Revenues

Beacon Equity Research's Victor Sula released what it calls an "independent" research report about BioSolar on September 12. At the time, BioSolar was trading for 35 cents per share, just 28% of the current share price. Because many of Sula's themes are sector-oriented, disputing them is very difficult. However, I am highly skeptical of his revenue estimates and projected multiples for BioSolar for reasons I would outline.

The analyst projected 2008 revenues of $6.3 million for the company, "assuming the most conservative scenario." The likelihood of BioSolar meeting this target appears to be very slim for a couple reasons. First, the company hasn't produced one dollar in revenues since its inception. Additionally, for the reasons illustrated in the chart below, BioSolar doesn't appear to be properly funding or equipping its research efforts:

As you can see, BioSolar's peers with similar market caps are all investing significantly more in developing products in the highly-competitive solar space. The chart makes it quite clear: BioSolar is not positioning itself to compete for years to come. Instead the company is spending its precious resources ($55,000 since September) to promote its stock -- charges that are considered "marketing" on BioSolar's income statement.

Comparables

For what it's worth, Ascent Solar Technologies (NASDAQ: ASTI) produced revenues of less than $750,000 in the first three quarters of 2007 while DayStar Technologies (NASDAQ: DSTI) has produced just $180,000 in revenues during the same time period. With all of these companies in related businesses and listed as "peers" of BioSolar in Beacon Equity Research's report, I find the prospects of BioSolar earning significant revenues next year to be minimal at best.

Another worthwhile comparable is Hoku Scientific (NASDAQ: HOKU). Despite very similar market capitalizations, Hoku Scientific has $24.8 million in shareholder's equity and $9.7 million in cash, while BioSolar has shareholder's equity of less than $900,000 and less than $150,000 in cash.

Sula ascribed the industry multiple of ten times sales onto his extraordinarily optimistic revenue assumptions. With its greatly inferior investment in research and development, lack of employees, and lack of shareholder's equity, BioSolar doesn't appear to deserve the same multiple as its peers.

Independent research?

The report ends with the interesting claim that "All decisions are made solely by the analyst and independent of outside parties or influence." Oddly enough, this claim follows this disclosure:

"Beacon Equity Research and its affiliates have been directly compensated a total of fifteen thousand dollars and one hundred thousand restricted rule 144 shs directly from the company for enrollment of BSRC in this research program and other marketing services ."

These two statements appear to be in direct conflict of one another. The ability of an analyst to remain independent of outside influence when the company itself is paying for the research is highly questionable as conflict of interest may occur. In fact, I'd argue that those two statements are very misleading and definitely raise some red flags in regards to communications.

Fundamental issues

That's not all that we heard from Beacon Equity Research. In fact, Beacon's Sula recently released an updated research report (pdf) on BioSolar. This report regurgitates many of the same big picture arguments behind the solar sector, the secular growth story, etc. But all of these themes still don't answer the fundamental question surrounding this company: How is BioSolar, with its two employees and minimal R&D spending, going to produce revenues far above DayStar and Ascent? The prospects of this occurring appear to be highly unlikely.

Without a reasonable explanation, Sula increased his projected multiple-to-sales to 20.36x from 10.83x -- a 40% premium to the peer group (according to Sula himself!). For the reasons I explained earlier, a more reasonable valuation for BioSolar is most certainly below its peer group rather than above.

Star Consulting and a ticking time bomb

In addition to ascribing a very optimistic multiple, the updated report also managed to disclose a different compensation plan for Beacon Equity Research:

BER and its affiliates have been compensated one million shares from Star Consulting for enrollment in this research program and to coordinate a marketing program.

This is also very interesting (and eyebrow raising) because BioSolar is not Star Consulting's only play in the penny stock space. In fact, this group paid for Beacon Equity's research on two penny stocks within the last six weeks, which have not performed too well. Expert Group (OTHER OTC: EXPT) was covered by Beacon here (pdf) at 11 cents per share and the stock quickly spiked to 29 cents per share following the report. Unfortunately, those who bought the hype are now sitting on 2.5 cent shares as you can see below:



Beacon Equity Research also received compensation from Star Consulting to produce a report on Mammoth Energy (OTHER OTC: MMTE) which is available here. At the time of the report's release (less than one month ago), the stock was trading for 12 cents per share. Currently, Mammoth trades for a paltry 3.5 cents per share.

Because no one really knows the true identity "Star Consulting," it's impossible to definitively declare the intention of this group and why it pays for Beacon Equity's research reports. In fact, upon inquiry, BioSolar's CEO said, "We do not know who the Star Consulting is." However, because Star Consulting compensated Beacon Equity Research with one million shares, there's currently a "ticking time bomb" for BioSolar investors: as soon as the restrictions on selling these shares expire, Beacon Equity Research is probably going to dump its position to the market because it is sitting on a $1 million+ position that BER, too, probably views with limited upside. At current trading volumes of an average of 230,000 shares per day, a rapid sale of Beacon Equity Research holding of one million shares will send shares lower. Unless the firm pre-arranges a block transaction, these shares will likely serve to flood the market with supply.

More research and other tactics employed

It's also interesting to note two other pay-for-research firms were hired by BioSolar in the last few months. Twin Trader was compensated $15,000 to promote BioSolar about a month ago and Red Chip Companies was compensated $25,000 to promote the company just last week. This brings BioSolar's total investment in promotional research reports to $55,000 since mid-September.

Moreover, although I can't definitively declare spam emails were distributed regarding BioSolar because I never received one, I've seen message board posts reporting being "inundated" with spam about BioSolar.

The additional pay-for-research reports and spam emails are just a few more ways to help explain the stock's incredible explosion during the last few months despite little publicly announced news related to the underlying business.

Executive offices are where?

I'm also quite skeptical of the company's "principal executive offices" which, after a quick Google search, I found to be the location of a temporary placement firm. This space ran for $4,581 (Line: Rent) for the first three quarters of 2007 according to the income statement found here. $4,581 for three quarters assumes a rate of roughly $510 per month. In late 2006, rental rates were $2.40-2.80 per square foot in Santa Clarita. To get an idea of the size of the space, let's assume the company secured a rate in the the bottom of this range because the data is about a year old (its precision is probably less than perfect) and I'm giving the company the benefit of the doubt. From these estimations, I find the total office space to be about 210 square feet, or roughly 15x15 feet. Regardless of the specificities, I'm highly skeptical of the company's ability to create new solar technologies from a small office rented for $510 per month staffed with the company's two full-time employees.

CEO David Lee

There are also red flags related to the company's CEO, David Lee. First off, I came across an SEC filing linking a certain David Lee to another penny stock, Machine Talker (OTCBB: MTKN). As you can see from the chart below, the stock has performed poorly since it became a publicly traded company. The stock, which debuted at more than 20 cents per share (time of Lee's sale of his 1,080,000 shares), is now sitting around 7 cents per share. Moreover, Twin Trader received $2,500 to cover the stock on April 5, 2007.

Also, both BioSolar and Machine Talker are owned by Wings Fund Inc., a "business planning firm" based in Santa Barbara, California. For what it's worth, four of the eight companies owned by Wings Fund are described as "developing breakthrough technology" in their respective introductory sentences. That can be interpreted as you wish, but my inborn response was one of skepticism.

BioSolar's Lee's response to my inquiries about his past (including his ownership of Machine Talk) was quite simple:

"I understand everyone should be entitled to his/her opinion based on various pieces of available information. My priority at this time, however, is on making BioSolar a real revenue producing company. I respectfully request that my valuable resources (time and sanity) would be used only on making BioSolar successful at this point, and I hope you would understand."

While I certainly respect his decision to make no comment on the matters, his statements have eliminated almost all of my skepticism I had held about him being the same David Lee involved at Machine Talker and Ramsey-Shilling. After all, if these accusations were false I'd assume he would simply deny them.

Conclusion

For all I know, BioSolar could be the hot stock of 2008. But considering BioSolar's incomparable R&D spending and resources, the CEO's checkered past and the extraordinary valuation attributed to this development-stage company, investors need to be very careful before purchasing shares of this high-flier.

Disclosure: Kevin Kelly has no position (long or short) in any of the companies mentioned in this article.