Octillion (OTC:OCTL): Another Worthless Penny Stock

CEO Previously Fined by SEC

First, see David Phillips’ article on the company’s CEO, Harmel S. Rayat, and his other failed companies. Then take a look at the SEC’s website to find out that Octillion’s CEO and majority shareholder was previously fined $20k for stock promotion. Andrew Left of StockLemon wrote a nice (if dated) article on Rayat’s company Hepalife (OTC:HPLF) back in 2003. David Phillips (of The 10Q Detective) wrote a more recent attack on Hepalife.

The CEO is still working at a number of his other penny stock companies. Therefore, the company states (in the May prospectus):

“Our officers and directors are also officers, directors, and employees of other companies, and we may have to compete with the other companies for their time, attention and efforts; none of our officers and directors anticipate devoting more than approximately twenty-five (25%) percent of their time to our matters.”

That the officers of the company are not full time is not exactly a good sign!

Valuation

As of June 29, 2007, the company had 51.125 million shares outstanding. At a recent closing price of $4.40 per share, that gives the company a $225 million market cap. The company has a book value of just under $1 million.

Back in mid-April (see the 8k) the company sold shares for $0.50 apiece in a private offering (actually, three warrants were included with each share, so this overstates the price). Has the company really become 10 times more valuable in the last 5 months?

Misleading Statements

Octillion triumphantly announced that NREL research had validated its own methods. However, as of right now, Octillion has nothing more than an idea and some silicon dust. Sure, the method they claim to use seems to work well. But I doubt Octillion, with a minuscule R&D budget, will be the company to get this technology to work consistently in the lab, let alone in a commercialized product. Octillion has issued another press release to claim that other solar power breakthroughs validate its technology.

The company likes to mention that the solar technology is covered by 10 US patents. However, the company does not own those patents–they are owned by U of Illinois Urbana/Champaign. It is only working to commercialize the patents. Since the company first started working with UIUC in August 2006 until May 2007, it has paid a grand total of $89,000. Not exactly a world-class research budget (see page 4 of this prospectus for details). Over the last three months, the company spent $151k on investor relations and only $27k on R&D.

It turns out that Octillion does not even have an exclusive license to develop and market the technologies it is investigating:

From page 17 of the company’s recent 10Q: “During the term of our ISURF Agreement and the UIUC Sponsored Research Agreement, we will determine whether to acquire an exclusive license from, respectively, ISURF and UIUC to the technologies underlying the agreements. The final terms and conditions of any such licenses cannot now be determined. If the results of the continuing research projects do not warrant our exercise of our option to negotiate an exclusive license to market the ISURF Nerve Regeneration Technology or the UIUC Silicon Nanoparticle Energy Technology, we may need to abandon our business model, in which case our shares may have no value and you may lose your investment.”

So even if these technologies end up working, the universities could demand more money for the licensing rights than Octillion could pay, and another company with deeper pockets could end up buying the license.

Knowing When to Sell

The brothers of CEO Harmel S. Rayat sold a large chunk (1.7% of the company’s shares) of their stake in the company in May (or soon thereafter, as set forth in the May prospectus, page 46). Other selling shareholders included two corporations that were wholly-owned by employees of Octillion (6.5% of the total shares outstanding).

Is Smart Money Buying?

David Gelbaum (a noted philanthropist) recently filed a 13D, stating that he (actually, a trust benefiting him and his wife) owned 6.7% of the outstanding shares of Octillion. However, considering his large stake in another OTC stock that I consider to be greatly overvalued (Worldwide Water, WWAT.ob), I doubt his investing prowess.

Conclusion: Stay Away

I peg Octillion’s fair value at $1 million, its book value. More aggressive speculators might believe it to be worth 10x book. Cynics might value it at $0 considering its CEO’s track record. No matter what it is at least 25x overvalued. For more information, as always, check out the company’s SEC filings.

Disclosure: I am neither long nor short OCTL. See my disclosure policy.