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May 3, 2006 at 2:09 PM

Neah Power goes from blue chips to Pink Sheets

Deputy Business Editor Rami Grunbaum contributes this report about Neah Power, the Bothell company working on energy systems for small devices:

Neah Power Systems, which is working on a miniature fuel cell to replace batteries in electronic devices, raised most of its first $21 million in financing from what you might call blue-chip venture-capital firms: Alta Partners, Intel Capital, Seattle’s Frazier Technology Ventures and the like.

Now it has gone where few companies dare to tread: the Pink Sheets, a stock market largely populated by enterprises with dubious histories and equally dubious prospects.

After engineering a merger with a publicly traded shell company last month, Neah Power this week filed its Securities and Exchange Commission paperwork

Turns out the company has more than 100 million shares issued, meaning that the stock’s rapid run-up this month ­– from less than $1 to above $3.50 on Monday — lifted its market capitalization to more than $350 million.

That’s a lot for a company with “little or no revenue,” almost no cash except $2.1 million from a last-minute private placement, and a need for at least $15 million to $20 million to continue its R&D through the end of the year, according to the filing.

It’s a bit of a reach, but compare Neah Power’s market cap with Northstar Neuroscience, which is slated to go public this week and would become the first technology IPO in Washington state since late 2004. At $12 per share, the low end of its estimated price range, Northstar would be worth $276 milllion — and that’s with something like $100 million in cash on hand after the IPO.

Stock Web sites typically don’t carry much info on Pink Sheet stocks beyond the trading price. Analysts don’t cover the stocks. All that makes them wildly unpredictable — Neah Power’s filing acknowledges that both the Pink Sheets (and the OTC Bulletin Board, to which it hopes the stock can graduate) are subject to “extreme price and volume fluctuations… [that] are often unrelated to operating performance and may adversely affect the market price of our common stock.”

And indeed, after cresting at $3.70 on Monday, the stock was down to $2.80 at mid-day Wednesday. The shares trade under the ticker NPWS.

Unlike selling company shares to the public in an IPO, Neah Power’s approach of going public with a reverse acquisition won’t put any new capital into its coffers. It does give management a liquid currency, but one with volatile value.

The backdrop for Neah Power’s venture into the Pink Sheets is a generally weak outlook for small tech IPOs.

Mark Heesen, president of the National Venture Capital Association, wrote recently that “we are becoming increasingly concerned about the economic implications of the lackluster IPO market for venture-backed companies.” His group recently noted that while acquisitions of venture-backed companies last quarter were at their highest level in five years, there was a paltry number of IPOs and their average value was down to 2002 levels.

Evidently, the owners of Neah decided finding a buyer was not their best option, and trying an IPO was not an option at all. The conventional approach would have been to seek more VC funding. But instead, they are proceeding down a less well-charted road.

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