Hoku Scientific falls
10.7% in debut

The alternative energy company’s
stock finally opens after its offering
price is cut again

Hoku Scientific Inc., an alternative energy company started four years ago in a two-bedroom Oahu apartment, fell 10.7 percent yesterday in its initial public offering while making paper multimillionaires of its co-founders, Dustin Shindo and Karl Taft.

The Kalihi-based fuel-cell technology developer, which became the first Hawaii-founded company in six years to go public, raised $21 million after 3.5 million shares were issued at the offering price of $6. Another $3.15 million could be raised if the stock’s underwriters decide in the next 30 days to purchase all of the 525,000 additional shares that are available to cover overallotments.

That would bring Hoku’s gross proceeds up to $24.15 million, but it still would be only about a third of the $62.79 million — including overallotments — Hoku hoped to fetch when underwriters Piper Jaffray, SG Cowen & Co. and Thomas Weisel Partners LLC filed an IPO registration last month anticipating a price range of $11 to $13.

The stock, listed under the ticker symbol HOKU on the Nasdaq National Market, had its first trade yesterday at $6.01 and traded in a range of $5.30 to $6.09 before closing down 64 cents at $5.36 on volume of 775,563 shares.

Expectations were lowered this week after lead underwriter Piper Jaffray twice reduced the offering price — first to $8 to $9 and then to yesterday’s $6 offering price. The 3.5 million shares offered yesterday also were a reduction from the 4.2 million shares — plus 630,000-share overallotment — originally planned.

Hoku develops fuel-cell membranes designed to supply cleaner and cheaper energy to homes, generate fewer harmful emissions in automobiles and provide longer life to portable devices such as laptops, cell phones and hand-held digital assistants.

Alternative energy analyst Walter Nasdeo said the lower offering price and reduced number of shares indicate that the underwriters likely had some difficulty attracting interest in the company.

“Maybe the reception or market for it is not as robust as what they thought it would be in the beginning,” said Nasdeo of New York-based Ardour Capital Investments. “This is still a development-stage company and there’s going to be a kind of wait-and-see, show-me attitude that I think we’ll have to get through a little bit of.”

Shindo, the 31-year-old chairman, president and chief executive, owns 4.8 million shares and saw his holdings worth $25.7 million at the end of yesterday’s trading.

Taft, 32, the chief technology officer, has 1 million shares that were worth nearly $5.4 million at the close of the market.

“We’re all very proud of him for his accomplishments. He’s worked very hard,” said Shindo’s father, Cal, prior to the offering.

Cal is vice president of Mehana Brewing Co., a family run microbrewery business on Hilo that Dustin established in 1995 and still serves as president.

The public debut of Hoku yesterday ended a week of anticipation that saw Piper Jaffray cut the price range after being unable to find sufficient demand. The stock initially was scheduled to begin trading on Wednesday,

Bill Richardson, general partner of venture capital firm HMS Hawaii Management Partners and a Hoku investor before the public offering, called the IPO ”a great win for Hawaii.”

Richardson, who invested an undisclosed amount in Hoku a little less than two years ago, said he was pleased to be getting a return on his money so quickly.

“Early stage venture capital investors generally think in terms of a five- to seven-year liquidity period,” he said.

Still, Shindo, Taft and other shareholders of the company won’t be able to cash in on the IPO just yet. Hoku and Piper Jaffray have lock-up agreements that prohibit investors who held stock prior to the IPO from selling their shares for at least 180 days.

The last time a Hawaii-founded company went public was in 1999 when Digital Island Inc., a seller of Internet and networking services, and Cheap Tickets Inc., a discount ticket retailer, had IPOs within three months of each other. Both companies have since been acquired by larger companies.

Hoku, which has lost $6.5 million since its inception in March 2001, lost $728,000 in the fiscal year that ended March 31. But that's considerably down from the previous two years, when it lost $2.9 million in fiscal 2004 and $2.8 million in fiscal 2003. Revenue jumped to $2.9 million in fiscal year 2005 from $55,000 in fiscal 2004 because of the completion of service contracts with Sanyo Electric Co. and Nissan Motor Co.

Nearly all of Hoku’s revenue to date has come from testing and engineering-service contracts with Sanyo and Nissan. Hoku also is the prime contractor in a Navy fuel-cell demonstration project.

Shindo, who owns 28.8 percent of the company, was paid a salary of $222,500 and a bonus of $12,400 in fiscal 2005, according to the company’s IPO registration filing.

The company said in the filing it plans to use $6 million of the net proceeds from the IPO to help with the construction of its new headquarters, $5 million to continue research and development, and the balance for working capital and other general corporate purposes, including potential acquisitions.

Hoku said it is in the process of building approximately 14,000 square feet of combined office, research and development and manufacturing space in Kapolei.

Cal Shindo said his son always has been motivated to succeed.

“He just studies what’s needed for the future and looks into trends to see where things are going,” Cal said. “In this particular case, he was studying energy. He’s very goal oriented, very intelligent, very aggressive. He knows what he wants to do and goes after that.”

Shindo and Taft, who according to Cal have known each other since they were 3, graduated together from Waiakea High School on the Big Island. Shindo has a bachelor’s degree in accounting from the University of Washington and a master of business administration from the Darden Graduate School of Business Administration at the University of Virginia.

Taft has a bachelor’s in chemistry from Pacific University in Forest Grove, Ore.; a master of science in environmental science and engineering from Oregon Graduate Institute and an MBA from Portland State University.