This all started when James Boric asked his Small-Cap Strategy Report readers to write to him with any companies they would like him to cover in his newsletter. He only expected to hear from a few people, but hundreds of his readers wrote in with their stock ideas.

So I agreed to help James out.  Now I will be looking at some of the most popular picks every month submitted by Small-Cap Strategy Report and Sleuth readers. And there certainly have been a variety of stock picks sent in so far. After just a few days of sifting, I’ve come across everything from startup biotechs to shipping companies to real estate ADRs.

Interestingly enough, one company stood out as the “most requested,” so I’ll begin my coverage with this small solar company aiming to change the way the world gets its electricity.

The Evolution of Solar Energy

The process of converting sunlight into electrical energy is called photovoltaics (PV). PV is a rapidly growing and improving technology. According to our featured company’s research though the Solar Energy Industries Association, the global PV market has averaged 25% growth annually over the last 10 years. In the past five years, global growth has been over 35%. And throughout this rapid growth, solar technology still makes up only a small percentage of the world’s power generation. You’d be hard pressed to find another industry with this kind of growth year after year…

Now there’s a small company in the process of developing technology aimed to integrate solar cells into ordinary building products. This looks to accomplish two goals: 1) to reduce the cost per watt of solar power and 2) to broaden the applications of the alternative energy by turning buildings into miniature power plants.

The name of the company is XsunX Inc. (XSNX: OTC BB). This $147 million company is, for all practical purposes, a start-up company trying to get on its feet. Previously known as Sun River Mining Inc., the company changed its name (and completely changed the direction of its business) to XsunX in late 2003 when it acquired three solar patents that are now a critical part of its business.

The company’s main solar cell technology is called Power Glass, which is a thin, almost transparent material that is applied to glass windows to generate electricity. XsunX is also developing an “opaque” solar cell. The company claims it is “so thin and flexible that it can be integrated into other building materials, such as roofing and siding. The possibilities are virtually endless.”

If XsunX licensed this technology to commercial glass, roofing, and other materials manufacturers, developers could build an office building that supplemented its normal power supply through solar power generated from almost every surface, from windows to siding to its roof (and all of this without installing conventional solar panels).

So you can see what they mean by transforming an entire office building or residence into a power plant. If the technology works as claimed, the entire outer shell of a building could conceivability be converting the sun’s rays into electrical power (or at least the areas with access to direct sunlight).

Technology

XsunX doesn’t make any products. The company’s plan is to develop the technology and license the equipment needed to make the products. While the company has no partners that are ready to make and sell its products at this time, it is seeking to develop relationships within the glass industry to get the products licensed and sold.

In June 2004, XsunX entered into an agreement with Colorado-based MVSystems, Inc., a corporation that, according to the XsunX website, designs, builds, and delivers state-of-the-art manufacturing tools designed specifically for the thin film semiconductor market. It’s a pretty good deal they have going. “The terms of the working relationship provide XsunX with complete R&D facilities without mark-up for profit on the use of staff and equipment,” according to the company.

Management

XsunX keeps its costs to a minimum, and I believe this is a reflection of good management. The company rents office space in California for only $750 a month, and aside from CEO Tom Djokovich’s $150,000 a year salary, other directors aren’t compensated with cash.

However, the company noted in one of its filings that Djokovich is not under contract. If for some reason he decided to walk, the entire business would be in trouble.

XsunX has also recruited some impressive talent. Some of the company’s techniques were developed by Dr. Arun Madan, chairman of the company’s scientific advisory board, whose “30-plus year career in the solar industry began with the creation of the first amorphous solar cell in the early 1970s,” according to the company.

And the company has enough cash to get through its administrative and R&D expenses through the year. XsunX slated 34% of its 2006 budget to R&D, which comes to about $1.5 million. To put this in perspective, the company had almost $5 million in cash as of March 31, 2006.

Assessment

XsunX should be looked at as a start-up firm. The company has never generated revenue, and it has not yet determined when — or if — it will ever be profitable.

While shares could pop sooner than XsunX turns a dollar, this stock will be a rollercoaster ride due to offerings to raise extra money or the dumping of warrants by investment firms if the price dips too low. The bottom line is this: If the company decides it needs more money, they will most likely have to issue more stock, further diluting shareholders’ investments.

Then there’s the lack of a timetable. While the company does present some very compelling ideas and innovations in solar power, it does not offer investors a timetable to when it expects profitability. Because of this, I’m going to do what any prudent investor would do and assume it will be years before XsunX is in the black.

For now, investors should look elsewhere. If XsunX shows that it will become profitable, that will be the time to invest. There will be plenty of time to get on this stock if it looks like it will succeed, and right now, XsunX is the ultimate long shot. If the firm does posses the right technology, then investors will reap their rewards for years to come. Let’s not jump in too early…

A lot can happen between now and then (assuming profitability is on the horizon). While the company does have a unique product idea, big firms like BP Solar or GE could trump XsunX’s technological gains before they can have a significant impact on the bottom line. And since XsunX’s eggs are all in one basket, this would most likely put an end to this company.

Keeping up-to-date on XsunX

I’ll continue my coverage of XsunX on the Sleuth Message Board, posting updates as they become available. It’ll be interesting to see what develops with XsunX over the next year, so I’ll try to be as thorough as possible, looking at how competing solar technologies fair compared to Power Glass.

Using the Message board format should get some good discussion going about the company and solar power in general, and as we continue to expand this “portfolio,” there will be plenty to talk about. And while I can’t directly answer individual questions, I hope I can be a catalyst for some thoughtful conversation.

And just to let everyone know when updates will be posted, I’ll add a note to the top or bottom of the Sleuth the day I post.

Best,

Gunner
July 10, 2006

New Coverage: Will Power Glass Succeed? was originally featured in the Penny Sleuth.