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Silicon Valley / San Jose Business Journal - by Lindsay Riddell

Barry Cinnamon is CEO of Akeena Solar, a company that installs solar panels for businesses like the Plumed Horse restaurant in Saratoga.

Akeena Solar Inc., didn’t want to miss the fervor that has led to record investment in clean technologies over the last few years.

But traditional methods of capital raising — through private equity or by growing large enough to file a public offering — were too slow.

“We knew access to capital would be a key success factor,” says Barry Cinnamon, CEO of the six-year-old solar installer. “We looked at our options and saw we could either raise venture capital or private equity or try and raise capital another way.”

Ultimately the company decided on a reverse merger — a backdoor route to the public markets gaining attention among some market makers — which ultimately paved the way for Akeena’s recent NASDAQ listing.

Akeena’s story is one being touted by some niche investment bankers trying to legitimize the reverse merger. But with just a handful of successful examples like Akeena to follow and reputational challenges to overcome, the reverse merger is still far from mainstream.

Brian Keating of New York-based investment bank Keating Investments is pitching the reverse merger to local firms.

“If they’ve got a good solid industry and are a decent buy and are going to grow their earnings at some point, there’s a market out there,” he says.

In a reverse merger a public company agrees to acquire a private company and relinquish control of the board and most of the shares to the private company.

In Akeena’s case, the shell it used was on the OTC Bulletin Board, a place where companies can continue to trade after they have been delisted from Nasdaq.

The private company avoids the review by state and federal regulators that traditional IPOs incur because the public company has already gone through that process. If they can sell their story to investors they can raise money, grow their companies, grow revenue and ultimately qualify for NASDAQ.

The shell companies in a reverse merger generally get between $500,000 and $1 million.

It’s unknown how many reverse mergers result in relisting on major stock exchanges, though Nasdaq estimates it’s only a handful.

There have been about 200 reverse mergers per year over the last three years since DealFlow Media started tracking them in 2004. Some of those are foreign companies trying to tap American capital while some are American companies like Akeena looking for fast cash and increased exposure.

Akeena was willing to risk it.

Akeena’s Route to Nasdaq

In spring of 2006, Los Gatos-based Akeena wouldn’t have qualified for a public offering on its own. It was too small, not to mention lacking in profitability.

Cinnamon had raised venture capital before but the process was time-consuming and he wasn’t sure venture capitalists would go for a contractor with no intellectual property. Plus, he wanted to maintain more control of the company than traditional venture might allow.

Friends urged him to look into a reverse merger as a faster, less expensive and less dilutive route to going public. A traditional public offering can take a year or longer.

Akeena found a shell company willing to sell in early August 2006 and one week later the company reverse-merged into the shell of Fairview Energy Corp. Inc., a hydro-electric power company out of British Columbia that retained its public listing after it went belly-up. At the time, Akeena’s shares were valued at $1 per share.

The risk with shell companies is that there could be hidden liabilities, lawsuits or collections agents waiting for the former public shell company to gain assets that could be seized. The new entity is responsible for those liabilities.

But, the Securities and Exchange Commission changed the rules in 2003, requiring bulletin board companies to report their financials to improve transparency.

And Cinnamon says Akeena used consultants to find a clean shell company and hasn’t encountered lurking liabilities.

And Cinnamon says Akeena used consultants to find a clean shell company and hasn’t encountered lurking liabilities.

“That was the easy part,” Cinnamon says. “Next came the hard part. Now that you’re a bulletin-board-traded, no-name company some people look down their noses at you because you’re not able to pull off an IPO.”

But the benefits of being public outweigh that risk, he believes.

Public companies can access a growing pool of self-directed investors who operate their own stock trading accounts through companies like E-Trade, Scottrade, Ameritrade and others. They can also access hedge funds which have been more willing to invest in risky or unproven companies. And public trading of stock can provide an alternative to raising private equity which for some companies can be hard to find.

“It was really hard for me to raise money at this company through private equity,” Cinnamon says. “We managed to get a half-million-dollar bank loan. But it’s hard because people don’t want to invest in a contractor and that’s basically what we are.”

Benefits of public trading

Public companies can raise additional financings through Private Investments in Public Equity, or PIPEs, where either stock is issued at a set price or convertible debt is issued to raise capital.

While trading on the bulletin boards, Akeena raised $3 million through private placement simultaneously with the reverse merger.

Then it concentrated on building the company and growing revenue. Akeena also developed patented technology for the installation of solar panels with some of the first funding it raised, helping the company attract investors in later financings.

“We had two things going for us,” Cinnamon says. “We had intellectual property and we had revenue.”

A second PIPE financing followed in March raising $4 million and in June another PIPE brought in $13 million.

A year after its reverse merger, the company qualified for a listing on the Nasdaq Capital Markets, NASDAQ’s small-cap exchange. Before the listing, the company was trading at less than $5 per share. At the end of October, shares were trading at about $8 and have climbed as high as $10.05.

A year after its reverse merger, the company qualified for a listing on the Nasdaq Capital Markets, Nasdaq’s small-cap exchange. Before the listing, the company was trading at less than $5 per share. At the end of October, shares were trading at about $8 and have climbed as high as $10.05.

The company is still operating at a loss but it’s growing its top line and hopes to grow large enough to attract institutional investors and increase trading volume.

With its new public leverage, Akeena courted Chief Financial Officer Gary Effren, the former CFO of Knight-Ridder Inc., a Fortune 500 company.

Akeena’s market cap is about $200 million, small by Nasdaq standards but trading volume is about 225,000 per day, already more than twice the average for Capital Markets-listed companies.

Revenue reached nearly $7.5 million in the second quarter, up 168 percent from the comparable quarter in 2006. Projected revenue should be somewhere near $30 million this year, Cinnamon says.

Nasdaq says it doesn’t track the number of reverse mergers that result in Nasdaq listings because those numbers aren’t relevant but a spokesman says the best guess is that only a handful make it.

“We don’t have an opinion,” says Bill Shaw, managing director of new listings for NASDAQ’s corporate client group in Menlo Park. “Our listing standards are the highest in the world. If anyone files to go public on Nasdaq, if they’ve met all the criteria and a company comes out clean and their records are right and their earnings are right, then we don’t have issues.”

LINDSAY RIDDELL covers finance, business services (law/CPA firms, etc.) and sports management for the Business Journal. She can be reached at 408-299-1829.

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