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NanoDynamics IPO Is Looking Needy

This clean-energy IPO offers promise -- but not much profit.

Initial public offering candidates like to preface their prospectus with a bit of imagery to give investors a quick taste of its offerings.

NanoDynamics

, which filed for an IPO last week, is no different.

The Buffalo, N.Y.,-based clean energy start-up has a picture of Earth with a gigantic post-it note thumbtacked onto Greenland (I guess the post-it adhesive kept falling off the polar ice cap). On it are four "to do" items, all checked off: Energy, Water, Food, Environment.

NanoDynamics' goal, apparently, is to take care of all of these -- surely one of the most ambitious corporate visions since somebody promised to organize all the world's information. And who, in good conscience, could wish them anything but success?

To top it off, the company is going to do it all using nanotechnology. That puts NanoDynamics at the crossroads of everyone's favorite speculative theme of 2006 -- clean energy -- with everyone's favorite speculative theme of 2004 -- nanotechnology.

Unlike many of the nano-issues favored by speculative investors, however, NanoDynamics isn't quite the moonshot it appears to be. It claims to have some products ready for sale, including NDRevolution, a 12-volt portable source of power; and its Cell-Pore water filters, which are being evaluated by a number of potential customers.

On top of that, NanoDynamics lists in its prospectus many more potential products, each of which seemed aimed at a market poised for strong growth: carbon nanotubes, nanocement, bacteria-and-fungus-free surfaces, biofuel synthesis, and so on.

And it says it's collaborating with big companies like

Eastman Kodak

(EK)

, India's

Tata Chemical

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and Japan's

Otsuka Chemical

to gauge their commercial potential.

All of which sounds good, but there are a couple of catches: The first is that most, if not all, of that potential commercial revenue is in the future.

In 2006, 89% of NanoDynamics revenue came from federal or state government contracts. That's not unusual for early-stage companies, but it does suggest that NanoDynamics is sticking its hand out into the public markets before it's had a chance to prove itself.

As for that other 11%, here's what NanoDynamics says: "Commercial sales of our products and advanced materials to date have been composed primarily of the sale of golf balls, copper powder, copper flake and silver powder."

In other words, the company made less than a half a million dollars last year in commercial sales, and those sales included metallic powder and golf balls -- albeit golf balls that can reduce hooking and slicing.

So, the only box checked off on NanoDynamic's to-do list so far is a space-age golf ball -- not exactly a crushing blow in the battle to save the environment.

Since its founding in March 2002, the company has brought in an aggregate $8.8 million in revenue, most of it from government contracts to develop emerging technologies. It has spent $19.3 million on research and development and $17.7 million on SG&A expenses (including $1.1 million for its chairman and top four executives last year alone).

Therein lies the other catch: An aggregate operating loss of $35.1 million, which is more than four times aggregate revenue.

How does a company stay in business while spending five dollars for every one it brings in? First, it sells $52.2 million in four rounds of investment ranging from $3 a share to $6.50 a share. Most of that money seems to have been invested by Allan Rothstein, a hedge fund manager who is also NanoDynamics' chairman.

But NanoDynamics is burning through most of that $52 million pretty quickly, so it's time to tap the public markets for $97.8 million. Most of that money is earmarked for marketing, R&D and capital equipment, with the rest in the bank for possible licensing deals or acquisitions.

The last six months or so have been very kind to companies like NanoDynamics -- companies with big plans for developing technologies that have as much disruptive potential as they do an appetite for cash. Most of these companies are entering the public markets with the monitored attention of a nightclub bouncer 30 minutes before the bar closes.

At some point, the party will end. When it does, NanoDynamics will likely have the $98 million it's seeking, but it will also have a fifth box to check off on its to-do list: Profitability.