Tech Futures:
May 7, 1999
By Michael Volker
A closer look at some locals; VCP Commentary and Update
Local Picks
Brent Holliday, in his recent column on T-Net, wrote about how many me-too entrepreneurs were getting into the internet game to cash in on the internet's love affair with investors. He made some good points about looking beyond today and building strong businesses for tomorrow. Following that lead, let's take a look at a few of the BC issuers that might fit this category - i.e. have some real substance to bet on. Sorry, let's give the dot-coms a rest this week.
At last month's Vancouver Enterprise Forum event, Rainmaker Entertainment Group's (TSE:RNK) CEO Bob Scarabelli gave a straightforward down-to-earth presentation on his company. Rainmaker is involved in the provision of post-production services to film, television and new media producers, as well as the development, production and distribution of feature films, television programs and interactive gaming products. The company has facilities in Vancouver, B.C. and Los Angeles, CA.
As Bob himself commented, this is a company that investors have difficulty in pigeon-holing. Does the company's work in video compression algorithms make it high tech? Does its post production work make it a service firm? Where's the sizzle?
You've undoubtedly seen some of Rainmaker's work. The firm's credits include feature films such as Armageddon, The Horse Whisperer, Batman & Robin, The Sixth Man, Flubber, Rocket Man, and Titanic, to name a few. Some of its television features include First Wave, Betaville, The Crow, The Outer Limits, Poltergeist, and Dead Man's Gun. The company also has numerous commercials and DVD productions to its credit.
Rainmaker's share price has drifted south as of late, hovering around $1.80 at the low end of its 52 week trading range of $1.70 to $4.15. This may be partly due to a marriage with Motion Pictures Corp which didn't work out and which the company is in the process of unwinding.
Bob made some compelling arguments, albeit in a low-key sort of way, about why Rainmaker would be a good local bet. The most refreshing point I heard was people related, i.e. their commitment to quality and service. Rainmaker has assembled an impressive team of professionals from around the globe (indeed, a brain gain for BC) to respond to the entertainment industry's needs for fast response in a very competitive skills-intensive business. That's fine to say, but where's the proof?
That proof is the sales record. For 1999, Rainmaker expects to generate $37 million in revenue, an increase of 70 per cent over 1998 revenue of $21.7 million. With only 11.2 million shares issued, that puts the market value of the company at just over $20 million. In 1998 Rainmaker reported a net after-tax profit of $1.1 million ($0.10 per share) as compared to a profit of $2.4 million ($0.24 per share) on sales of $18.4 million for the 1997 fiscal year.
Rainmaker has been around since 1979. It's been through some proverbial learning experiences but the customer endorsement demonstrated by the current growth and magnitude in sales tells me it might be a good investment, especially at current prices.
Marine BioProducts International Corp (VSE:MBP) is another local company that I'm particularly fond of. Because I'm a director of this one, you might think I'm a bit biased. Indeed I am and here's why.
I've known the CEO, Dr. Ron Foreman, a former UBC Professor of Botany for more than a decade. He's such a fanatic for excellence that he drives me nuts. Ron, a tenured professor, left the security of academia to venture into the entrepreneurial domain. I've always viewed professors as being entrepreneurial in nature: they are their own bosses, they're receptive to new ideas and change, eager to learn, innovative, enterprising, good marketers (i.e. always making pitches to research funding organizations), and they don't accept failure as an option. Ron fits this picture well.
The Company has been publicly traded on the VSE since 1992 and has raised and expended over $10 million on research and development.
Marine BioProducts is now on the verge of producing and shipping a real product. For a biotech venture, that's a major milestone. The company recently moved into a new production plant on Annacis Island where it is gearing up to manufacture agar for the pharmaceutical industry. Like all good biotech firms, Marine Bio forged an alliance with Big Pharma Becton Dickinson Corp of Maryland. Becton has provided financing in excess of $1 million (US) towards development and has entered into a $10 million (US) purchase agreement.
Agar is a colloid extracted from certain species of seaweed. Its unique physical properties makes agar of great importance in the biopharmaceutical, microbiological/medical, and food industries. You probably have seen it as the gelatinous substance used in petri dishes to grow cultures. There are two essential steps in making agar: 1) obtaining the raw material (seaweed) and 2) extracting the agar from the seaweed.
First, with respect to obtaining the raw material, we're not talking about your average Howe Sound seaweed. The seaweed from which commercial pharmaceutical quality agars are produced can only be found in certain regions of the world like Mexico and Spain. The supply is scarce and unpredictable. To address this, Ron has been able to identify and successfully grow in a controlled environment, i.e. in large on-shore tanks, the necessary seaweed species (Gelidium). This in itself is an exercise that would take a competitor several years to replicate even if that competitor knew all of the trade secrets behind this development. The firm built a pilot-scale cultivation facility, and has developed Gelidium strains, nutrient and harvesting protocols, and a model for optimizing Gelidium growth. It is now working towards building commercial growing sites in Canada and the USA. No other company has been able to successfully grow the correct strains.
Second, with respect to extraction, the company has developed the process technology to extract agar from seaweed. Although there are a few commercial producers of agar which process seaweed found in nature, Marine BioProducts' research into the extraction process has allowed it to produce very high quality agar from its own consistent uniform supply of raw material as opposed to relying on the vagaries of nature. In essence, the Company controls both the input and output side of the production equation.
The strengths and key advantages the company has are that a) potential competitors are faced with a high barrier to entry (costly, multi-year development cycle) b) world demand for agar is increasing ($1.5Bn market), c) world supply is unpredictable and sporadic, d) it has a supply agreement with Becton Dickinson and e) it has developed its own technology for both cultivating and extracting agar.
With regard to risks or threats to the firm, the main challenge now is to ramp up the production. This will require the hiring of new operations related talent and, although the company has more than $3 million cash on hand, it will need to raise additional capital in order to increase production output. In the past, as is common with tech companies, most of management's time has been consumed by research and development. In its next stage of development the company will need to give more attention to the financing and operational issues, e.g. attracting new investors. To help him make the transition, Dr. Foreman has formed a board with strong external directors.
For example, John Withers, formerly Executive VP with the Pattison group, is acting CFO. Anthony Pasquarelli, a past president with a Becton Dickinson division, is offering strategic marketing assistance. Ken Teskey, President of Focus Capital Pacific Corporation, brings legal and business expertise to the table. David Beatty, who recently joined the board and holds directorships with various blue chip firms including the Bank of Montreal, brings broad business expertise. Company chairman Ken Hallatt has an impressive track record in building manufacturing ventures such as Maxim Corporation, Sun-Rype, Sleeman, and Western Garnet.
A prospectus offering of more than $10 million was initiated last year, but was abandoned in favor of a smaller $3.5 million ($1.00 per share) private placement when market conditions weakened in mid-summer. This emphasizes the need for on-going investor relations activities.
An excellent local example of a company which has done a superb job in cultivating investor interest over a long development period is QLT Phototherapeutics (TSE:QLT). When QLT first went public on the VSE, its shares were trading in the $2.00 area. QLT spends more than $1 million per year on investor relations activities. This has allowed the company to finance its growth by attracting new investors. Just recently, QLT announced that it had closed a new equity offering of $200 million. Its shares are trading in the $70's, having reached a high of $79.15. Not a bad example for Marine Bio to emulate!
With the CEO's commitment to excellence and quality, supplemented by a strong and relatively new board of directors, I think Marine BioProducts deserves a close look. The shares are presently trading around $0.80, near the low end of their 52 week range of $0.60 to $2.13.
CREO Products Inc. is a well known local private company just appearing on the maybe soon-to-be-public radar screen. CREO is one of BC's largest and fastest growing tech companies specializing in pre-press printing technology. This, if it proceeds, will likely be a very popular IPO with lots of upside potential. I believe that CREO will be the first BC firm to hit the $500 million sales mark. Keep an eye open for this one.
Sierra Wireless Inc. has now had its IPO priced at $14.50 per share. The public offering consists of 4.5 million shares, of which 2.83 million are treasury shares while the balance is a secondary offering. Sierra Wireless, a Richmond firm, provides wireless data communications equipment used for wireless applications such as internet access and remote data base inquiry. Scotia Capital Markets is the lead underwriter.
For companies like CREO and Sierra, it helps to know any of the senior management. Ask them to put you on their "president's list". This is a way of making sure that you can buy some of the offering at the initial offering price rather than having to bid for it on the open market.
VCP Commentary and Update
Mecca Medi-Tech Inc (VSE:MEC) is a Venture Capital Pool (VCP) company which started trading on the VSE on April 29th. Although the IPO price was only $0.20 per share, the stock never even traded close to that level. It has been trading at the high end of its $1.65 to $1.90 range. This tells me two things: 1) the market will indeed put a premium on the corporate team and 2) perhaps the IPO should have been priced higher to leave less money on the table (even though the VCP ceiling is $0.30).
Most of the folks behind Mecca are the same as those behind Forbes Medi-Tech Inc (VSE/TSE:FMI). Forbes' directors Tazdin Esmail, Jack Miller, Egon Novak and Percy Skuy are all behind Mecca. This will be a good group to watch. It'll certainly be interesting to see how an acquisition will be structured in view of the high valuation which the market is placing on Mecca, i.e. with 3.4 million shares issued, Mecca has a market cap of almost $6.5 million.
Silicon Slopes Capital Corp (VSE:SLS) is offering its IPO on May 10th, and is expected to begin trading on May 12th. Silicon is a VCP looking for a local high tech acquistion.
Finally, our >Venture Capital Pools chart listing all the VSE VCP companies has been updated. Of the 18 VCP's that have issued a prospectus to date, two have completed their "qualifying transaction" (QT) thereby removing their VCP status. These are First Venture Capital Corp which has become Lasik Vision (VSE:LSK) and Colloqium Capital Corp which has become Imagis Technologies Inc (VSE:NAB).
What Do You Think? Talk Back To
Mike Volker
Tech Futures is a bi-weekly column that focusses attention on new and emerging BC publicly listed
technology companies. Mike Volker is the Director of the University/Industry Liaison Office at Simon
Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology entrepreneur. He owns
shares in many of the companies he writes about. Contact: mike@risktaker.com
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