*** I don’t know what the heck has come over me today.  Maybe it was my weekend in New York. I saw Christo’s The Gates, grabbed a cab to the Second Ave. Deli for an incredible corned beef on rye, then back uptown to see Billy Crystal’s one-man extravaganza “700 Sundays” and overall just walked around the Big Apple with my wife, bracing ourselves against the bone-chilling cold with the occasional Irish whiskey.

But whatever happened, I got a bad case of rumor-mongering. So look out Gripper, Sala and Chris, because there’s no stopping me…

*** Carl (The Gripper) Waynberg has finally done it. He’s challenged me to a nanotech “smack down” and I’ve accepted his puny dare.  I don’t care how much you’ve made for your readers, Gripper. I’m going to lay waste to the very notion that anyone can make a red cent in nanotech. In fact, in this very issue, I dispel the mass hysteria about one of the biggest nanotech IPOs that never was: the dreaded Nanosys. Any time, any place, Gripper. BRING IT ON!!!!!!!

I’m telling you now, Gripper, I’m not at all intimidated by your great track record. So what if your recommendations made 217.43%, 110.14% and 261.35%? So what if you know Bruce Willis? And so what if you answer your readers email, PERSONALLY? Because when I get done with you, you’ll be begging for mercy.

So stay tuned, small-cap smack down fans, as Carl and Irwin hurl stock symbols at each other like folding chairs in a Fear and Greed event coming to your PC soon. In the mean time, if you want the Gripper’s tale of the tape, you’ll have to go to www.the-gripper.com.

*** Sala Kannan has a great idea, and we’re “running” with it…and you’re the first to know. She’s going to be running stock screens for us two or three times a month. Sala has figured out new ways to slice and dice the small-cap market to reveal the best (and worst) companies in a new light.

Some screens you can expect from her include small-cap cash cows, fund-managers favorites or the 10 small-cap stocks to dump now. Even though you’ve been reading Sala on a regular basis, maybe one of the things you don’t know about her is that she really did graduate from Cambridge University with a masters degree in economics.

I don’t know about you, but if I had anyone run a screen for me, it would definitely be Sala.

And speaking of my esteemed colleagues…

*** This morning, while I was making a cup of coffee in our company kitchen, I ran into Chris Mayer. As you Sleuthers know, Chris is editor of The Fleet Street Letter and a regular contributor. I’m proud to run his essays because he is one of the brightest guys I know. I’d heard that Chris was up to something really big, and I asked him about it…or should I say pried it out of him (Chris is also quite modest). Chris started to explain it to me, and my jaw dropped.

After we finished talking, I ran up the three flights of stairs to my PC…because I had to let you know ASAP. Here’s the scoop: this Friday, Feb. 25, Chris is introducing a new service. I can’t divulge the name of it right now, but I can tell you this…

It’s based on a 100-year-old trading system that beats the pants off “buy-and-hold” while dramatically slashing your exposure to risk. Chris’ system identifies three crisis points in a stock. When they all line up, you execute the trade…while the rest of the herd on Wall Street is stampeding in the opposite direction. Chris’ ability to spot a deal that others don’t is the main reason that he was the vice president of a bank before the age of 30. In fact, the bank never lost a dime on any of the massive loans that Chris approved.

Apparently, our publisher Addison Wiggin is getting ready to email you something soon.  Please read it, because it will include a special 14-day offer to Chris’ service. I believe that once you find out more about this new opportunity, you’ll be completely blown away by the amount of money you could pocket. Just don’t say I didn’t warn you.

*** As I mentioned, Nanosys is in my cross-hairs. I came across an SEC document for the yanked Nanosys IPO. Check it out. If you believe all the nutty hype about making a fortune in nanotech, the information that I’m going to share with you will turn your blood ice cold…

No-Go Nano

If you’re a fan of horror stories, then forget Steven King, Peter Straub or Richard Matheson. Because I found one that will make your blood curdle, bring on night sweats and make you swear off those teeny-weeny hobgoblins that croon sweet ditties of fortune and paradise — only to suck you penniless.

This tale of dread is to be found in the SEC Form S-1 registration of Silicon Valley’s Nanosys, Inc. — the most ballyhooed nanotech IPO that never was. After reading it, you ask yourself, “How did it all get so out of hand?” I mean, the S-1 is a public document, designed for corporate disclosures. It includes typical boilerplate information regarding use of proceeds, management and dilution. But in the Nanosys S-1 of April 22, 2004, it was the section “Risks Relating to Our Business” that caused my hair to stand up.

It was like being absorbed in a story about newlyweds wandering the forest during a late- night thunderstorm…when they stumble upon a creepy castle. As they approach the imposing gate, wolves howl, and you think to yourself, “Don’t do it, don’t do it.” But they keep approaching it, pound on the monstrous door — and as they wait there shivering and frightened, you wonder, “What the heck are they thinking?”

Leading up to its proposed IPO last year, Nanosys was hailed as the breakout company for the fledgling nanotech industry. What Netscape’s IPO had been to the Internet, Nanosys would be to nanotech. Nanosys would finally prove that Wall Street, K Street and Main Street were ready to bank on companies that built things measuring in nanometers, or 1/100,000th the diameter of a hair. Smart money was betting that it would be inevitable…

The company had partnered with Intel, Matsushita and DuPont. Through them and leading universities, Nanosys had either acquired or had applications pending for more than 250 patents. The $2.5 million in revenue it had booked for the first half of 2004 stemmed from R&D contracts with its partners. During that period, though, Nanosys had lost $8.8 million — 252% more than it had earned.

Based on its own fallacious merits and the meteoric success of other nanotech IPOs such as Nanophase Technologies, Altair Nanotechnologies and Flamel Technologies, Nanosys was expected to raise $94-101 million by selling shares valued at $15-17 each.

Then there would come the big bang in nanotech…a construction boom in factories (only visible through scanning electron microscopes), which would spit out devices about the size of a human blood cell for every imaginable application — and in the process make huge fortunes for investors and insiders.

Nanosys had been on everyone’s lips, the buzz amplifying in 2003 after President George W. Bush signed the 21st Century Nanotechnology Research and Development Act. It allocated $3.7 billion for nanotech R&D between 2005 and 2008. The bill also endorsed the industry as a whole — hastening along the Nanosys IPO…despite the gory details in pages 15-28 of its S-1.

Reading them will scare you silly. You will never invest one thin dime in newly public nanotech companies — or for that matter, in anything nanotech. Because the chilling risks it discloses are, in fact, TYPICAL OF THE INDUSTRY. This section of the Nanosys S-1, however, is a greater cautionary tale of nanotech IPO zombies that haunt the corridors of Wall Street.

For example, some disclosures include…

A history of losses starting from its inception. As of Dec. 31, 2003, the company had burned through $17 million — and that was just for 34 employees at the time. The company also warned that because it was deploying new technologies, it might not
be able to develop any products at all. Certainly a credible concern, since Nanosys had yet to develop any products on which to build a sustainable business.

Product revenue depended on market acceptance, the company explained, but the markets being targeted had never adopted a nanotech product, and there was no guarantee that they would. Hmmm…

Even if they had the full cooperation of their partners, which the company couldn’t guarantee. That means Intel, DuPont and others could not assure Nanosys that it would supply a real-world environment to test, sell and manufacture the products — essentially leaving commercialization of Nanosys’ creations to one’s imagination.

So Nanosys could be forced to manufacture its own products. But — by the way — it had demonstrated the ability to do that.

The situation gets much worse once the S-1 delves into licensing arrangements. Since Nanosys licensed much of its core technology from research institutions such as Columbia University, Harvard University and UCLA, the company’s freedom to refine these technologies depends on the license. Royalties would also be affected by the terms of these agreements, depending on corporate milestones, revenues and the number of patents covered by the contracts. In short, Nanosys has given up considerable control of the evolution, profitability and pricing of its products in order to reach a broad number of markets.

And finally, even if Nanosys were able to wrest a viable commercial product from these Byzantine pacts, it still would have faced direct competition from its formidable industry partners — finding itself in a David-and-Goliath battle in which Goliath had full access to David’s puny battle plan.

On Aug. 4, 2004, citing “adverse market conditions,” Nanosys yanked its IPO. So in the end, Nanosys was a no-go. A happy ending to a scary nanotech tale for small-cap investors.

Happy investing,

Irwin Greenstein

February 22, 2005

No-Go Nano was originally featured in the Penny Sleuth.