By Michael
Volker
Financings are Alive, Capital Pool Corps
Update and Local Happenings
Contrary to comments I'm hearing,
deals are still being done. The so-called market correction has only returned us
to what, until last year at this time, was a typical process of raising capital
- i.e. a long, demanding exercise of courting investors and gaining their
confidence. Indeed, financing activities are still alive.
Although junior company financing
activity on the Canadian Venture Exchange (CDNX) declined 30 per cent
over the same period last year, equity financings in the first quarter totaled
$424 million as compared to $606 million in the same period last year.
Technology companies accounted for
36 per cent of these financings. Capital pool companies represented only three
per cent of capital raised (this is only the startup "seed" capital
which they raise - not the follow on financings).
So far this year, CDNX financings
reflect a move away from technology and towards increased interest in oil and
gas. Of the $2.37 billion in equity financings for all of 2000, 11 per cent went
to oil and gas, 50 per cent went to technology and 16 per cent went to mining.
Interestingly, new listings showed
a 134 per cent increase so far this year. There were 75 new listings in the
quarter, 14 of which are former Canadian Dealing Network (CDN) companies that
were invited last fall to list on CDNX as tier 3 listings. There were 32 new
listings for the same period last year.
The CDNX continues to feed its
maturing ventures to the senior markets as evidenced by 11 companies which
graduated to the TSE during the first quarter. These CDNX graduates accounted
for 34 per cent of the TSE’s new listings during the quarter and 38 per cent
overall in 2000.
With respect to more senior
financings on the Toronto Stock Exchange (TSE), this week's announcement
by Vancouver's Westport Innovations (TSE:WPT) is a good example of a
larger Canadian financing.
A syndicate led by investment
dealer Raymond James (formerly Goepel McDermid in Vancouver)
agreed to purchase (in a "bought deal") 1.5 million common shares of
Westport from the company at a price of $10.25 per share, for gross proceeds of
$15,375,000. The syndicate had the option to purchase up to an additional one
million common shares. Demand for the offering was sufficiently strong to cause
the syndicate to already exercise its option, thereby increasing the offering to
$25,625,000. The offering is scheduled to close on or about May 15, 2001. At
March 31, 2001, Westport had 40,368,753 shares outstanding. Net proceeds of the
offering will be used for research and development expenditures, and for general
corporate purposes.
On it's news release file, Canada
Stockwatch shows that Westport had 35,634,560 shares issued as compared to
the company's report of 40,368,753. Why do I mention this? Because it points out
one of the difficulties in tracking the worth of tech stocks - as we do in the
T-Net20 index. Due to on-going financings and the exercise of employee options
and investor warrants, dilution continues as market caps rise. Based on
Westport's number, the company was worth $413.8 million on Apr 30th at the
financing (i.e. market) price of $10.25 per share. After the 2.5 million share
dilution and taking into account the $25.6 million raised, the company's
valuation is $439.4 million. However, based on the positive market reaction to
these events, the stock is currently trading in the $11.25 range (a nice little
increase for the $10.25 investors) giving it a value of $482.2. So, a $25
million investment has added over $68 million in value in less than a week!
Cool.
Westport makes for an interesting
case study. The company is based on an enabling technology from the University
of B.C. that allows diesel engines to use gaseous fuels such as natural gas.
Natural gas burns cleaner and typically costs less than diesel fuel in
most parts of the world. I've heard that it is even becoming economical to haul
natural gas from Australia to California by ocean freighter. Westport
technologies promise to retain the high performance and fuel efficiency of the
diesel engine while significantly reducing pollutants. Environmental legislation
in jurisdictions such as California will drive the demand for vehicles using
this technology.
Westport started life as a Junior
Capital Pool company (now called Capital Pool Corporations on the CDNX - see
below) on the Alberta Stock Exchange selling shares to local
investors for pennies. It's one of the best examples I know of which
demonstrates how a junior exchange such as the CDNX can give a company the
access to capital that it needs to grow and become successful. Although most
companies are not going to perform like Westport, the CDNX can at least give
them a shot at success and for investors a winner like Westport - even if its
one in ten or one in a hundred - it's still worth taking the risk.
So, evidently financings are not
dead. Deals continue to be done. I suspect that if our regulatory system were
overhauled, we'd see even more. I personally know of many junior financings
which fail simply due to the expense and delays caused by archaic rules and
procedures. And a better investment stimulus tax break like an upfront
write-off scheme which I've espoused before (versus an investment reward like
a cap gains exemption) would help, too.
In my last column I wrote about
what it'll take to make the CDNX work for its listed companies. I complained
about the red tape brought about by our system of inconsistent Provincial
securities regulations and the challenges faced by stock exchanges such as the
CDNX in somehow unifying its policies so as to be compatible with Provincial
laws.
Just after writing this, I
was subjected to just the type of nonsense that I was bemoaning. Maybe I
should've kept quiet. I received a letter from the Commission des valuers mobilières
du Québec (i.e. Quebec Securities Commission) advising me that I would now have
to start filing an insider trading report in Québec. This is because a B.C.
company of which I am a director, has become a "reporting issuer" in
Quebec (this means that the company has to file its reports in Québec in order
to be able to attract investors from Québec).
To help me do this, I received the
requisite form, in French, which I have to complete and send to Québec.
Interestingly the form looks identical to that which is filed in B.C. I'm not
sure if they'll let me use the B.C. form (in English) and just send a copy to Québec.
I remember doing this for a company which was a reporting issuer in B.C. and
Alberta - requiring me to file the same report with both agencies.
In Canada, we have SEDAR - the
System for Electronic Document Analysis and Retrieval (see it at www.sedar.com).
It's the repository for public corporation information. So why not just
use this for purposes of making a single filing in Canada instead of having to
file certain reports with each applicable commission. Am I missing something?
Apparently, I'm allowed to submit
these forms by fax. I'm not sure what a "fax" is. I think lawyers
still use this technology. Why not just submit them via a web-browser managed by
Sedar for all securities commissions?
On a side note, the B.C.
Securities Commission should be commended for taking the lead in providing
investors with disclosure information. For example, it is much easier to get
insider trading information on directors of B.C. companies than it is to get
such information on directors of TSE companies in Ontario. Similarly, the CDNX
provides a lot more information on its listed companies than you'll find for TSE
companies. Hopefully, upon taking over the CDNX, the TSE will apply some of the
CDNX's practices to its operations.
Here's a little feedback from a reader who responded to my CDNX article in
the previous
column.
He wrote: "I liked your latest article on CDNX. You are absolutely right
when you say the client has been forgotten in the TSE/CDNX process and
securities policy formulation in general. The Bill Hess approach has also left
members out in the cold otherwise the Corporate Finance rules would not be the
flaming pile of crap they are. (Amen!) I guess he figures with such an
ineffective board he can do what he wants anyways. I understand the BCSC has
some significant reservations about the merger but whether or not they could
block it even if they wanted to is unclear. The costs of complying with CDNX
policies is staggering for an issuer."
He went on to say that policies are being written by Exchange employees who
have never raised a penny for a junior company and that perhaps the CDNX board
should apply the same rules to itself that it imposes on company boards. How
true! I used to sit on the policy committee as a volunteer trying to get in a
word here and there on behalf of that often forgotten entity - the listed
company (i.e. the customer). That committee faded into the woodwork and the
Exchange seems to have stopped using it - neglecting to inform its participants.
Hence, I was a little surprised to see, in a press release this week confirming
the takeover by the TSE, the formation of a new board as well as a new policy
committee. Let's hope it works a little better. Maybe with some folks like Harry
Jaako (local high tech investor and supporter) on the new TSE board, there's
still hope! Readers of Harry's comments in Business in Vancouver will
know what I mean.
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. They provide companies with an alternative to
traditional venture capital financing. CPCs are the continuation of the former
VCP and JCP programs on the Vancouver (VSE) and Alberta Stock Exchanges.
Some observers believe that the
CPC program may be a victim of the TSE takeover and will be disbanded. I
personally believe that unless some sweeping changes are made in the
administration of this program, they won't survive regardless of what the CDNX's
new owners think about the concept.
Since the program was launched on
the VSE, more than 250 CPCs have been formed and more than 30 have completed
their so-called Qualifying Transactions (QT). It takes at least a year - usually
longer - for a CPC to find a suitable takeover candidate and another six months
to a year for a deal to be finalized. See my earlier remarks on red-tape!
New additions to the list over the past month
are Benem Ventures Inc., CastleRock Capital Inc., EREZ Inc., Mondex Ventures
Inc., and Wyatt Capital Corp.
CastleRock and EREZ are from Alberta and Benem,
Mondex, and Wyatt are from BC.
Since the previous update, the following
companies have come to trade:Essendon Solutions Inc., Jessian Capital Corp.,
Lattice Capital Corporation, Old Sun Resources Ltd., Revolve Capital Corp.,
Trioptimum Capital Corp., Wireless Capital Corp., and Zena Capital Corp.
Baden Technologies Inc.
has been removed from the list because it has completed its QT.
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.
An introductory article explaining
CPCs may be found at www.bctechnology.com/statics/mvolker-jun
Local Happenings
The next Vancouver
Enterprise Forum event will be held on Tuesday, May 22nd. It's banner
is: CEO War Stories, The Good, The Bad and The Ugly. This event will take
attendees inside the boardroom as local CEOs tell their war stories ~ the good,
the bad and the ugly. You'll hear CEO stories on turmoil, turnarounds and
triumphs from three veterans of the B.C. high-tech community. These include Shawn
Chute, President, CEO & Director of Voyus Inc.
(CDNX:VCS.U,U$0.29), Iain Black, President & CEO of Electric Mail (CDNX:ELE,$0.44),
and Robert Craig, former President & CEO of Stratford Internet.
They'll provide valuable insight and anecdotes on how they've addressed some of
their greatest challenges and turned potential failure into success. Each CEO
has been in a position where a single decision would have significant
consequences to the future of their company and, indeed, their personal careers.
The CEOs will discuss the events that brought them to the brink of disaster, and
the actions they implemented to bring them back onto the playing field. The
organizer of this event is Glen Scobie of the BC Ministry of
Employment & Investment.
Got a hot idea? Check out
New Ventures BC. The New Ventures BC Competition is an annual event open
to all BC residents, with prizes totaling $125,000 - which is believed to be the
largest of its kind in North America. Individuals with a new business idea can
attend seminars and networking information sessions that will give them the
chance to turn their idea into a successful startup. A number of these are
scheduled to take place during the month of May. Check www.newventuresbc.com
for details.
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? 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 Harbour Centre campus at 515 West Hastings St. More
information can be found at www.sfu.ca/time.
PS - there are some great facilities for holding your company's AGM.
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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