In past articles we’ve highlighted the dangers of over-the-counter (OTC) stocks, especially those that seem to attach themselves to up and coming disruptive technologies. Such companies need to be subjected to detailed scrutiny as the majority of OTC companies will lost investors’ money over time. Whether through intent or not, company management always seems to be well compensated regardless of the company’s success. In almost all cases, investors in OTC companies will walk away with worthless shares while company management will move on to their next venture taking their wealth accumulated throughout the process. One OTC company that has risen over +1500% in the past year is Solar3D (OTCMKTS:SLTD). Just in the last trading session, SLTD was up over +25%.
In July of 2010, an OTC company called MachineWalker changed their name to Solar3D (OTCMKTS:SLTD) and decided to pursue solar cell development. According to Solar3D, their “patent-pending 3-dimensional cell can produce 200% of the power output of conventional solar cells”. Solar3D then brought on a CEO and one other employee. The CEO was given an incentive package of an option to purchase up to 15,000,000 shares of the Company’s common stock for a period of seven years from the date of grant (July 2010), at a purchase price of $0.05 per share, and a yearly salary of $200,000 per year along with bonuses for certain company “market cap” targets being met, some of which he has achieved as well. In the 3 years following the name change, the two employees at Solar3D continued developing their technology along with increasing the outstanding number of shares significantly to help finance the operation. Without even a manufacturing prototype yet, the company then moved to acquire a solar installation company, Solar United Network or “SUNworks” in January of 2014.
SUNworks was founded in 2011 and is a small solar installation company with 42 employees. SUNworks’ saw second quarter sales in 2014 of $7.5 million with Q2 sales approaching the sales level of all of 2013. Sales for Q1 2014 were much lower as SUNworks’ total sales for the first half of 2014 came in at $9 million. According to Solar Power World, of the top 250 solar contractors in 2013, 25% were California based companies with SolarCity listed as the 2nd largest. Sunworks came in this list at #72 and at #34 of the 103 top California-based solar contractors in 2014. In January 2014, SUNworks was acquired by Solar3D, the terms of which are stated below:
The purchase price is $2,794,500, $1,044,500 of which was paid in cash at the closing of the SPA and $1,750,000 of which is payable in installments over a period of five years after the closing.
The acquisition was financed through a loan of $1.25 million. A question to ask would be what synergies Solar3D can realize through their acquisition of SUNworks? Solar3D is focused on developing an advanced “3D solar cell” and SUNworks performs solar installations manufactured by solar equipment providers. If Solar3D has manufacturing capacity to install advanced solar cells at scale, then maybe the acquisition would make sense but otherwise there don’t seem to be any obvious synergies that would accelerate the development of Solar3D’s “3D solar cell technology”.
Solar3D’s $74 million Valuation
At a current market cap of $73 million, investors are placing bets on a 3D solar cell technology that is being developed and a solar installation company that is in a highly competitive market and does not seem to have any noticeable competitive advantages or barriers to entry. That solar installation component, SUNworks, was acquired for $2.8 million. Even if that purchase price represented a 90% discount, the valuation still would not exceed 50% of Solar3D’s current market cap. Would the 4 company owners who sold their shares have valued SUNworks at that steep of a discount? It doesn’t seem likely, but if we assume they did, this would value the “solar cell development” potential of Solar3D at around $46 million. This part of the business does not even have a manufacturing prototype yet. It represents two employees and “the services of several research consultants who are responsible for product development” which represented $907,000 in general and administrative costs and $107,000 in R&D costs in 2013. In the company’s last 10Q, Solar3D as a standalone company generated a loss of $4.8 million in the first 6 months of 2014 alone, while SUNworks as a standalone entity was actually profitable by $968,912. This resulted in the combined entity realizing a loss of $3.8 million for the first two quarters of 2014.
Solar3D (OTCMKTS:SLTD) is different from other OTC companies in that they actually seem to have acquired a legitimate business though the acquisition price is completely detached from current valuations. They now have company leadership that were previous majority owners of the acquired company and who seem to be successful entrepreneurs. While the acquisition may have been an accomplishment for 2014, the number of shares for Solar3D increased by 40% significantly diluting existing shareholders. The new entity has a cash balance of $1.2 million. While it will be interesting to see the inner workings of a small Californian solar installation company, the share price seems to be well detached from the actual valuations making this a volatile OTC stock that may be interesting to speculate on, but not to invest in.