Ilika: Less Than Full Steam Ahead (OTCMKTS:ILIKF)

U.K. solid state battery company Ilika (OTCQX:ILIKF) updated the market recently on its progress and, in a word, it is slow.

In the past two years, I have written seven pieces on SA about Ilika, all carrying a “Sell” rating, most recently the July article Ilika: Getting Closer To Show Time. Even in the four months since that piece, the firm has lost a further 40% of its value. I continue to have a “sell” rating on the company.

Business is Slow

The company released a trading update this month ahead of its interim results, scheduled for January. It guided for revenue of £0.2m (no change versus last year’s interim results) and EBITDA of –£4.5m (67% worse than last year’s equivalent).

The reason for the higher loss was given as “the increase in operational costs associated with the commissioning of the Stereax manufacturing facility and an intensification of the Goliath development programme.” The firm forecasts a full-year EBITDA loss of approximately £9.0m

That can be seen as good or bad. My immediate reaction is that it is bad: the company continues to bleed money and it is unclear how much of a grasp it has on its own costs in terms of ramping up Stereax production. From a positive perspective, though, these costs can be seen simply as part of the ongoing development costs to bring Stereax and, ultimately, Goliath to market at commercial scale. So they are not exactly unexpected and the moving closer to commercialisation brings us – perhaps – closer to the point where Ilika may demonstrate a viable business model (by which I mean a business model based on selling batteries not raising funds from investors).

The potential here continues to be strong – in the statement, Ilika mentioned that it has initial orders for Stereax from 18 customers in the miniature medical devices sector. It did not reveal the nature of those orders so it is hard to gauge what level of commitment they entail from those customers, nonetheless I do see this as an encouraging sign of the potential appeal of Ilika’s technology. Ilika reckons it will take five years to reach capacity of its U.K. factory.

On its Goliath programme, the company pushed back its target date for lithium-ion energy density parity to later in 2023 than previously. I would not be surprised to see further delays in the Goliath programme although I do not necessarily problematic for the Ilika valuation if it is able to ramp up Stereax fast enough, which should buy it more credibility and patience with investors.

The Future Moved Back

In its update the company said that, “as a result of the revised expectations for the speed of Stereax ramp-up, revenue in FY24 and FY25 will be materially lower than in previous forecasts.”

I continue to regard Ilika as now being close to showtime in terms of proving it can move to commercialise fast enough and with the right commercial model. This latest delay is one more speed bump but, despite lower expectations, I still think the coming couple of years will help show whether Ilika has a viable future as an enterprise or is just a money pit for shareholders.

Liquidity is Fine for Now

Cash and cash equivalents at the period end were £18.6m, 33% lower than at the same point last year. That is expected to fall to £14m at the end of the firm’s financial year.

For now, that is fine. At some point, though, if the current cash burn continues or gets worse (as it may well do with scaling up), more cash will be needed. Ilika is no stranger to diluting existing shareholders to raise more funds – last year saw a £23.9m net fundraise – and I expect that there will be further dilution in future to boost liquidity, perhaps in the coming year.

Valuation is Impossible

The shares responded to the update by falling to a 12-month low before ending the day down 39%. They have lost four fifths of their value in the past year and trade at just over a tenth of their value last February.

That puts the market capitalisation at £43m, which bearing in mind the cash on hand means that the enterprise value is beneath £30m. Ilika has promising technology and I think £30m could be a bargain price for it.

However, that does not mean it is a good investment for me as a private investor. It is currently impossible to value Ilika accurately based on its commercial outlook thanks to its vagueness and lack of track record. A trade competitor may happily spend £30m (or more) on the company to get its technology, but that does not necessarily mean a bid that would be profitable for small retail shareholders. Instead they could just wait for Ilika to burn through its cash, for example. I continue to avoid Ilika and see it as a crap shoot, as despite the potential upside the risks put me off altogether.

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