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The Renewable IPO, Part 1: the Good, Bad and Ugly

2010 proved to be a much better year for the initial public offering and renewable energy companies, perhaps surprisingly, saw their share of activity. In 2010 there were more than double the number of initial public offerings than in 2009, and we also saw a significant increase in secondary offerings as well.

Worldwide public investment in renewable energy increased 21 percent last year, with China representing 20 percent of the 2010 market, according to VB/Research of London. The REW 40 Index is up 15 percent over the past year at this writing. While it’s hard to predict if 2011 will be a frothy IPO market for renewable companies, it is clear the public’s appetite for risk in renewables is growing. Despite what you may hear about the effect of lower natural gas prices on renewables, I believe that it is public market performance and availability of willing investors, not commodity prices, that drives the IPO market.

The renewable IPO field saw a series of fits and starts in 2010. The fits — Solyndra, PetroAlgae, Trony Solar — withdrew or reduced their IPOs. But there were some starts as well. Even though Codexis didn’t raise the $100 million it had hoped for last April, it still pocketed $78 million from public investors with its IPO. And Amyris is trading at the $30 level, nearly double the IPO of $17.20.

Codexis and Amyris both had successful IPOs even though they are money-losing early stage companies because they have proven technology and real revenues and contracts, with potential high-revenue products in the pipeline. Revenues were $101.5 million last year. The company develops custom enzymes and catalysts for industrial chemical production and has a project going with Shell, a major investor, to speed up production of biofuels from nonfood sources.

Amyris had revenues of $68.5 million for its synthetic biofuels technology. To date, the company has been funded by venture capital investors who -- based on how much money has been invested – must be confident that the company could be "the leading provider of renewable specialty chemicals and transportation fuels worldwide." The company’s Biofene yeast-based chemical takes Brazilian sugarcane and ferments it into a petroleum replacement with several different applications, including diesel and jet fuel.

California-based cylindrical-PV panel manufacturer Solyndra withdrew its IPO in late June citing “ongoing uncertainties in the public markets,” opting for a $175 million private placement and a $535 million loan guarantee from the federal government instead. The Solyndra withdrawal was described by some observers as “muddying the waters” for other solar panel makers to hit the markets, but considering the company had private and government options, it was only prudent for management to pull the $300 million public offer until a better time.

PetroAlgae, on the other hand, is an example of what not to do. VentureBeat called PetroAgae one of its worst clean tech investments of 2010. The site reported that most analysts said the company "jumped the gun" because it burned through $58 million in three years and has no revenues. Worse, it has a complex corporate structure and has already restated its financial statements.

Companies need investors to understand their story in order to buy into it, including the management, technology, corporate structure and business and financial plan. Complex is bad; simple is good.

The decision to go public is multifaceted, situational and a big step for any company. Not all IPOs are huge. According to Keating Capital/Capital IQ, 85 percent of NASDAQ companies have market caps less than $1 billion and 40 percent of listed companies are unprofitable. About 10 percent had revenues less than $10 million.

If your company determines that an IPO is the way to go, part two of this article will discuss what to expect and how to prepare.  It isn’t all about the money.

Greg Pfahl, CPA, is an audit partner in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Southern California. He also serves as a local leader for the alternative energy practice area. Pfahl can be reached at gpfahl@heincpa.com or 303.298.9600.

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