Mike Tarsala's TechWatch: DayStar (DSTI) CEO interview
Will white-hot solar energy stock DayStar Technologies keep on shining, or will its shares burn out after the company exercises warrants to raise cash?
DayStar (DSTI, $13.55, -0.39) shares have more than doubled in a week's time, after the maker of silicon-free solar panels signed its first big contract for its unique solar sells. Some traders are now speculating about the possibility of additional deals.
Yet what some newcomers to the stock may not realize is that a dilutive exercise of warrants could be imminent. DayStar went public in February '04, and sold 2.1 mln warrants at $6, and 4.2 mln warrants at $10. The $6 warrants are callable if the stock closes above $8.50 for five consecutive days.
And today marks Day 5.
"Clearly, the warrants are our lowest-cost way to raise capital," John Tuttle, DayStar's chief executive, told us. "The warrants have built-in dilution, so you don't have disappointed shareholders - or at least you shouldn't." Tuttle wouldn't say if or when the company will exercise the warrants.
It seems to us that DayStar badly needs the cash a warrants exercise would provide. The company is barely generating any revenue, and it's burning through roughly $1 mln a quarter (about $1.39 mln for the March period). At the end of Q1, the company had just $472,000 in cash and equivalents, and about $1.756 mln in short-term investments.
A dilutive warrants exercise would raise about $14 mln to $15 mln for the company - seemingly enough to keep the company going for roughly two years, depending on how quickly the company ramps its second and third-generation technologies.
Once that overhang from the 'A' warrant exercise is gone, though, DayStar is a company that we will continue to watch. We see many potential applications for its so-called Copper Indium Gallium Selenide solar cells.
As demonstrated with its first-ever sizable contract with German solar equipment-maker Blitztrom on June 9, DayStar's cells can be used in place of traditional silicon-based solar cells. And they may be very attractive to customers if silicon prices keep climbing, and if silicon material simply remains hard to get. Blitztrom plans to buy up to $60 mln of DSTI's products through 2008, based on current solar cell prices.
Another potential market for the cells is for cutting solar cells to size, and using them to run remote devices that need 10 to 15 watts of power (roads signs and parking meters are good examples). The market is expected to provide higher margins than the silicon solar cell-replacement market.
The most lucrative potential market by far for DayStar's technology is powering equipment on military and commercial satellites with DSTI's most-efficient thin cell material, called LightFoil. The company sees a potential market for using the lightweight cells to run surveillance equipment on satellites, and quite possibly on stationary airships that may eventually used instead of low-earth orbit satellites for communications. In that type of scenario, one airship could potentially provide cell phone coverage for a major metropolitan area, instead of multiple cell towers.
Our understanding is that the company is seeking LightFoil deals that would add about 30 to 40% margins, above the company's manufacturing costs.
"We want to fill out one customer in each of the three channels, and possibly several customers for LightFoil by the end of '06 or early '07," Tuttle says.
Tuttle wouldn't tell us which potential customer he's been talking to - only that the company has had "lots of conversations."
We at Briefing.com did some digging, and we identified what we think are some potential customers for LightFoil technologies. We think Lockheed (LMT) is the leading candidate to receive a contract to provide high-altitude surveillance airships for the Dept. of Homeland Security, and that LightFoil may be among the most attractive ways to power equipment on that type of aircraft.
We also note that a company called GlobeTel has a subsidiary that is building specialized airships to be used for wireless networks. The company's Web site says that its so-called Stratellite will deliver wireless, voice, video and data services at "a much lower cost than technologies of today." We think LightFoil could be a good candidate to power equipment on Stratellites, too.
While there are many companies with solar-cell technologies, we only know of one other major player that can make the type of CIGS solar cells that DayStar produces: Global Solar Energy, which is majority owned by Unisource Energy (UNS).
One of the factors that we think is likely to limit DSTI's otherwise very strong market potential is its production capability. Tuttle says he's confident he can sell all the material he can manufacture over the next few years. But he says the company can now make less than 1 megatwatt-worth of solar cells a year, and hopes to ramp to roughly 2 megawatts by mid '06.
The big ramp in capacity is expected come with the launch of DSTI's Gen-III technology, which is expected to come online at the end of '06 or early '07. With Gen III, the company expects to be able to produce 50 megawatts of power or more.
Until then, we think DSTI will be under the gun to sign as many military contracts as possible, to maximize the potential profit from the materials it can produce. But if the company is successful with those contracts, we see a chance for the company to turn a profit, even before it starts marketing its Gen III technology.
Regarding the company's stock price, Tuttle compares his company to an early-stage biotech - one without any revenue, but a large potential market. He notes that commercial solar cells were a $7.6 bln industry in '04, and that DSTI could benefit from taking a small fraction of that market.
We note that a lot of early-stage biotechs trade on a multiple of the cash they have on hand. Providing that DSTI can convert its warrants, it would have somewhere on the order of $15 mln to $16 mln in cash, and would trade at roughly 3X cash. That would not be considered an obscene valuation - at least for a biotech.
Technically speaking, we think the stock looks extended, considering its run the past four days. It may be due for a pullback, especially if the company converts its warrants. We note that the stock has a low float, relatively light trading volume (not counting the past week) and is therefore only seems appropriate for aggressive traders. We would take a look at DSTI again once the warrants are converted and the stock starts making new highs.
We asked Tuttle if he'd recommend his own company's stock to family members following its strong runup. For what it's worth, he told us said he would.
"As our cap goes up, we open up the ability for institutional investors to come in," Tuttle said. "I'm happy to see the stock moving the way it's moving; it's a direction that better reflects the opportunity in the company." - Mike Tarsala, mtarsala@briefing.com.
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