BEACON EQUITY RESEARCH Analyst: Lisa Springer, CFA Initial Report December 17th, 2007 XSNX daily
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Tel.: 949-330-8060 Tel.: 888-797-4527 Fax: 949-330-8061 www.xsunx.com
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Market Data Market data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Dec . 15th, 2007 Symbol / Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTC . . . . BB: XSNX Coverage Initiated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Dec . 15th, 2007 Current Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$0.30 Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Speculative ..... Buy Price Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.50 Outstanding Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157M . Market Cap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $48M 52-Week Range. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$0.26 - $0.655
Company Overview XsunX, Inc. (OTC BB: XSNX) was created in 2003 to develop and commercialize advanced, thin-film photovoltaic (TFPV) solar cell technologies and manufacturing processes. Over the past year, the Company has shifted its focus from licensing its technologies to using its technologies to design a cutting-edge manufacturing system for producing and marketing thin-film amorphous solar modules. The Company has begun work on a multi-megawatt solar module production facility in the US. XSNX has commissioned a baseline production system expected to come on-line in early 2008, which will serve as the blueprint for a 25 megawatt (MW) production system expected to become operational by year-end 2008. The Company anticipates expanding its annualized solar module manufacturing capacity to 100 MW by early 2010. XSNX has secured a $21 million financing commitment from Fusion Capital Fund II, LLC and is already contracting with vendors to begin building the parts and sub-systems for a solar module produc-
Millions
65 Enterprise Aliso Viejo, CA 92656
Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
tion system. XSNX will initially produce solar cells and modules incorporating thin-film amorphous silicon on glass substrates. In the future, the Company may expand its product offerings to include nano-crystalline and proprietary multi-junction solar designs which will improve performance and further reduce per watt production costs. The Company is traded over the counter as XSNX. XSNX plans to market its solar cells and modules to large-scale solar energy device installers and operators, including solar farms, government agencies, power purchase associations, utility companies and large commercial installations. In anticipation of commercial production, the Company has begun loading its sales channels and building its brand, to date, XSNX has established pre-sales agreements with solar integrators reserving more than 100 MW of its future solar module production capacity.
Investment Highlights Increasing demand for solar energy Exploding worldwide energy demand, depleted fossil fuel resource and soaring oil and gas prices are fueling demand for clean alternative energy sources such as wind and solar energy. The solar energy technology sector currently generates $10 billion in annualized revenues and has been growing 35-40% annually as a result of significant investments in new production facilities and technologies in Europe, the US, China and Japan. Financial incentives from governments around the world are encouraging the deployment of clean, renewable energy technologies. Some experts believe the PV market will reach $25 billion by 2011. Although the solar photovoltaic (PV) industry potentially addresses a trillion dollar worldwide market, solar energy system deployment has been limited by the fact that, until recently, solar energy has not been economically viable in the absence of government tax and other incentives. Adoption and deployment rates are expected to increase over the next five to seven years as per watt costs of PV technology are reduced to a level competitive with conventional electricity sources.
Government incentives encourage solar deployment Germany has established relatively aggressive incentive programs for solar energy and other European nations have followed suit. In the US, the California Solar Initiative provides for $2.9 billion in incentives over ten years. In Oregon, where XSNX is locating its production facility, the Oregon State Senate has passed legislation requiring large utilities to generate 25% of their energy from renewable sources by 2025. The area in Oregon where XSNX’s plant will be located has been classified as an enterprise zone, qualifying the Company for additional savings through the reduction of property and other operating taxes.
Increasing market share for thin film technologies Thin film technologies, such as the amorphous technology deployed by XSNX, offer the lowest cost per watt at the module level. As a result, thin film’s share of the overall solar photovoltaic market is expected to increase from around 5% currently to as much as 20% in five years and deployment of thin film technologies will grow much faster than the overall PV market.
Competitive advantages of XSNX’s cutting-edge technology XSNX has an advantage over other solar cell manufacturers because of its cutting-edge technology, which enables the
XsunX, Inc. (OTC BB: XSNX)
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
conversion of an inexpensive sheet of 100cm X 160cm glass into a complete solar module in less than three hours. The Company’s thin film PV technology uses only a fraction of the semiconductor material that is required to produce traditional crystalline silicon solar modules. Given the high cost and supply constraints on semiconductor materials, using less silicon gives XSNX a huge cost advantage. In addition, the power conversion properties of the Company’s amorphous solar cells exhibit near 100% conversion potential at temperatures of 650C while other thin film and conventional silicon wafer technologies lose around 20% of conversion potential. Amorphous silicon solar cell technologies also outperform crystalline silicon solar modules on an average and total wattage basis over a complete 24-hour cycle and provide superior performance in cloudy and indirect sunlight conditions.
XSNX has strong research and development capabilities XSNX has a research and development facility in Colorado and a portfolio of proprietary intellectual properties and processes relating to amorphous thin-film silicon design and manufacturing. Since its inception, XSNX has compiled an impressive list of accomplishments, which include internally developing its key technologies, licensing its intellectual properties and successfully completing proof of concept demonstrations. During its development phase, XSNX focused on developing and refining thin-film solar cell technologies that can more efficiently convert sunlight to electricity, are adaptable across a broad range of applications and temperature conditions, and can be manufactured inexpensively in large scale quantities.
The Company is rapidly advancing towards commercial production XSNX has commissioned a baseline production system which will serve as a blueprint for the 25 MW production system it is also building. The 25 MW system is expected to commence commercial production in late 2008 with the first of its modules available for sales in early 2009. The Company anticipates having a full 100 MW system in place by February 2010. XSNX has already contracted with vendors to build key parts of the production line components and sub-systems and has already announced agreements with installers for more than 100 MW of reserved production capacity.
$21 million financing commitment supports production system plans The Company recently secured a $21 million financing commitment from a Chicago-based institutional investor, Fusion Capital Fund II, LLC. These funds will be utilized to purchase the major components and parts of the subsystems, beginning with components having the longest lead times. Having work on the sub-systems underway now will enable the Company to quickly and efficiently bring its new production system on-line next year.
XSNX has a seasoned management team The Company’s management team has decades of experience in developing and commercializing thin-film solar energy technologies. President/CEO Tom Djokovich has over 30 years experience in the high-tech and building industries. He is a veteran manager of public companies and has successfully attracted millions of dollars of investment capital to his companies. Joseph Grimes, COO, has more than eight years direct experience in thin-film technology and manufacturing. Jeff Huitt, CFO, has 20 years financial management executive experience and has worked for both large organizations and start-ups. Vice-President of Engineering Robert Wendt has over 20 years experience in thin film solar technologies, most recently as VP of Sales and Operations for Global Solar Energy, Inc. a major producer of thin film photovoltaics.
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Solar Energy Market Growth Increasing energy demand worldwide Global energy consumption is increasing as the result of population gains and economic growth, with demand increasing most rapidly in emerging economies. Due to economic and social reforms, China and India are sustaining annual GDP growth rates exceeding 10% and 8%, respectively. Robust GDP growth is creating seemingly insatiable energy demand in both of these countries. In the last two years, China and India have accounted for about 70% of global energy demand growth. In fact, per capita energy demand from these countries is forecast to double between 2005 and 2030 . According to a US Department of Energy report, overall worldwide demand for electricity is expected to expand 2-3% annually over the next decade and reach 26.0 billion MWh by 2025.
Depleted fossil fuel reserves boosts demand for alternative energy sources The rapid depletion of conventional energy sources such as crude oil, natural gas and coal will result in a shortage of these fuels for electricity generation. The International Energy Agency (IEA) warns that rising global demand could create a supply crunch as early as 2015. According to the US Department of Energy, current global oil production is around 85 million barrels a day, whereas consumption hovers around 86 million barrels a day. The DOE predicts output will grow to 118 million barrels by 2030, but even this level of production may not be enough to meet rising demand. Exhibit 1: Estimates of US crude oil shortages
110,000
120,000 90,000
80,000
70,000
100,000
120,000
80,000
Barrels/day
105,000
130,000
140,000
35,000
0 2007
2008
2009
2010
2015
2020
2025
2030
Source: US Energy Information Administration
Due to the supply/demand imbalance and escalating political tensions in some oil-producing regions, energy prices have risen significantly this year, with crude oil prices approaching $100 per barrel in November 2007. All these factors are supporting double-digit growth in demand for alternative energy sources such as solar, wind and nuclear power.
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
100
12
80
10
60
8
40
6 Jul-07
Apr-07
Oct-06
Jul-06
Apr-06 Coal
Oct-07
14
Jan-07
120
Jan-06
Price ($)
Exhibit 2: Prices of conventional sources of energy
Crude Oil
Natural Gas
Source: Bloomberg
Booming market for solar energy The solar energy market has experienced strong growth in recent years. Solar energy demand has been growing consistently at 35-40%annual rates in recent years1. The solar energy technology market is valued at around $10 billion currently and continues to expand at high double-digit rates2. Solar device manufacturers in Europe, the US, China and Japan are investing significant amounts of capital in new production facilities and new technologies. The percentage of the sun’s rays that reach the earth’s surface could satisfy global energy consumption 10,000 times over3. On average, each square meter of land exposed to sunlight receives 1,700 kWh of energy every year. Because of Exhibit 3: Global cumulative PV capacity 7000
6634
5167
5250
MWp
3847
3500
2795 2201
580
669
795
948
502
1994
1995
1996
1997
1998
1750
1150
1428
1762
2006
2005
2004
2003
2002
2001
2000
1999
0
Source: EPIA
1 2 3
Solarbuzz - Solar Energy Industry Statistics European Photovoltaic Industry Association (EPIA) – Solar generation IV-2007 European Photovoltaic Industry Association (EPIA) – Solar generation IV-2007
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
the abundance of this energy source, solar energy offers an attractive long-term solution to the world’s energy needs. Cumulative installed capacity of solar photovoltaic (PV) systems around the world has increased from 1,200 MWp in 2000 to 6,500 MWp in 2006. Worldwide installations of PV cells and modules have been expanding more than 35% annually since 1998.
Declining PV generation costs accelerate solar energy deployment The actual cost of electricity varies around the world based on differences in consumption patterns and delivery costs. According to the EPIA, the cost of solar electricity will be reduced by half over the next 10-15 years. As the cost of Photovoltaics (solar power technologies that employ semiconductor materials to convert solar radiation into electricity) is reduced and the cost of conventional energy continues to rise, PV will become even more price-competitive and gain a greater share of the overall energy market. Generating costs of PV-powered electricity have declined steadily and continue to fall, as shown in the table below. Exhibit 4: Development of utility prices and PV generation costs
€/kWh
Photovoltaics Utility peak power Utility bulk power
1.0
0.8
900 h/a: 0.60 €/kWh
0.6
1800 h/a: 0.30 €/kWh
0.4
0.2
1990
2000
2010
2020
2030
2040
Note: The blue band indicates that market support programmes will be necessary until about 2020 in some markets. Source: EPIA (h/a – Hours per annum)
Deutsche Bank analysts predict the solar PV industry will achieve price parity with grid electricity within five to seven years, enabling PV to compete effectively as a complementary source of electricity for point-of—use generation and consumption. Calyon Securities analysts also anticipate grid parity for PV technologies within five years, and look for a five-fold increase in global solar equipment sales to approximately $90 billion by 2010.
Thin film technology gaining solar energy market share PV cells are generally made from either crystalline silicon sliced from ingots, castings or grown ribbons, or thin film, deposited in thin layers on a low-cost backing. Up until 2006, crystalline silicon was used to produce around 93% of cells whereas only about 7% was produced from thin film. Thin film technology is expected to gain a much larger share of the PV market in the future because of its advantages over crystalline silicon modules, which include lower material consumption, lower weight and a smoother appearance. EPIA expects thin film market share to represent about 20% of PV module production by 2010.
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Exhibit 5: Cell technology shares in 2006
2.7%
4.7%
0.2% 2.6%
43.4%
46.5%
Mono Crystalline Silicon Multi Crystalline Silicon Cadmium Telluride Source: Photon International, March 2007
According to a NanoMarkets LLC report, the global thin film photovoltaic (TFPV) market will expand to $7.2 billion in 2015 from just over $1.0 billion today. It will continue to grow faster than the crystalline silicon PV market and also outperform other solar energy technologies.
Solar energy eliminates greenhouse emissions Solar energy is one of the most attractive options for replacing fossil fuels since it causes no pollution. An off-grid solar system that replaces a typical diesel unit can save about 1 kg CO2 per kilowatt hour of output. The pollutants from fossil fuels are a major source of global warming. Many countries have signed the Kyoto Protocol, agreeing to substantially reduce emissions of carbon dioxide and other gases. In addition, there are national and regional pollution control boards which are mandating stricter emission standards.
Political support and tax incentives for solar energy Governments have created financial incentives to promote solar installations in a number of countries, most notably Germany, Spain, and the US. The US Congress is contemplating extending the Solar Tax Credit which provides a tax incentive for companies investing in PV systems. Legislation to extend the solar tax credit for 10 years is advancing through both houses of the US Congress, and a new bill called the Solar Opportunity and Local Access Rights Act has been introduced. Also, President Bush has proposed a large funding increase for solar energy research. His program targets the US deployment of 5-10 GW of solar power capacity by 2015 which could rise to 70-100 GW by 2030.
XsunX, Inc. (OTC BB: XSNX)
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
XsunX Business Strategy Strong research and development capabilities XSNX was founded in 2003 to develop and commercialize advanced thin film solar cell designs and processes. The Company acquired three existing patents that same year relating to methods for integrating semi-transparent PV devices into windows. The Company successfully created small area (12 cm X 12 cm) and large area (40 cm X 40 cm) prototypes of semi-transparent PV coatings in 2004. Also in 2004, XSNX acquired the exclusive rights to a portfolio of chemical and plasma deposition technologies and contracted with a third-party research facility to further refine its technologies. In 2005, the Company successfully proved its processes for manufacturing semi-transparent solar cells on plastic substrate, expanded its intellectual property portfolio and developed manufacturing processes enabling the use of inexpensive plastics for solar cell substrates. As a result of these breakthroughs, XSNX was awarded the 2005 World Technology Award in the Energy Division for its development of a semi-transparent solar cell. Last year the Company shifted its focus from licensing its technologies to producing and commercializing thin-film amorphous solar energy modules. XSNX developed a commercially viable production process and began building a prototype solar cell device incorporating amorphous silicon. This device allows dissimilar materials and operating currents to be used to deliver high energy conversion gains. XSNX has established a research and development facility in Golden, Colorado which provides the infrastructure and tools necessary for advancing its technologies to commercialization. In 2007, the Company focused on preparing a well-defined plan for building and financing its solar module manufacturing facilities. A phased build-out has begun of its prototype production line and a 25 MW thin film solar cell manufacturing plant. XSNX has recruited a scientific advisory board consisting of recognized leaders in solar technology development representing over 30 years experience in commercial applications for advanced thin film processes. XSNX’s scientists and engineers work with a variety of research and development partners, including highly skilled scientific consultants, industry partners, government research agencies and academic institutions.
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Thin-Film Amorphous Solar Energy Modules XSNX’s thin film solar modules are designed with two stacked layers of amorphous silicon, a proven, reliable thin film material that provides the exceptional performance needed for commercial and industrial applications and installations in warmer climates. Exhibit 6: Tandem Junction, Amorphous Silicon Solar Cell for XASI-120 Modules
Reflector and Back Contact
MAGNIFIED VIEW
PIN Tunnel Junction PIN
Incident Sunlight
PIN Device (a-SiC) PIN Device (a-Si)
Quadlam Encapsulate EV A
SnO2 Textured TCO Extruded Glass Superstrate Aluminum Frame P
I
N
Tunnel P
Bus Bar
Incident Sunlight I
N
ZnO Back Surface Al Back Contact Bus Bar EVA
Multiple Layers of Coatings
Glass Superstrate
QuadlamEncapsulat
Source: Company Reports
The Company’s XASI - 120 Solar Modules are designed to outperform in environments where other solar panels experience significant conversion loss. Based on experimental and limited commercial use of its thin film formulas the Company anticipates that its amorphous silicon and thin film material used in XSNX’s modules will achieve a stabilized efficiency of 7.9% at the module level. These modules are mounted on a low-cost aluminum frame and standard UL approved J-box.
Advantages of amorphous silicon thin film XSNX’s design offers numerous performance advantages over traditional crystalline silicon solar cells. First, amorphous silicon outperforms other technologies in cloudy and overcast weather conditions. While crystalline silicon devices may produce higher peak energy potential, XSNX’s solar modules generate superior average and total watts over a complete 24-hour cycle. Amorphous silicon also consistently outperforms other solar cell designs in warm weather conditions and in cloudy and/or overcast conditions. Another advantage of amorphous silicon is that the materials are readily available and pose no environmental risk. This is in sharp contrast to other solar cell technologies which incorporate hazardous heavy metals in their design. Finally, amorphous silicon manufacturing is a proven technology with a track record of 30 years of commercial volume production.
XsunX, Inc. (OTC BB: XSNX)
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Characteristics of XSNX’s ASI – 120 solar cell module • • • • • • • •
Rated Power (P Max) 120 Watts @ STC Nominal Voltage 50V/100V Limited Warranty 20 years High Power Module: (120 Watt@ STC) using thin amorphous silcon Environment friendly: No heavy metals such as cadmium or lead UL, TÜC & IEC Certifi¬able High Voltage: 50V, ideal for use with high power inverters for On-Grid applications No expensive solar tracking devices needed and no moving parts
Target Markets XSNX’s target market includes large-scale solar energy installers and operators such as solar farms, government agencies, utility companies and large commercial installations having power needs of one megawatt or higher. These more sophisticated users will likely prefer amorphous silicon because of its superior performance on an average and total basis and suitability for large-scale applications. The keen interest these customers are expressing in XSNX’s technology is evidenced by the fact that the Company has already pre-loaded its sales pipeline with more than 100 MW of reserved capacity.
Target Customer • • • • •
Solar farms - License Holders in Germany, Spain & Canada Government Agencies - Bureau of Land Management, Department of Defense Power Purchase Agreements - Renewable Ventures Utility Companies - Meeting Green Mandates Large Commercial Installations
Manufacturing Capacity XSNX’s goal is to put 100 MW of base production capacity in place as quickly as possible. The Company is currently in the process of building a baseline production system which will enable it to perfect key variables such as materials, processes and chemistry and serve as the blueprint for its 25 MW production system. XSNX expects to have the baseline system in place by mid-year 2008 and the 25 MW production system up and running by year-end 2008. The Company will be utilizing the $21 million funding commitment from its financing partner to purchase key components and sub-systems for the production line such as cleaning systems, laser systems, specialized disposition systems and material transport systems. XSNX anticipates having a full 100 MW of base production capacity in place by February 2010.
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Competitive Analysis The following companies are among XSNX’s competitors in the PV solar module market: First Solar, Inc. and its subsidiaries engage in the design, manufacture, and sale of solar electric power modules. The solar module is a polycrystalline thin film structure that employs cadmium telluride semiconductor material to convert sunlight into electricity. The company sells its products to solar project developers and system integrators primarily in Germany. The company was founded as First Solar Holdings, LLC in 1999 and changed its name to First Solar Holdings, Inc. Further, it changed its name to First Solar, Inc. in 2006. The company is headquartered in Phoenix, Arizona. SunPower Corporation designs, develops, manufactures, and markets solar electric power products primarily in the United States, Germany, and Asia. It offers solar cells, solar panels, and inverters, which convert sunlight to electricity compatible with the utility network for residential and commercial applications. The company also provides imaging detectors based on solar power technology primarily for medical imaging applications, as well as infrared detectors based on high performance all back contact technology primarily for use in computing and mobile phone applications. In addition, its subsidiary, PowerLight Corporation, offers PowerGuard Roof System, a roof-mounted solar panel mounting system; PowerTilt solar power system; SunTile?roof integrated system for residential market; Ground Mounted PowerTracker systems; Fixed Tilt and PowerTracker systems for parking structures; and metal roof system and day lighting with translucent solar panels. SunPower Corporation sells its products to system integrators and original equipment manufacturers. The company was incorporated in 1985 and is headquartered in San Jose, California. SunPower Corporation is a subsidiary of Cypress Semiconductor Corporation. Suntech Power Holdings Co., Ltd., through its subsidiaries, engages in the design, development, manufacture, and marketing of photovoltaic (PV) cells and modules. It also provides PV system integration services in China. The company’s products are used in various residential, commercial, industrial, and public utility applications for on-grid electricity generation, as well as for off-grid use, such as stand-alone lighting for street lamps, garden lamps, telecommunications relay stations, and mobile phone networks. It sells its products to solar distributors, engineering and design firms, and other energy product distributors, as well as installers, system integrators, property developers, and value-added resellers. The company was founded in 2001 and is headquartered in Wuxi, China. JA Solar Holdings Co., Ltd., through its subsidiaries, designs, manufactures, and sells solar cells primarily in the People’s Republic of China. The company offers monocrystalline solar cells. It sells its products primarily through a team of sales and marketing personnel to solar module manufacturers, who assemble and integrate its solar cells into modules and systems that convert sunlight into electricity. JA Solar Holdings Co. also sells its products to customers in Germany, Sweden, Spain, South Korea, and the United States. The company was founded in 2005 and is based in Ningjin, the People’s Republic of China. Canadian Solar, Inc., together with its subsidiaries, designs, develops, manufactures, and markets solar module products that convert sunlight into electricity for various uses. Its products include a range of standard solar modules to general specifications for use in various residential, commercial, and industrial solar power generation systems. The company also designs and produces specialty solar modules and products based on customers’ requirements. Its specialty solar modules and products consist of customized modules that its customers incorporate into their own products, such as solar-powered bus stop lighting, and complete specialty products, such as solar-powered car battery chargers. In addition, the company implements solar power development projects, primarily in conjunction with government organizations to provide solar power generation in rural areas of the People’s Republic of China. It sells standard solar modules to distributors and system integrators, and specialty solar modules and products directly to
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
various manufacturers, who integrate these solar modules into their own products or sell and market them as part of their product portfolio. Canadian Solar offers its products to customers located worldwide, including Germany, Spain, Canada, China, Japan, and the United States. The company was founded in 2001 and is headquartered in Markham, Canada. Energy Conversion Devices, Inc. commercializes materials, products, and production processes for the alternative energy generation, energy storage, and information technology markets. The company operates in two segments: United Solar Ovonic and Ovonic Materials. The United Solar Ovonic segment designs, develops, manufactures, and sells proprietary thin-film solar (photovoltaic or PV) modules, which are lightweight, thin, flexible, and durable products for converting sunlight into electricity. It sells these PV modules to commercial roofing materials manufacturers, builders and building contractors, and solar power installers/integrators, who incorporate these PV modules into their products and services for commercial sale. The company also sells PV modules for ground-mounted and residential applications and, for some applications, manufactures and sells framed PV products. The Ovonic Materials segment invents, designs, and develops materials and products based on its materials science technology, principally amorphous and disordered materials. The company is commercializing NiMH materials and consumer battery technology through this segment internally and through third-party relationships, such as licenses and joint ventures. The company also engages in pre-commercialization activities for various emerging technologies, such as Ovonic solid hydrogen storage technologies, Ovonic metal hydride fuel cell technologies, and Ovonic biofuel reformation technologies. The company operates in the United States, Germany, China, Japan, Italy, and internationally. Energy Conversion Devices was founded in 1960 and is headquartered in Rochester Hills, Michigan.
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Financial Analysis Financial Record XSNX is still in an early development stage and has yet to generate meaningful revenues from product sales. Up until recently, the Company’s efforts were focused on building its portfolio of intellectual properties and refining its technology. In 2007, the Company’s focus has shifted from licensing its technology to the commercial production of solar cells and solar modules. Production on a limited basis may begin in late 2008 but we don’t anticipate the Company will be generating meaningful product sales until FY 2009. Operating expenses declined in the nine months ended June 30, 2007 to $1.7 million from $2.2 million in the comparable FY 2006 period because of greatly reduced expenses for warrants, which represented 43.6% of overall expenses last year. XSNX’s major expense areas in the first nine months of FY 2007 were salaries, R&D expenses and legal and accounting expenses, which represented 34%, 19% and 12%, respectively, of overall expenses. Salaries and wages were higher this year because of additional hires in the areas of marketing, finance and engineering. Research and development spending declined from 31% of expenses last year to 19% of expenses this year due to the winding down of outsourced R&D initiatives. Legal and accounting expenses were 116% higher this year as a result of asset acquisition agreements. The Company generated net interest income this year because of conversions of debentures into common stock and the investment of XSNX’s cash balance in interest-bearing accounts and the Sencera note4. The Company’s net loss declined 44% year-over-year to $1.5 million or $0.01 per share in the nine months ended June 2007 from $2.7 million or $0.02 per share in the prior year nine-month period. Exhibit 7: Selected income statement data
Nine months ended June 2007 Revenue Total Operating Expenses Operating Profit/ (Loss) Net Interest Income/(Expense) Net Loss Loss / Share (Diluted)
Nine months ended June2006
$6,880
$8,000
$1,689,334
$2,179,421
($1,682,454)
($2,171,421)
$155,574
($539,024)
($1,526,880)
($2,710,445)
($0.01)
($0.02)
Source: Company Reports
4
Sencera Note : is a seven- year ,10% installment credit note providing up to $1.5 million for developing technologies for licensing
XsunX, Inc. (OTC BB: XSNX)
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Liquidity & Capital Requirements At June 30, 2007, the Company had cash of $1.4 million, down from $4.3 million at fiscal year-end 2006. Intangible assets, which include patents and marketable prototypes, were valued at $1.8 million. Investments increased to approximately $1.3 million in the June FY 2007 quarter due to notes receivable and interest accrued receivable. The Company has minimal current liabilities, no long-term debt and stockholders’ equity of $4.7 million. Since its inception, XSNX has accumulated losses of approximately $10.7 million. Exhibit 8: Selected balance sheet data
June 30, 2007
September 30, 2006
Cash & cash equivalents
$1,363,815
$4,305,105
Net working capital ( excluding cash)
($220,014)
($239,581)
$482,484
$397,626
$3,104,308
$1,807,615
$536,269
$588,699
Nil
Nil
$4,730,593
$6,270,765
Net Fixed Assets Net other assets ( intangibles & investments) Total current liabilities Total Long term liabilities Total Stockholder’s Equity/ (deficit)
Source: Company Reports
In November 2007, the Company announced a $21 million financing commitment from Fusion Capital Fund II, LLC, a Chicago-based institutional investor. XSNX has already received $1 million in funding, which it is using to purchase components and sub-systems for its 25 MW production system. After the SEC has declared effective a registration statement related to the transaction, the Company has the right, over a 25-month period, to sell its shares of common stock to Fusion Capital, from time to time, in amounts up to $1 million per sale, depending on certain conditions set forth in the stock purchase agreement, up to the full aggregate commitment of $21 million.
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Outlook and Valuation As mentioned earlier, XSNX plans to commence commercial production of thin film solar modules in late 2008. We expect production to rise sharply from an initial range of approximately 0.5 megawatts of solar modules in FY 2008, rising to approach 25 megawatts in FY 2009 and 100 megawatts in FY 2010. Assuming revenues per watt of approximately $2.80, we anticipate the Company may produce FY 2008 revenues of $1.4 million. We are forecasting FY 2009 revenues at approximately $60 million and FY 2010 revenues at $275 million, assuming production increases partially offset by declining revenues per watt. Revenues per watt will likely stabilize when price of solar electricity reaches parity with grid electricity. Most experts believe solar energy will achieve grid parity within the next five to seven years. Exhibit 9: Projected Renevues $ in millions
We further expect XSNX to become profitable in FY 2009 and to generate operating margins approaching a 40% range in FY 2010, as economies of scale are realized on increasing production volume.
Valuation As shown in the table below, XSNX currently represents the least expensive investment in solar energy market growth based on manufacturing capacity divided by current share price. In addition to representing the lowest investment cost per megawatt, XSNX offers investors the additional advantages of low technology risk (since amorphous silicon is a proven technology with high volume production for some 30 years), a seasoned management team who understand the solar energy market and how to guide start-ups to profitable operation, and a compelling valuation relative to PV industry peers. Other companies in the PV industry peer group (consisting of Energy Conversion Devices, First Solar, Sunpower, Suntech Power, JA Solar and Canadian Solar) trade at Price/Sales multiples ranging from a low of three times sales for Canadian Solar to a high of 52 times sales for First Solar. The average Price/Sales multiple for the six company peer group is 17 times sales. The average forward Price/Earnings multiple for the PV industry peer group is 38 times earnings. At the Company’s current $48 million market capitalization, XSNX trades at less than one time our FY 2009 revenue estimate. We think these shares are substantially undervalued at current prices, and are thus initiating coverage of XSNX with a Speculative Buy rating and a $1.50 price target, based on a four times forward Price/Sales multiple of our $60 million FY 2009 revenue estimate.
XsunX, Inc. (OTC BB: XSNX)
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Valuation $ / Megawatt
Exhibit 10: Most Attractive Valuation per Megawatt of Targeted Capacity (1)(2)(3)
$14 $12 $10 $8 $6 $4 $2 $0
$13.36 $13.93
$6.48 $1.48 $1.78
$3.07 $3.19
(1) Valuation includes current Market Cap., Debt, and announced capital raises for future expansion (2) Canadian Solar, First Solor, Energy Conversion Devices and Suntech Power Market Cap assumes no futher financing (3) Stock Prices as of 8/27/2007
While we believe these shares present an attractive value at current prices, investors should keep in mind that XSNX has yet to commence commercial production of solar modules and is at least a year away from generating meaningful revenues. We further advise investors to consider the risk factors discussed below before investing.
Risk Analysis Unproven technology The Company’s solar modules have a limited operating history. While XSNX’s technology has been successfully tested in proof of concept demonstrations, its solar modules have not yet been deployed in commercial applications. If the modules degrade faster than anticipated or has a shorter useful life, XSNX may incur high warranty expense and/ or lose customers.
Reliance on government incentives can pose risk Solar power is not yet cost-competitive with conventional energy sources or other renewable energy source. Government incentives are required to sustain demand and create incentives to further reduce solar energy production costs. These subsidies and incentives are subject to policy changes and fiscal budgets.
Reliance on key vendors The Company relies on outside vendors to provide components and sub-systems for its production system. If it is unable to locate vendors to build its components or sub-systems or if these vendors are unable to meet XSNX’s timetable, the Company may encounter delays in bringing production on-line.
Patent infringement risk The Company has patents on its technology portfolio relating to photovoltaic technology design, manufacturing processes, and the development of technology. However, XSNX cannot be certain of the level of protection, if any, that will be provided by our patents in the US and abroad. In addition, its patents may not be broad enough to prohibit a competitor from deploying a similar technology.
XsunX, Inc. (OTC BB: XSNX)
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Management Tom M. Djokovich,
Mr. Djokovich has over 30 years of executive management and entrepreneurial experience, managing growth and innovation in both the high-tech and building industries. He has held senior executive positions with publicly-traded corporations and raised millions of dollars in capital investments for business development. He has also been directly responsible for managing investor relations and compliance with Security Exchange Commission regulations.
Joseph Grimes,
Mr. Grimes has more than eight years experience in thin film technology and manufacturing with Applied Magnetics Corporation. He served as Vice President (Defense Solutions) of Envisage Technology Company, where he directed and managed the defense group business development process, acquisition strategies and vision for next generation applications. He was also the Co-Founder, President and CEO of ISERA Group. Mr. Grimes holds a Bachelor’s degree in business economics and environmental studies, and a Master’s in computer modeling and operation research applications, both from the University of California.
Jeff Huitt,
Mr. Huitt has 20 years’ experience financial management experience with both larger organizations and start-ups. Most recently, he served as COO/CFO of a start-up defense contractor and guided the company through high growth rates and recapitalizations. He has also worked with venture capital firms, technology and non technology start-ups, and served as Controller of Qwest Wireless. His current responsibilities at XsunX include operations management and coordination of resources. He is a CPA and holds a Bachelor of Science degree in Accounting and a Master’s in Business Administration from the University of Denver.
Thomas Anderson,
Mr. Anderson has been a director of the Company since August 2001. He has been working as an environmental scientist in the environmental consulting field for the last 17 years. He was a Senior Environmental Scientist with Concurrent Technologies Corp. from November 2000 to December, 2004. Between March and November 2000, he was employed as a Senior Hydrogeologist at Stone & Webster Engineering, Inc. From July 1998 to March 2000, he worked with Advanced Integrated Management Services as an Environmental Scientist/Engineer. He has worked as a research assistant in the Environmental Science and Engineering Program at the Colorado School of Mines. He completed an M.S. in Environmental Science and Engineering at the Colorado School of Mines in 1998. Since 1998, he has been providing consulting services to the Department of Energy and Department of Defense for addressing complex characterization and remediation activities at radioactive and hazardous waste sites. He is currently employed as a Senior Environmental Scientist at Apogen Technologies in Los Alamos, New Mexico.
President and Chief Executive Officer
Chief Operating Officer
Chief Financial Officer
Director
XsunX, Inc. (OTC BB: XSNX)
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Mr. Oz Fundingsland,
Mr. Fundingsland has over 40 years experience in sales, marketing, executive business management, finance and corporate governance. Up until 1994, he worked for Applied Magnetics, a disk drive and data storage company, where he played a key role in the company’s growth from $50 million to over $550 million in sales. For ten years, he served on the board of directors of the International Disk Drive Equipment Manufacturers Association (IDEMA) where he continues to serve as an advisor to the board. He also continues to provide consulting services to a variety of companies in the disk drive, optical, software, and LED industries.
Dr. Michael A. Russak,
Dr. Russak is also a member of the Company’s Scientific Advisory Board. Dr. Russak has over thirty five years of industrial experience progressing from a research scientist to senior executive officer of two public companies. He has expertise in thin film materials and devices for magnetic recording, photovoltaic, solar thermal applications, semiconductor devices as well as glass, glass-ceramic and ceramic materials. He also has over twelve years experience at the executive management level of public companies with significant off-shore development and manufacturing functions. He received his B.S. in Ceramic Engineering in 1968 and Ph.D. in Materials Science in 1971, both from Rutgers University in New Brunswick, NJ. During his career, he has been a contributing scientist and program manager at the Grumman Aerospace Corporation, a Research Staff Member and technical manager in the areas of thin film materials and processes at the Research Division of the IBM Corporation at the T.J. Watson Research Laboratories. In 1993, he joined HMT Technology, a manufacturer of thin film disks for magnetic storage, as Vice President of Research and Development. His responsibilities included new product design and introduction. Dr. Russak became Chief Technical Officer of HMT and held that position until 2000 when HMT merged with Komag Inc. Dr. Russak was appointed President and Chief Technical Officer of the combined company. He continued to set technical, operational and business direction for Komag until his retirement at the end of 2006. Dr. Russak is currently Executive Director of IDEMA-US, the trade association for the Hard Disk Drive Industry. He has published over 90 technical papers, and holds 23 U.S. patents.
Dr. John Moore,
Dr. Moore is a Materials Scientist who holds the position of Trustees’ Professor and Head of Department of Metallurgical and Materials Engineering at the Colorado School of Mines. Dr. Moore is also Director of the interdisciplinary graduate program in Materials Science and Director of the Advanced Coatings and Surface Engineering Laboratory, ACSEL, at the Colorado School of Mines in Golden, CO. Dr. Moore established the Advanced Coatings and Surface Engineering Laboratory (ACSEL) at the Colorado School of Mines in 1994. The main objective of ACSEL is to perform fundamental research in advanced PVD and CVD systems that will aid the US thin films, coatings and surface engineering industry. ACSEL is a national and international leader in research on advanced coatings, surface engineering and thin film processing. Dr. Moore was awarded a B.Sc. in Materials Science and Engineering from the University of Surrey,
Director
Director
Chairman - Scientific Advisory Board
XsunX, Inc. (OTC BB: XSNX)
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
UK, in 1966, a Ph.D. in Industrial Metallurgy from the University of Birmingham, UK, in 1969, and a D.Eng. from the School of Materials of the University of Birmingham, UK, in 1996. Dr. Richard K. Ahrenkiel,
Dr. Ahrenkiel is a Research Professor of Metallurgical and Materials Engineering at the Colorado School of Mines in Golden, CO. He is also a Consultant and Research Fellow Emeritus at the National Renewable Energy Laboratory, (formerly the Solar Energy Research Institute) in Golden, CO, where he has worked from 1981 to 2005. He became a Research Fellow at NREL in 2000. His area of specialization is the measurement and characterization of photovoltaic cells and materials. He is one of the world’s experts in the area of carrier recombination and carrier lifetime. He also works in photovoltaic device design and modeling. He received a B.S. degree in Engineering Physics and the M.S. and Ph.D degrees in Physics at the University of Illinois, Urbana. He joined the staff of the Research Laboratories of the Eastman Kodak Company. From 1972-76, he worked on the newly founded electronic photography project using silicon charge coupled devices as sensing elements. He joined Laser Division of the Los Alamos National Laboratory in 1976 (then LASL), and in 1978, he became a Group Leader in the Electronics Division of LANL. He is a Fellow of the American Physical Society, the Institute of Electrical and Electronic Engineers (IEEE), the American Vacuum Society, and the Optical Society of America.
Dr. Edward T. Yu,
Dr. Yu received his A.B. (summa cum laude) and A.M. degrees in Physics from Harvard University in 1986, and his Ph.D. degree in Applied Physics from the California Institute of Technology in 1991. In September 1992, following a one-year postdoctoral appointment at the IBM Thomas J. Watson Research Center in Yorktown Heights, NY, he joined the faculty of the University of California, San Diego as Assistant Professor of Electrical and Computer Engineering. He was promoted to Associate Professor in 1996 and Professor in 1998. Professor Yu has been the recipient of an NSF CAREER Award (1995), an ONR Young Investigator Award (1995), an Alfred P. Sloan Research Fellowship (1995), and the UCSD ECE Graduate Teaching Award (1997). He has served on numerous conference organizing committees and currently serves as General Chair/Past Program Chair of the TMS Electronic Materials Committee and Electronic Materials Conference, and Fellow of the DARPA Defense Sciences Research Council (DSRC). At UCSD Professor Yu directs a research laboratory concerned generally with the characterization, understanding, and application of physical phenomena and of material and device properties at nanometer to atomic length scales. Current research interests in his group include III-V nitride heterostructure materials and device physics; scanning probe characterization of advanced electronic materials and devices; solid-state nanoscience and nanotechnology; and photovoltaics and other technologies for energy generation. The results of his research have been reported in over 140 refereed journal and conference publications and over 150 conference and seminar presentations.
Member - Scientific Advisory Board
Member - Scientific Advisory Board
XsunX, Inc. (OTC BB: XSNX)
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Analyst: Lisa Springer, CFA Initial Report December 17th, 2007
Disclaimer Beacon Equity Research (otherwise known as BER) is an independent research firm specializing in small and micro capitalization companies. BER has no investment banking or consultation conflicts thereby minimizing the inherent conflicts of interest between the research analysts and the companies they cover. BER is not a registered investment advisor or broker dealer. No information in this report should be construed as an endorsement to either buy or sell any securities mentioned in this report. The analyst(s) who prepared this report rely on publicly avail¬able information which neither the analyst, nor BER, can guarantee to be error-free or factually accurate. All conclusions in this report are deemed reasonable and appropriate by the author. The Private Securities Litigation Reform Act of 1995 provides investors a “safe harbor” in regard to forward-looking statements. To fully comply with the requirements of this law, BER cautions all investors that such forward-looking statements in this report are not guarantees of future performance. Unknown risk, uncertainties, as well as other uncontrollable or unknown factors may cause actual results to materially differ from the results, performance or expectations expressed or implied by such forward-look¬ing statements. Investors should exercise good judgment and perform adequate duediligence prior to making any investment. BER and its affiliates have been compensated a total of fifteen thousand dollars directly from the company for enrollment of XSNX in its research program and other services. Ratings and price targets in this report should not be construed as recommendations or stock price predictors. Readers of this report are urged to use due-diligence in any purchase of security listed herein. Readers should consult the Company’s SEC filings as well as our initial report on the firm to better understand the inherent risks associated with this security. There may be many uncontrollable or unknown factors which may cause actual results to materially differ from the results, performance or expectations expressed or implied by such forward-looking statements. Investors should exercise good judgment and perform adequate due-diligence prior to making any investment. All decisions are made solely by the analyst and independent of outside parties or influence. I, Lisa Springer, CFA, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report. Lisa Springer, MBA, CFA - Research Analyst Lisa serves Beacon Research Partners as a research analyst. She brings to the company over 15 years experience in equity research and investment marketing. Prior to joining Beacon, Lisa worked as an equity analyst for an independent research provider. She has also held positions as investor relations officer for a NYSE-listed company and director of financial analysis for a large consulting firm. Lisa earned an MBA from the University of Chicago and is a Chartered Financial Analyst (CFA).
XsunX, Inc. (OTC BB: XSNX)
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