By Michael
Volker
Eschewing Obfuscation, Year End Checklist, The
Innovation Agenda, Good Buys, CPC Comments
and Update, and Coming Events
Eschewing Obfuscation
I recently saw the words "eschew obfuscation"
on a bumper sticker. It got me thinking about some of the obfuscation in
the stock market, especially with respect to corporate performance - i.e. who's
making money.
A fundraiser asked me which tech companies in B.C. were
profitable so that she might approach them for some sponsorship support. To
answer her, I went through the T-Net20 and T-Net100 lists. I'm amazed at how few
companies are producing positive earnings. I thought it worthwhile to highlight
this information. I guess the question to ask is why are the unprofitable ones
not making any money? What's wrong with these companies? Is it because they are
still development (R&D) stage firms or is it because they're in a heavy
expansion mode or are they simply not well run or managed? (And, I won't even
suggest that some of it is due to 9-11, heaven forbid!)
The reasons vary. Some previous top performers such as Creo
Products (TSE:CRE) and PMC-Sierra (NASDAQ:PMCS) are,
uncharacteristically, reporting red ink. In Creo's case, they've had extra costs
associated with the acquisition of Scitex (which turned them into B.C.'s
first $1 billion in sales company) and a slowdown in the demand for pre-press
printing hardware while PMC got caught in the telecom sector downdraft (in spite
of Cisco's accolades for PMC's technology).
Others, such as the biotechs and companies still in the
R&D stages of their evolution, e.g. Ballard Power (TSE:BLD) have
never reported a profit. Yet, of these, QLT Inc (TSE:QLT) is reporting
one heck of nice bottom line, thank you. Another biotech, Angiotech
Pharmaceuticals Inc (TSE:ANP), is just starting to break even, reporting a
small $27k profit on revenue of $1.1m for the fourth quarter ending in
September. A popular infotech company, Pivotal Corp (NASDAQ:PVTL) has
flirted with profitability and at one point it was running around breakeven but
the last four quarters have steadily deteriorated from a U$4.7 million loss in
Dec.2000 to U$22.6 million in the September 2001 quarter. The ball's in
management's court on this one. I wonder if they're exploring their prospects
for being taken over? This may be their best route to redemption.
Of course, to be really meaningful, one ought to look at
profitability in relation to a company's revenue performance. In the case of ALI
Technologies Inc (TSE:ALT), their recent quarterly profit figure of $2.4m
may not seem like much, but based on revenues of $12.3m, that's a great bottom
line. ALI has always been one of my favorites - nice, steady increases in
revenues and profitability. It may not be one of your meteoric companies, but
then again, its performance has stayed in orbit. Silent Witness Enterprises (TSE:SWE)
has, with recent exceptions, performed like ALI. In its first quarter ended
October 31, revenue increased 26% to $14.1m from $11.1m a year earlier but
earnings were only $207k compared to $1.5m. The company reports that this is due
mainly to "integration costs" of almost $1m associated with an
acquisition. It chose, to its credit, not to isolate these charges on its income
statement, although - to be fair - we ought to add $1m to the $0.2m shown in the
chart that follows.
Regardless of the reasons for their performance,
especially in those companies which are not performing according to plan (i.e.
lack of profitability may be acceptable for development companies if planned
for), I can't help but wonder the extent to which Management is taking it on the
chin. I noted that the CEO of Celestica Inc (TSE:CLS) - the #1 ranked
infotech company, and a Canadian one at that - took a one-third pay cut in these
tough times. We don't often see CEOs sympathizing with shareholders to that
extent. I like it! But, we haven't seen much of that locally! For a quick fit of
envy, just go to quote.yahoo.com, enter the ticker symbol of your choice and
click on "profile" to view the compensation of your favorite exec. It
makes you wonder why salaries keep going up no matter what happens on the bottom
line.
Speaking of obfuscation, it is becoming more and more
difficult to figure out if companies are really making a profit or not. There
seem to be at least three bottom line numbers that get reported (bottom line is
now pluralized to "bottom lines"). These are: Net Profit (after ALL
possible charges - usually the "worst" number); Operating Profit (Net
Profit from operations - excludes non-recurring or special items); and EBITDA
(Earnings before Interest, Taxes, Depreciation and Amortization - usually shows
how good a job management is doing in operating the business before factoring in
taxes, write-offs, etc).
It's not actually that simple. You'll find companies
referring to "adjusted net income", for example. Or, how about
"normalized net income". And you'll see references to things like
"Net Income according to Canadian GAAP" which is different from U.S.
GAAP, and so on. Pretty soon, it's investors who are going to have to hire
the accounting firms - just to interpret what's being reported!
The real bottom line on all this is that it's not a
simple matter to know if a company is making money or not - without lots of
qualifiers.
In looking at the Top 20 B.C. firms (i.e. the T-Net20
list), I looked only at the most recent quarter reported by the companies and I
used (as much as possible from the obfuscation) the operating profit definition
- i.e. all charges (e.g. depreciation, etc. - which is a real cost of doing
business) factored in except for non-recurring extraordinary items. For example,
in its most recent quarter, QLT Inc (TSE:QLT) reported a $5.6 million
operating profit on revenue of $31 million. It also reported a Net Profit of
$11.6 million (in this case the additional profit arose from the sale of an
intellectual property asset, an extraordinary item). On the other hand, if you
take a look at Creo's (TSE:CRE) financials, you'll see an
"adjusted" operating loss (which is sort of an EBITDA) of U$7.8
million on sales of U$143 million but a Net Loss of U$382 million after all of
the pre-adjustments! Whew!
Of the Top 20 BC technology firms, only six are making
an operating profit! One conclusion I've come to over the years - and it's
evident here - is that it is very, very difficult to make a buck and when doing
so, the profits are modest. However, when losses are reported, they're often
very dramatic! Just look at the size and number of the red figures as compared
to the black ones in the chart! If extraordinary items were included, the red
numbers would be much larger. I always like to point this out to students who
think that Corporate Canada is just one big greedy money machine.
WHO's MAKING MONEY?
|
Company |
Last
Trade |
Profit
(Qtr) |
Mkt.
Cap. |
More
Info |
| PMC
Sierra Inc. |
$27.10 |
U$34.5m |
$
4.5 Bil. |
quote/chart,
website |
| Ballard
Power Systems |
$48.20 |
$23.7m |
$
4.4 Bil. |
quote/chart,
website |
| QLT
Photo Therapeutics |
$35.90 |
$5.6m |
$
2.4 Bil. |
quote/chart,
profile,
website |
| Angiotech
Pharmaceuticals |
$81.41 |
$0.03m |
$
1.3 Bil. |
quote/chart,
profile,
website |
| Creo
Products |
$12.72 |
U$7.8m |
$
623.0 Mil. |
quote/chart,
website |
| MacDonald
Dettwiler |
$25.25 |
$7.2m |
$
893.9 Mil. |
quote/chart,
website |
| Sierra
Wireless |
$28.00 |
$2.9m |
$
451.2 Mil. |
quote/chart,
website |
| Westport
Innovations |
$6.27 |
$14.3m |
$
271.1 Mil. |
quote/chart,
website |
| Stressgen
Biotechnologies |
$4.11 |
$7.3m |
$
209.0 Mil. |
quote/chart,
website |
| Pivotal
Corporation |
$5.66 |
U$22.6m |
$
135.8 Mil. |
quote/chart,
website |
| ALI
Technologies |
$18.80 |
$2.4m |
$
198.7 Mil. |
quote/chart,
website |
| Inex
Pharmaceuticals |
$7.35 |
$5.3m |
$
195.5 Mil. |
quote/chart,
website |
| ID
Biomedical |
$6.25 |
$2.9m |
$
187.5 Mil. |
quote/chart,
website |
| 360Networks |
$0.16 |
$164m |
$
118.7 Mil. |
quote/chart,
website |
| Burntsand
Inc. |
$2.22 |
$0.8m |
$
144.7 Mil. |
quote/chart,
website |
| Inflazyme
Pharmaceuticals |
$2.02 |
$3.7m |
$
114.6 Mil. |
quote/chart,
website |
| Intrinsyc
Software |
$2.90 |
$0.1m |
$
93.8 Mil. |
quote/chart,
website |
| Anormed
Inc. |
$3.42 |
$3.7m |
$
87.5 Mil. |
quote/chart,
website |
| Silent
Witness Enterprises |
$11.55 |
$0.2m |
$
71.2 Mil. |
quote/chart,
website |
| Micrologix
Biotech |
$1.09 |
$4.6m |
$
43.0 Mil. |
quote/chart,
website |
Year End Checklist:
It may not be too late yet to do a little tax
maneuvering before the year end. Here are some reminders.
1) Capital Gains - if you have capital gains from the
past three years, and if you have current year capital losses, you have until
December 24, 2001 to sell your dogs in order to use those losses to offset
(and recover cash on) previous gains. Even if you don't have previously
reported gains, it might still be good to sell some dogs because the losses
can be carried forward indefinitely.
2) 30% Tax Credit for BC Investors: BC investors can
invest in products such as the Working Opportunity Fund or FutureFund
Capital (CDNX:FFC) and receive a 30% tax credit. Both funds specialize in
investing in private companies in British Columbia and are RRSP eligible.
Recent market actions have provided both funds with
the ability to invest in junior technology & biotechnology companies at
very attractive evaluations that were not available during the strong
technology markets.
Working Opportunities Fund: The maximum per investor
per year is $5000 and the hold period is 8 Years. Investment in this fund is
at the full estimated market value of the existing portfolio. Working
Opportunity is limited to raising $80M this year and it is expected to sell
out early.
FutureFund: The maximum per investor per year is
$200,000, FutureFund trades on the CDNX, hence is liquid at all times (no hold
period). FutureFund's existing portfolio is estimated to have a value of
approximately $0.60 per share, their current offering is at $0.40 per share.
It is anticipated this offering will close by December 21st.
3) Stock Donations - I like this one - the government
has made permanent the reduced capital gains inclusion rate for charitable
donations of publicly traded securities. This "incentive", which was
going to expire at the end of the year reduces the amount included in the
donor's income to 50% of the amount included for other capital gains. I'm not
sure why they don't just reduce it to 0% - it's not an impossibility and it
may happen yet. In any event, if you have some losses this year, it might make
sense to take advantage of this before Dec 24th or if you're ahead of the game
so far this year, then wait until after Christmas to make the contribution.
That way, you'll brighten up someone's season and you won't have to worry
about the tax due for 15 months. Bottom line: a $10K stock donation only costs
you $1.2K (approx) in real cash, assuming the entire $10K is a cap gain. The
newly created Social Venture Partners - a local charitable organization
formed by socially conscious tech entrepreneurs - would be delighted to
receive your shares!
4) Bonuses - employees ought to defer any year-end
bonuses until the new year so that the bonus will be taxed next year - not
this year. You could even get your employer to send the entire bonus -without
holding back any tax - to your RRSP. Then, you can claim the RRSP contribution
as a deduction this year and the bonus won't be taxed until next
year.
5) Self-employed - for the self employed, it's a good
idea to make capital equipment purchases before the year-end so as to be able
to claim the capital cost allowance (CCA) this year. For the same reason, it
might be prudent to put off a sale of an asset until next year. For those
thinking of taking a bonus or dividend, consider putting this off until the
new year. This is especially attractive for dividends since there's no
withholding tax on these.
6) Check with your advisors - finally, if you're not
sure about something, check with your accountant or financial advisor now. You
can't set the clock back so now may be the time to act.
Thanks to Stewart Reid of Yorkton Securities
and Tim Cestnick of the Globe and Mail for some of these tips.
The Innovation Agenda
Our federal government sees the high tech industry as
key to our country's future wealth. Here in B.C., the tech industry has been
trying to get that point across to provincial politicians for many years and
has achieved that with the newly elected Liberal government. Cutting personal
income taxes was the main focus of our local industry and in 2001 we finally
saw some relief.
To build a strong industry, though, takes more than
just tax cuts. We need to encourage investment by having "going-in"
incentives as well as "going-out" breaks on income and capital
gains. And, most importantly, we need to invest in the natural resources of
the tech sector - the human talent and the on-going development of
intellectual property at our research institutions.
I found some interesting reading in the fed's
parliamentary web site. In
June of this year, the
Standing
Committee on Industry, Science and Technology
produced its fifth report titled, “A
Canadian Innovation Agenda for the Twenty-First Century”. The report notes
that “Innovation,
as founded on Science and Technology, has thus become the principal means for
achieving economic success in the twenty-first century.” Based on this
premise, it follows that an increase in research and development activities is
necessary for innovation.
The latest StatsCan data (November 2001) gave
the total "Gross Expenditures on Research and Development" (GERD)
for 1999 as $17.242 billion. That's the latest year for which actual solid
data exists. For 2000, the estimate is $19.129 billion, an increase of nearly
11%. Projections for 2001 put the GERD at $20.871 billion, but the StatsCan
survey was conducted before the worst of the economic meltdown and 9- 11. When
the 2001 data become available, it may well be lower than that.
Industry observers know
only too well that our GERD-to-GDP ratio, or gross expenditure on R&D per
unit of gross domestic product, has averaged 1.5% compared to the Organization
for Economic Co-operation and Development (OECD) average of 2.2%.
I
recall Finance Minister Paul Martin declaring just over a year ago that
Canada must triple its annual commitment to R&D to $ 47.5 billion by 2010.
Accordingly, new initiatives such as the Canadian Foundation for Innovation
were launched and increased support for existing government programs was
announced.
The Canadian Advanced Technology Association (CATA)
was calling for the creation of a $10-billion fund, to pour
into the economy in a monitored program. "If the economy begins to
recover," said John Reid, CATA's head, "we can cut back on the
additional spending, but if the economy continues to decline, we should be
prepared to spend it all.
The suggestions put forward by CATA were pretty bold,
but in the very least, it gets some debate and discussion going or so I
thought until I read an editorial in the Financial Post last week in
which University of B.C. Business Professor, Paul Kedrosky,
poo-poohed the whole initiative. His piece prompted me to send the following
comments to the Post:
I'm agitated by Professor Kedrosky's very negative
reaction to the Canadian Advanced Technology Association's (CATA) lobby effort
to "Jumpstart the Economy".
At the recent (19-20 November) Conference Board of
Canada's Innovation 2001 conference in Montreal, Canada's "innovation
gap" was the hot topic of the day. Entrepreneurs are seen as the
champions of innovation - they are the ones who bridge the gap between
knowledge and consumers - turning inventions into viable commercial products
for economic benefit. Taking intellectual capital and monetizing it is not
easy - especially early in the innovation chain.
CATA's proposals aim at bridging this gap. As a
university professor, one has the right to be critical of new ideas and
proposals. And indeed, Prof. Kedrosky has thought of all sorts of flaws with
these initiatives. This strikes me as being unduly negative. I have always
thought that professors should balance any criticisms with their own
contributions and suggestions. Not one positive idea is presented in his
attack. I doubt that CATA would expect all of its ideas to be accepted without
debate and refinement.
Having been involved in the tech startup game for
three decades, there's no doubt that we could be doing more of, as well as
doing better in, that which we do fairly well in this country - launching
superb technology ventures!
Prof. Kedrosky appears to be falling into the trap
that's caught many Westerners - the reluctance to get behind a national
initiative that's really going to make a difference. And, this is a national
matter.
The technology industry needs a lot more than just a
few payroll tax breaks in order for we taxpayers to enjoy the fruits of our
investment in basic research. [end of comments]
I cc'd Prof. Kedrosky and he kindly responded to me by
noting that it was not incumbent on column-writers to present better ideas
than the ones being criticized, especially when the premise is nonsensical.
His view is that the suggestions were simply too amateurish and ill-conceived
to the extent of being an embarrassment.
While I respect his view, I nonetheless believe that
there's still a lot that can be done to position our country as a leader in
Science based enterprises. Interestingly, after the budget came down earlier
this week, CATA responded by noting that many of its proposals were being
heeded and that the government was moving in the right direction with regard
to the so-called "Innovation Agenda".
Good Buys
Azure Dynamics Corp (CDNX:AZD) is a UBC
spin-off working on hybrid electric-diesel engine technology. Already, Canada
Post is test driving the product.
I took a read through the resumes of the management
team which are all posted on the company's website. It's always reassuring
when companies make such information readily available. And, in the case I can
see why - the resumes read well and the team appears to have broad range of
skills and experience. For example, David E.
Deacon,
President and Chief Operating Officer
spent a term as President of the Ontario Liberal party. That points towards
good lobbying and communications skills. Campbell Deacon, Chairman and
Chief Executive Officer, is Chairman of Deacon & Company, a private
firm providing assistance and consulting on international and domestic
mergers, acquisitions, financings, and business development. From the names
and their photos, it would appear that these fellows are brothers. In any
event, the latter once served as Chairman of the Investment Dealers
Association of Canada - that should mean he's well-connected in the investment
community. He's also currently a director of the following public companies: Azcar
Technologies (TSE:AZZ), CPI Plastics Group (TSE:CPI), and UTS Energy
Corporation (TSE:UTS).
The company has ambitious plans to produce complete
vehicles by early 2004 (in B.C. I hope). I read in Business in Vancouver
that the company is raising capital to get it to its first milestone of
signing a sales contract for its vehicle. I would offer this advice to this
and any other tech company raising capital - get your sales contract first.
It'll make your valuation better and the task of raising equity immeasurably
easier.
Azure got listed on the CDNX in April of this year via
a reverse takeover of Wild Horse Resources Ltd. Who knows? Maybe you
can ride this horse to riches.
One of this year's successfully completed CPC (Capital
Pool Co) deals entails the acquisition of Vantagepoint Systems Inc. (CDNX:VPG),
by Technology Growth Partners - a CPC spearheaded by Sharka Stuyt,
one of the members of the Pivotal Corp (NASDAQ:PVTL) founding team. The
company's sales picture is looking good and a small profit is being reported.
Vantagepoint began trading on the Canadian Venture
Exchange in August, 2001, under the symbol VPG, and raised $1.1-million in the
process. Vantagepoint is in a niche market - ERP and CRM software for the
packaging industry. It entered into a strategic original equipment
manufacturer reseller agreement with Pivotal Corporation (NASDAQ:PVTL)
to enhance its Web-based customer relationship management system.
The company also entered into a letter of intent with Menasha
Packaging, one of the premier packaging companies in North America, to
implement Vantagepoint's complete suite of software into its corrugated and
specialty packaging plants, including the first implementation of e-solutions
customer relationship management.
VPG increased recently reported annual operating
revenues by 18% to $5.7-million while achieving "adjusted income"
from
operations of $943,574 (i.e. before income taxes, interest and bank charges,
amortization, or management fees). This translates into a real profit of $49K
but, hey, it's a good start. And, it looks like there's a good team (and
board) in place to build on that.
For a few other suggestions, see my earlier comments
regarding Working Opportunity Fund and FutureFund Capital (CDNX:FFC).
Capital Pool Corporation
(CPC) Comments and Update
In this column,
I keep track of Capital Pool Corporation ("CPC") companies as
defined by the CDNX because they may provide funding and management to, and in
the process acquire, technology companies. They provide companies with an
alternative to traditional venture capital financing. CPCs are the
continuation of the former VCP (Venture Capital Pool) and JCP (Junior Capital
Pool) programs on the Vancouver (VSE) and Alberta Stock Exchanges.
Regrettably,
though, the program could be working a lot better than it is. The current
market conditions, the lack of broker activity, the glut of CPCs, the red tape
and the uncertainty over the CDNX's future have all contributed to making the
CPC route one of last - rather than first - choice for companies seeking
capital.
If you add up
all the CPC, VCP, and JCP companies that were formed since Alberta invented
the idea back in 1987, you'll find more than 1200 such companies. In total,
these have raised more than $3 billion (yes, that's a "b") for
growing companies.
Since the CPC
program was launched in B.C. a few years ago, some 300 CPCs have been formed
but only a small number, i.e. less than 50, have completed their so-called
Qualifying Transactions (QT). Right now, there are dozens just sitting there
with modest amount of cash - usually around $500K - not knowing what to do
with it. Under a relaxation of rules by the CDNX, CPCs are permitted to merge
with one another, coincident with acquiring a qualifying company, thereby
eliminating the need to raise additional funds.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the CDNX's
CPC and VCP companies, thanks to David Ing of Pacific International
Securities.
This list is updated on a
regular, e.g. monthly basis. It was updated last week to reflect the October
and November activities. These are as follows:
New additions to the list are Advent Energy Capital
Inc., Arbour Energy Inc., Blueland Capital Inc., Cardiff Resources Inc., CPL
Capital Inc., Ergo Ventures Inc., Innoventures International Inc., Landmark
Capital Corp., Phoenix International, Inc., Piper Capital Inc., Red Chip Inc.,
Spitfire Energy Ltd., Thrust Capital Corp. and Typhoon Venture Capital
Corporation.
Arbour, Blueland, Cardiff, CPL, Innoventures,
Landmark, Spitfire and Thrust are from Alberta. Advent, Ergo and Typhoon are
from Quebec. Piper and Red Chip are from B.C. (c'mon B.C. let's go!) and
Phoenix is from the United States.
The following companies have come to trade: Advent
Energy Capital Inc., Apsley Management Group Inc., Carvelle Capital Inc., Dev
Investments Inc., Dreamtec Inc., Javelin Capital Corporation, One Click
Ventures Inc., Predator Capital Inc., Rocky Old Man Energy Inc. and The
Ulysses Group Ltd.
The following companies have been removed from the
list because they have completed their Qualifying Transactions (QTs) and are
therefore no longer labeled as CPCs: Arapaho Capital Corp., Escape.com
Inc., Glenwood Ventures Inc., Mountainview Energy Ltd., Planet Organic Health
Corp. and VistaTech Corporation.
So, there you have it. Go get the money!
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Coming Up
The next Vancouver
Enterprise Forum event will be held on January 22, 2002 and the topic is
"Finance: Venture Capital, the Banks, and the Market". This is
always a popular one and tends to sell out in advance. Details will be
available at: www.vef.org. The VEF's new tag
line is: "VEF - Advancing Technology Entrepreneurship."
A complete calendar of
technology events can be found on T-Net's
Events page.
Footnotes
If you're an entrepreneur
looking for a place to get your company started, there's some great space
available at Harbour Centre downtown. The New Media Innovation Centre (NewMIC)
and SFU's TIME Centre have teemed up to provide not only office space
but also access to various resources, e.g. tech advisors, access to capital,
mentors, etc. Worried about the high cost of being downtown? Well, not to
worry - they'll even reduce the fees and take some payment in the form of
equity. Check www.sfu.ca/time for contact
info.
A reminder: SFU's TIME Centre
is open for business - business folks, that is. TIME is an acronym for
Technology, Innovation, Management, and Entrepreneurship. TIME supports the
growth and development of the tech industry in B.C. TIME features a
"Business Centre" (looks like an airport business lounge) which is
open to technology entrepreneurs and business people to use as a drop-in
downtown office facility. Need to plug-in? Make some calls? Do some work? Hold
a meeting? There are some great facilities for holding your company's AGM. Why
hang out at MacDonald's when you can work productively at the TIME Centre?
Drop by and check it out! It is located at SFU's downtown campus at 515 West
Hastings St.
For a convenient printable, pdf version of this
column, click
here.
Michael
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. Copyright,
2000.
What
Do You Think? Talk Back To Mike Volker
Tech Futures is
a bi-weekly column that focuses attention on new and emerging BC publicly listed
technology companies.
Contact: mike@risktaker.com
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