTOR EFFECTIVENESS
First, is the Army SBIR project (Small Business Innovation Research), with whom Raser had a Phase I contract. The Army’s project has been touted by Raser as perhaps the top opportunity for Raser.
--SBIR overview: Phase I = $50K award and is determined based on a written proposal, Phase II = $730K award and requires proving the feasibility of the concept, Phase III = commercial rollout.
--In October, Raser was not selected to advance to Phase II, which as far as I know has not been announced by Raser (the army made it public though). Most companies make it to Phase II (77% in 2004, 92% in 2003). I spoke with someone in the Army SBIR project, who gave me a fairly vague answer that I translated as the army does not see much value in Raser. But, bottom line is that they confirmed that Raser did not make it to Phase II.

Second, Raser talks about third party tests which prove the power of their design. I spoke with one of the testers, who said they only did a limited test of the motor. He cautioned me about reading too much into the results saying that no durability tests were done, for example, which is needed for commercial applications. The third party just did the tests they were told to, on the motor they were told was Raser’s.

Third, one of its first projects (and subject of video and press promotions) was an electric snowmobile demonstration for the National Park Service. Park officials were excited after seeing a snowmobile make a quick jaunt with a supposed Raser electric motor (no one examined the motor; these were not engineers) and they wrote a letter saying they would, “support Raser’s efforts to develop its technology”. Raser’s press release at the time said, “We are currently in discussions with U.S. National Parks and the Yellowstone Clean Cities chapter regarding funding for the testing of clean, quiet snowmobiles for use in the Park.”
However, as reported by WSJ, the park letters never heard back regarding its offer of funding. They then wrote a second letter, to which Raser did not reply, to the disappointment of the Park officials.


ELECTRIC MOTOR INDUSTRY
I spoke with several industry experts whose comments are worth sharing because they cast doubt on whether Raser is uniquely positioned to conquer the world, as they claim.
1) Hundreds of organizations are working on new motor designs and they often come up with new ways of skinning the cat. There has been a “tremendous amount of research on motors” since the motor was invented in the 1800s.
2) One change will not address all markets, since motors are pretty specialized depending on the end use. This is because high torque, for example, might be offset by noise, efficiency, endurance, etc.
a. Note that this contradicts Raser’s claim to have a technology that can be applied across applications.

Additional comments were: 1) Raser's changes are not too different from other technologies and 2) The chances of them revolutionizing the industry are “pretty remote”.
3) “There are definitely some specialize applications where this type of
motor could be useful, but this is not going to be the motor to end all motors” 4) “The controller technology is impressive, but I think it solves a lot problems that no one has. Unless these things are just cheaper than dirt, I just can't see this thing working. “

In addition, from talking with an automotive electric motor expert, I learned the industry was quite conservative and that a new technology would have to be quite significant for anyone to adopt it, and he very much doubted Raser had something that significant. Also, it would not be that hard to engineer around a patent if an auto player wanted to. Basically I heard that it was nearly certain that no auto maker would be interested in Raser technology. That sentiment was echoed by an engineer I had look at the patent drawings, who thought that the motors would never work in hybrid or combustion engine vehicles (although the caveat is that what Raser is actually doing is not publicly released).



COMPARABLES
Normally I dislike comparables since nothing is truly apples to apples, but here they serve as a useful reality check that other companies have “breakthrough technology” and yet have achieved few sales and small valuations.

-Lynx Motion Technology said in 1998 they had developed a motor with, “10 times the torque-to-weight ratio of conventional electric motors” yet no meaningful commercial success has come.
-UQM has a “20% more efficient, 53% smaller, 49% lighter motor” and they have been doing alternate engines for over 20 years. They are often cited as old players in the industry to talk to. $100M market cap with little revenue. UQM Management told me they have been hopeful on the industry since 1980, but have been disappointed to date. Notable is that UQM does currently produce motors and has real design contracts, unlike Raser.
-Azure Dynamics: claims a 50% reduction in fuel consumption. $157M market cap, with almost no revenue. Nearly a dozen patents awarded.


DOWNSIDE VALUATION
If Raser actually secures a contract, I estimate a lifetime value of at most $100M.
--Background: Raser is going the license route (vs. in-house manufacturing). Based on conversations with small startup specialty engine makers who have looked at licensing, license fees would likely range from <1% (high volume such as auto) to 7%-10% for great technology and a highly specialized application.
Also, since motors (especially this one) are almost always for highly specialized applications, a motor will fill a niche, and not cover all industries (hence pick a scenario below).

--Scenario 1: Specialty engine
1M volume yr * 1% license fee * $2500 retail value of motor = $25M/yr - $6M expenses – 35% taxes = $12.4M/ yr.

--Scenario 2: Auto**/hybrid vehicle engine
10K volume yr * 8.5% license fee (as % of sales price) * $10K/motor (high end) = $8.5M revenue - $6M expense (annual company) – tax = $1.6M/ yr.

--Multiple of post-tax earnings applied: 20x * 50% discount (since might happen many years out) = 10x. Therefore, $10M (scenario 1)* 10 = $100M

**Note: As stated before, auto makers are quite risk adverse and they could likely design around any patents, but for arguments sake I include the possibility of an auto contract.


RECENT EVENTS: overpaying for AMP with overpriced stock
Raser will soon acquire AMP for ~$220M ($88M in cash + debt assumption, + 10M shares). AMP is an operator of geothermal power plants and the owner of a patent for geothermal fluids, which seems to have zero relation with Raser’s business. AMP was privately owned with a VC owner (Highland Capital Partners). Since Raser bought from informed buyers, I doubt they underpaid. My own analysis of AMP value gives a range of $140-$175M, although as a private company it is tough to get a more exact number. These numbers are not considered in the valuations previously cited.
Interesting that the stock price spiked right before the AMP acquisition was announced. It went from $14 on Jan 1st to $22 just three weeks later on the announcement date. What caused this, I can’t say.
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Catalyst

1) Cash burn
2) Dilutive equity sales
3) Public knowledge of company’s true state
4) Continued insider selling