Tech Futures:
November 17, 2000
By Michael
Volker
Market Commentary, CDNX vs VC Financings,
How to Trade Junior Equities, IPO Watch, Capital Pool Corps Update
Market Commentary
Jeepers. You'd think the world revolves around Nortel! I
guess it does to a certain extent. But, it isn't just Nortel. Last week, the
tech fallout ended an awful week for the Nasdaq, which declined 422 points, or
12.2%, in the five sessions - its third-worst weekly performance ever. The
Nasdaq is down 25.6% in 2000 and 40% below its peak of 5048 in March of this
year. The Nasdaq stands just above key support at 3000. Earlier this week,
stocks broke their string of losses with a healthy rally which drove the Nasdaq
back above the psychologically important 3000 point level to its 10th sharpest
percentage gain ever adding 171.55 points to close at 3138.27, ending a six-day
string of losses that had knocked 14% off its value.
The market benefited from positive analyst comments,
good earnings news, and even optimism about the U.S. election and about this
week's Federal Reserve policy meeting.
Here are some interesting observations from an email I
recently received:
year to date the TSE index is up 9%
the CDNX is up 38%
the DOW is down 8%
the Nasdaq is down 38%
the Nikkei is down 20%
the Hang Sang is down 9%
And I quote from said email, "So why do these Gurus
who work for banks and mutual fund peddlers still tell people to invest outside
Canada? Are they getting higher commissions there?"
Isn't it interesting that the senior high tech market,
the Nasdaq, is down by exactly the same amount by which the junior high tech
market, the CDNX, is up, i.e. 38%? Yes, yes, I know I'm pushing it a bit when I
call the CDNX a junior high tech market. However, the CDNX Tech index
closed yesterday at 3250 in comparison to the broader CDNX index which closed at
3140. Both are up over 50% from their start at 2000 when the CDNX was created
almost a year ago on November 29th, 1999.
Moral of the story: junior companies can provide some
healthy returns to those willing to take the risk. And Canada is a good place to
invest.
One "junior" in the news lately is Meteor
Technologies (CDNX:MMI). The CNBC voted MMI's website as the "day's
cool site". MMI released its PlanBee software through the prominent
ZDNet.com website. The product of MMI's 50%-owned Thoughtshare Communications,
is an innovative internet research mapping program for information management.
Dr. Jim Miller, a co-founder of QLT, was recently appointed as CEO. Check out
the technololgy at www.thoughtshare.com.
A "junior" experiencing its share of troubles
is WSi Interactive Corporation (CDNX:WIZ). WSi is a business development
and marketing firm whose objective is to capitalize on content and
infrastructure opportunities on the Internet. WSi builds, manages and markets
online businesses in the financial, e-tail and e-commerce, entertainment, and
e-advertising sectors focusing on early-stage companies. It looked hot earlier
this year when the stock was trading over $8.00 per share. But it hasn't been so
hot lately. The stock hit a low of $.17 and is now trading at that level.
The company is undergoing a corporate restructuring
which includes a reduction in its
management
team. John York has resigned as the Chief Financial Officer and Bryan Kanarens
has resigned as Vice President and General Manager. Theo Sanidas will remain as
President and Director until a new management team is identified and will assist
the Company during the transition period. Lance Morginn, vice-president of
technology services, is no longer with the company. Also, James Harris has
resigned as the Corporate Secretary in conjunction with his resignation as an
officer of seven other public companies. Mike Donald, a director of the company
has also resigned.
You can always tell who the real entrepreneurs
behind a venture are when the going gets tough. They're the ones that stay. The
others all head for the hills.
Canada Stockwatch's street wire reports that
WSi Interactive may not get approval from the CDNX to proceed with a $500,000
floorless convertible, or "death-spiral", financing. Now there's a new
form of financing - a death spiral deal. Fancy that! WSi has entered into an
interest-bearing loan agreement (subject to CDNX approval), under which
"the lender has the right at any time prior to repayment of the loan, to
convert all or part of the outstanding principal amount of the loan into common
shares of WSi."
The price per share for conversion would be the
lesser of 33 cents or the market price at the time of conversion. Interest
accrued on the loan would be converted into common shares of WSi at the market
price at the time of conversion. The loan would be due and payable on April 29,
2001. You can see why its a spiral - the lender can exercise its right and
sell shares into the market, forcing the price down allowing it to acquire even
more shares at lower prices. Theoretically, the lender can acquire control and
other shareholders can get diluted ad nauseam.
On the bright side, though, the company's
recent financials, for the year ending June 30, hold some promise. They show
that the company had $2,561,529 in working capital. It lost $1,810,783 during
the year, which means it was losing about $150,000 a month. Perhaps the exodus
of its high-priced talent will alleviate some of the pressure.
In the "good buys" (not good-bye as
noted above) category, I can't help but once again recommend both Creo
Products (CDNX:CRE) at $32.75 and Pivotal Corp (NASDAQ:PVTL) at
U$49.50.
Creo's stock
price tumbled $7 (16%) last Friday to close at $38 after the company said its
fiscal fourth quarter loss was $3.6-million or 19 cents a share. However, Creo
said it had $17.1-million in acquisition-related costs. Excluding these costs,
stock compensation and $2.7-million related to "business integration,"
Creo's profit rose to $16-million or 32 cents a share. Sales in the period ended
Sept. 30, more than tripled to $173.3-million from $55.9-million a year earlier,
reflecting the April purchase of Scitex Corp.'s prepress division for
$508-million.
Pivotal deserves
mention because it has just been reported as being in the 9th spot on the Fast
500 - Deloitte's survey of ALL North American tech company's ranked
according to year-over-year growth. Get this: Pivotal's revenue grew by 34,548%
between 1995 and 1999! Wow!
CDNX vs VC Financings
Let's take a look at some pubco financings in the market
as compared to private company venture financings.
The CDNX recently announced that it has
completed equity financings worth $1.96 billion in 2000, according to third
quarter results.
It attributes the strong results to the high
demand for venture capital among CDNX-listed technology companies, and a growing
national recognition for the CDNX as a sophisticated, well-regulated market for
venture class securities. (I won't comment on some of the red-tape and
processing delays which many companies are complaining about.)
Technology companies accounted for 57 per cent
($1.1 billion) of total CDNX financings for the first nine months of 2000, with
mineral exploration companies accounting for 15 per cent ($293 million) and oil
and gas companies accounting for eight per cent ($153 million).
The largest financings completed in Q3 were Turbo
Genset Inc. ($70,112,02); Global Light Telecommunications Inc.
(US$67,050,000); Cell-Loc Inc. ($50,150,000); and BRM Capital Corp.
($40,000,000).
Bill Hess, CDNX President and CEO commented:
"These past nine months have demonstrated that the CDNX is clearly a
significant source of venture capital for promising start-up companies, as well
as a stepping stone for companies to graduate to senior exchanges."
Indeed, a total of 13 CDNX listed companies
graduated to the Toronto Stock Exchange (TSE) in the third quarter of 2000,
bringing the total number of graduates this year to 37. These graduates
represent 46 per cent of the TSE’s new listings in 2000. Companies graduating
from the CDNX in the third quarter of 2000 include ACD Systems International
Inc., Isotechnika Inc., NAME Inc. (formerly EcomPark Inc.), Medcom
Soft Inc. and Gabriel Resources Ltd. On average, the share price for
companies graduating from the CDNX has increased 213 per cent in the year prior
to their graduation, from $2.59 to $8.11.
Fifty-one new companies began trading on the
CDNX during the third quarter of 2000, bringing the total number of new listings
for the year to 130. Eighty-two of these new listings are capital pools (see
section below on CPCs), 29 are resource-based companies and 19 are industrial
-based companies. In addition, 20 reverse takeovers have occurred in 2000.
The top 10 CDNX financings, mostly tech deals, raised
$251.1m in the first half of this year. These are:
| Exenet |
$50M |
| Unique Broadband Systems |
$41m |
| Micrologix Biotech |
$40m |
| eDispatch.com Wireless Data |
$31.5m |
| ACD Systems |
$22.5m |
| Gabriel Resources |
$16m |
| Isotechnika |
$14.5m |
| stox.com |
$14m |
| Sideware Systems |
$11m |
| First Star Energy |
$11m |
In a Vancouver Sun article by David Baines, he was quick
to point out the negative side of these financings, i.e. that only two of the
deals are in the money. He stated that the aggregate paper loss equates to
$109.7 million. eDispatch.com Wireless Data (CDNX:EWD), for example, sold
$31.5m in shares at $10.50 ea in February,and is now below $2.00 per share. I
generally like Baines' articles - he does do some great investigative reporting,
especially in revealing scam deals. However, under current market conditions,
such price drops should not be viewed as investors getting deliberately fleeced.
On the private company side, Canadian venture capital
investments for the second quarter amounted to $1.21B as compared to $1.1B in
the first quarter for a total of $2.3B in 683 deals in the first half. This is
approaching the $2.7B raised in all of 1999 total.
So, although the VC financings are ahead slightly, it
would appear that the junior public companies are doing quite well via under the
CDNX umbrella.
While on the subject of VC deals, I'm sure you've heard
it said that investment firms tend to follow one another. As soon as one venture
cap firm invests, others will want in, too.
The reason often given for this is that investors like
to share the risk. Not so. In a recent Management Science Dept study at the
University of Waterloo, Prof. Paul Guild found that the real reason for the
herding phenomenon is not to share risk but rather, not to lose out on that one
shooting star! No one wants to not be included in those few deals which go
through the roof.
It was also noted that, on average, pooled investments
do better & larger pools do better.
What about the VC market in the USA? U.S. venture
capital firms continued funding portfolio companies at near record levels in the
third quarter, but the flow of money into new ventures - particularly Internet
companies -- slowed noticeably, said a recent industry report.
This report, compiled by the National Venture Capital
Association (NVCA) and Venture Economics, said venture firms invested $25.9
billion in 1,774 companies overall in the third quarter - a slight drop from the
$27.8 billion invested in 1,830 companies in the second quarter. However, the
funding downturn is more pronounced when looking at start-ups (Oh-Oh!).
According to the report, VCs invested $5.2 billion in 623 start-ups during the
third quarter, compared with $7.1 billion invested in 695 start-ups in the
second quarter.
The average start-up
was $8.3M. I'm impressed.
How to Trade Junior Equities
A commonly cited problem in buying and selling shares of
junior technology companies on the CDNX is illiquidity - i.e. lack of abundant
buy and sell orders.
Many junior companies trade only a few thousand shares
on a daily basis. Sometimes, in fact many times, companies' shares don't trade
at all. Any company which trades fewer than an average of 20,000 shares on a
regular daily basis, needs to beef up its Investor Relations (call it promotion
if you wish) activity so as to provide a "fair" market for its
stakeholders.
There is often a sizable gap (i.e. 20% or more) between
the price at which shares are being offered for sale and the bid price, i.e. the
price which buyers are willing to pay. So called market-orders, i.e. orders to
buy or sell at the market bid and ask prices, will inevitably be filled at or
even below current bid/ask prices. I have seen relatively small orders of 10,000
shares or so knock the price of a stock down (or drive it up) by a substantial
amount.
If you are a seller, a good strategy would be to offer
stock at a penny or two below the market and wait. If you have a lot of stock to
sell, offer it in modest chunks. If you're in a big hurry to sell or if you
think the stock is going to tank, then you'd be more aggressive, of course. If
you are a buyer, enter a bid for a penny or two above the highest bid price and
wait. Avoid "market" orders!
Following the above strategy has always worked well for
me. There's no point in paying $1.00 for a stock you can get at $0.80. Sometimes
it may take a few days to get a fill, but there's no rush, especially now when
the markets are cool.
If you like a particular stock and are a buyer, you
might buy only half or three-quarters of the amount that you'd like, always
keeping some bids in at below market prices. That way, if someone is desperate
to sell, you can pick up some stock cheaply. Or, if the stock is trending
downward, you'll have some cash in reserve to buy at the lower prices,
effectively averaging-down. If you should be so lucky as to have the stock take
off, well then you've still done OK, albeit not as well as if you had jumped in
with your total allocation.
IPO Watch
Kinetek Pharamaceuticals Inc, a UBC spin-off, is
moving closer towards its IPO offering on the TSE to raise $25 million for drug
research. It's prospectus was receipted on October 19th. Kinetek was formed in
1992 by Professor Steven Pelech to develop new drugs to treat cancer,
inflammation and metabolic diseases and anti-diabetic compounds. Goepel McDermid
in Vancouver is the lead underwriter for the offering which is expected to be completed
in December. The shares will be offered in the $6.50 range. QLT's cofounder
Julia Levy sits on the board. Investors WOF, Royal Bank Ventures Inc., and
Ventures West hold a combined 35% interest in the company. Another company
founded by Prof. Pelech, Kinexus Bioinformatics Corp is raising $800K
privately following $1 million raised in June from BIRC, Milestone Medica and
others).
Sourcesmith Industries Inc.
is a North Vancouver software technology company that is proposing to raise
$1,000,000 through an IPO on the CDNX. This offering is limited to BC and
Alberta. The company, based in North Vancouver, is six years old and has some
revenues - about $500K (annual). The company recently (Nov 2) updated its
prospectus to show the final offering terms, i.e. 2,000,000 shares at $.50 per
share. Haywood Securities Inc is acting as the agent for Sourcesmith.
WaveCom Electronics Inc. is
a Victoria, BC company which designs broadband transmission equipment for data
over cable and fixed broadband wireless networks. It seeks to raise
approximately $75 million at $13-$15 per common share. Pricing should be, if not
already done, finalized any time now with with a closing expected in the last
week of November. The most recently updated prospectus is dated October 20th.
The company has a 12-year history of sales and profits. In its most recent
fiscal period (June 2000), sales were almost $22 million with a $4.5 million net
income - after tax! If you're keen on this one, contact one of their
underwriting agents - Goepel McDermid, Yorkton Securities, TD Securities, or
CIBC World Markets.
Beanstream Internet Commerce Inc's
filed a preliminary prospectus on September 11th to raise $1.575 million by
selling $1.75 million shares at $0.90 per share to BC investors only. Haywood
Securities is acting as the agent.
I just can't resist mentioning that south of the border,
Playboy.com has pulled its pending IPO due to weak market conditions. I
hope this dot-com doesn't go tits-up! Maybe it would be a good acquisition for
one of my favorite capital pool companies, Silicon Slopes. We could change the
name to Silicone Slopes.
Despite this year's ups and downs - not just for
Playboy, but in general - Erick Maronak, director of research for NewBridge
Partners, a private New York-based money manager that specializes in technology
stocks sums it up this way: "I don't think the outlook has changed in any
significant way. The negative sentiment right now actually reflects a lot of
known information."
Interest rates were hiked six times, driving a stake
through the heart of "irrational exuberance," as Alan Greenspan called
the tech bubble three years before it burst. Oil has gone from $10 a barrel to
$30. The Mideast is in turmoil, "and we have our own political drama here
in the United States," Maronak notes. "Plus you have no shortage of
high-profile companies -- not just the dot-coms that can no longer go to the
capital markets, but some leading companies missing their numbers, like Lucent,
Hewlett-Packard and IBM." Meanwhile a few tech names have managed to pop in
the aftermarket.
Transmeta (NASDAQ:TMTA), a maker of systems for
mobile Internet computers, went up nearly 70% in its first week of public
trading; Ixia Inc. (NASDAQ: XXIA), which designs systems to analyze
network performance, surged more than 80% in its first month.
The Internet, which adherents believe is the most
significant of computer-based technologies, is still in its infancy, after all.
You can get a full prospectus on any
Canadian IPO offering (or any Canadian public issuer for that matter) on the
Sedar website at http://www.sedar.com.
Capital Pool Corporation (CPC)
Update
In this column, I keep track of
Capital Pool Corporation ("CPC") companies (see chart below) as
defined by the CDNX because they may provide funding and management to, and in
the process acquire, technology companies. CPC's are the continuation of the
former VCP and JCP programs on the Vancouver and Alberta Stock Exchanges.
I like CPCs from an investment
perspective. Although one may regard them as speculative (indeed, they are),
they are also an inexpensive way of getting in early and inexpensively. You can
pick up 10,000 shares of a typical CPC for pennies.
In this column, I usually identify new CPC
companies as well as those who have started to trade and those which are working
on acquisitions. I regret not providing such an update in herein, but please
check the
list from time to time as it regularly gets updated. In the next column, I
promise a more thorough update.
Check
our Capital
Pool Corporation chart (in .pdf format) for a complete updated list of the
CDNX's CPC and VCP companies, thanks to David Ing of Pacific
International Securities.
An introductory article explaining
CPCs may be found at: www.bctechnology.com/statics/mvolker-jun02
Footnotes
Today, I attended the Vancouver
Board of Trade's luncheon with our P.M., Jean Chretien. I must say that I was
impressed by his talk. The "I" word figured prominently in his speech.
No - not the Internet, rather Innovation. His commitment to a balanced
approach involving investment in fundamental research and development, industry
sector stimulation and a competitive approach to taxation and investment
incentives bode well for the continued development of our growing knowledge
based industries.
The Vancouver
Enterprise Forum's November 28th event is titled "Mobile Commerce:
Emerging Wireless Technologies and Companies". The moderator will be Norman
Toms of Sierra Wireless (TSE:SW). Norman will make a general presentation
on the state of wireless technology and pervasive
computing, where the technology is going and which companies are taking us
there. Panelists for this session include Barry Jinks, President & CEO, SynchroPoint
Wireless, Inc., Juliana Cafik, President & CEO, Soft Tracks
Enterprises, Karim Khoja, Chairman & CEO, EXI Wireless Inc (CDNX:EXI).
It will be MC'd by Pyarali Jamal, VP Corporate Finance, Ernst & Young.
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. Contact: mike@risktaker.com.
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.
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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