Don't all innovative startups deserve access to the same tax break?

One of the items included in the Ontario budget unveiled yesterday was "a 10-year Ontario income tax exemption for new corporations that commercialize intellectual property developed by qualifying Canadian universities, colleges or research institutes."

As with all budget announcements, this will be subject to refinements and revisions before it gets implemented ... if it ever does ... and an obvious first reaction would be that few tech startups are particularly concerned about paying income tax (and provincial income tax in particular). There's usually enough losses up-front to put off paying a significant amount of income tax for a long time.

What disappointed me, though, was the distinction this announcement made between university spinoffs and other tech startups. As presented in the budget, only spinoffs would qualify for the tax exemption.

We have several university spinoff companies in the Waterloo area, but most of our tech startups are not spinoffs -- certainly not in accordance with how Statistics Canada defines a spinoff. Neither are most of our largest tech companies. Some are, but most aren't.

I have an office at the Accelerator Centre at the UW Research & Technology Park, and on our floor we have spinoff companies and non-spinoff startups working side-by-side. If you weren't told which were which, you'd have a tough time separating one from the other in terms of the sophistication of the technology, market opportunity, or number of employees.

Under the budget proposal, however, we'd have the spinoff in one suite exempt from Ontario income tax and essentially being subsidized by its neighbouring startup that isn't a spinoff and doesn't qualify for the exemption. I can't see any justification for that distinction.

If the Ontario government wants to give a tax break to new companies commercializing innovative technology, let it extend that benefit to all tech startups regardless of their starting points. If the goal is to assist in the economic development of the province, it shouldn't matter whether companies that drive our economic success are university spinoffs or not.

Strong year for seed investment in Waterloo Region

Links to a couple of posts I made on the WatStart blog:

There may be some ominous signs for the future of venture capital in Ontario, but 2007 was a good year for Canadian VC investment.

In Waterloo Region, it was an amazing year, with a record number of seed-stage investments ... even though you may never have heard about most of them.

More associations demanding new Internet taxes

A couple of weeks ago, ACTRA (Alliance of Canadian Cinema, Television and Radio Artists), the Canadian Film and Television Production Association (CFTPA), the Directors Guild of Canada (DGC) and the Writers Guild of Canada (WGC) issued a news release claiming that Canadians wanted the federal government to require all Canadian Internet service providers (ISPs) and wireless service providers (WSPs) to pay money "to help fund the production of Canadian digital media content."

This request for what is essentially a new tax was said to be supported by a poll commissioned by the four groups that issued the news release. You'd have to take their word for it though, as they chose not to disclose the questions asked in the poll. Presumably, those four groups think that they should be -- at the very least -- among the recipients of the proceeds of this new tax, although they don't go into any specifics about what kind of levy they want and where the funds would go (and this complete lack of detail makes their whole claim of a poll supporting their proposal hard to take seriously). According to Michael Geist, the associations are asking for a levy of 2.5% of all broadband revenues, which works out to about $10-20 a year added to the bills of every broadband customer.

A lot of us create "digital media content" -- including this blog post -- but somehow I suspect that ACTRA, et al, won't be recommending that proceeds from their proposed tax be shared with us. Obviously, no one at these associations cares a whit about my website or your blog, or about 99+ percent of the content on the web, which is created with no input from members of any of their groups.

Most content creators wouldn't have a prayer of seeing a penny of this money, so where would it go, exactly? And what's the justification for demanding a government handout for content that creators have either chosen to make available on the web (like this blog) or have been paid to create (such as streaming video on ctv.ca)?

Geosign in Financial Post Business Magazine

The cover story of the current Financial Post Business Magazine is a piece on the Geosign saga, written by Robert Thompson. The story will be familiar to people in the local tech community, but this may be the first time the story has been covered by the mainstream national print media.

The one part that didn't seem quite accurate was this:

American Capital's latest securities filings peg Moxy Media's value at US$128 million - which means the sum of Geosign's former assets are worth less than American Capital's original minority investment.

American Capital, from the outset, listed its Geosign investment at around this level. In fact, it was initially listed as US$126.7 million in its first appearance on a 10-Q, and the debt component rose slightly with the next two reports until the total was finally listed as US$128.2 million.

The just-filed annual report shows a disposition of the full investment. I don't believe that Moxy Media was ever mentioned in any of the filings. I was expecting to see a value attached to Moxy Media in the annual report, but if there's anything there, I didn't see it.

So, why the difference between the reported $160 million and the US$127-128 million on American Capital's books? I can think of three possibilities, but it's never been reported. That's a question that American Capital's IR folks might answer, since the company was the source of both numbers.

There are some good quotes from Jim Estill in the Post piece, but other than a no-comment type comment from Tim Nye, it looks like no one from Moxy Media, eMedia, or American Capital wanted to talk.

Waterloo Tech Digest - March 4, 2008

Compiled and written by
Gary Will
gary@garywill.com

In this issue:

1. Desire2Learn loses patent suit
2. Dalsa investor causes board shakeup
3. AideRSS hires Carol Leaman as CEO
4. New CEO at Arise
5. Atria to acquire Hydro Ottawa's telecom business for $63 million
6. Com Dev to acquire California business for US$12M
7. RDM forecasts huge nine months after "disappointing" Q1
8. Former VideoLocus execs form Avvasi
9. Open Text sales climb 12%
10. STOCK REPORT: Dalsa shares jump to 16-month high
11. Miscellaneous tidbits from Communitech, Covarity, Sandvine, Primal Fusion, PrinterOn, Biorem.

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[1]---------------------------------------------------------------
Desire2Learn loses patent suit
February 22, 2008

A jury in Lufkin, Texas has decided that Desire2Learn has infringed on a patent held by Blackboard and awarded the Washington, DC-based company US$3.13 million in damages as compensation for lost profits and royalties up to the time of the trial.

A hearing is scheduled for next week where Blackboard will have an opportunity to ask for an injunction to block future sales of infringing Desire2Learn products in the U.S. According to a report on The Chronicle For Higher Education's website, Blackboard intends to ask for an injunction. Before that step is considered, the companies would likely be asked to try to negotiate a licensing agreement.

The trial started on February 11 and the jury started deliberations 10 days later, reaching a decision before noon the following day. The jury found that Desire2Learn had infringed on the patent, and that it could not find "clear and convincing evidence" that the patent claims were either anticipated or obvious.

The jury awarded US$2.5 million in lost profits, well below the US$15.5 million that Blackboard requested. The royalty award was US$630,000. Blackboard had asked for US$1.6 million, representing a 25% royalty on Desire2Learn revenue of US$6.5 million. Blackboard has also requested an additional US$320,000 in interest, covering the two year period from the granting of the patent in 2006 to the date of the judgment. Desire2Learn was not ordered to pay Blackboard's legal fees, which would probably have been more than the damages awarded by the jury.

Desire2Learn has not yet said if it plans to appeal the decision. It will continue to challenge the validity of the patent with the U.S. Patent and Trademark Office.

[2]---------------------------------------------------------------
Dalsa investor causes board shakeup
February 20, 2008

On the last day of January, New York's Crescendo Partners, headed by well-known activist investor Eric Rosenfeld, announced that it had acquired over 10% of Dalsa's shares. It didn't take long for him to make his presence felt, as three weeks later Dalsa announced an overhaul of its board of directors.

Rosenfeld will join Dalsa's board, along with two of his associates: Colin Watson, former CEO of Spar Aerospace and Rogers Cable, and Mark Burton, former CEO of Montreal's Ad Opt Technologies.

Rosenfeld has a long record of becoming actively involved with companies through his position as a shareholder. In 1997, as managing director of Oppenheimer, he led a shareholder revolt against the board of Vancouver's WIC Western International Communications, but Rosenfeld really made his name in Canada two years later, after founding Crescendo Partners, when he won the support of Spar Aerospace shareholders and replaced the board of directors, with Rosenfeld as chairman. The president of the company was Watson and he not only survived Rosenfeld's uprising, he successfully turned the company's fortunes around (new ATS CEO Tony Caputo later took the reins at Spar with Wilson on the board of directors), and the two have worked together at other companies since then.

Just after taking control at Spar, Rosenfeld successfully lobbied for a CEO change at Call-Net Enterprises, which ran Sprint Canada. In recent years, his most publicized activity in Canada was his involvement with Geac in 2005, when he was said to have demanded two seats on the board of directors and then planned to run in opposition to the board-backed slate at the AGM. He later decided not to stand for election and Geac's board received the support of the Ontario Teachers' Pension Plan. Rosenfeld served as a director of Ad Opt, where Burton was CEO, and was also a director of BCE Emergis.

Leaving Dalsa's board are University of Calgary professor Graham Jullien, John Simons, who was chairman of Ad Opt in the pre-Rosenfeld days, and Carol Perry, who has served as commissioner of the Ontario Securities Commission for the last three years. Jullien has been on Dalsa's board for 16 years, and Simons for 13 years. Perry served on the board since 2005. Simons was paid $49,000 in 2007 for his work on Dalsa's board, with Jullien receiving $38,000. Perry chose to take her $41,500 fee in shares

Crescendo is Dalsa's third-largest shareholder, after founder Savaas Chamberlain (21%) and Howard Tattersall Investment Counsel (14%). Franklin Templeton Investments is just slightly behind Crescendo, with both companies holding 11% of Dalsa's shares.

Dalsa's management information circular shows that Savaas Chamberlain received a $175,000 bonus last year "in recognition of his service as CEO." He is now CTO, having passed the chief executive reins to Brian Doody. However, neither of them collected the largest base salary at the company last year. That spot went to digital cinema president Rob Hummel, who received $400,000 in salary. Chamberlain's total compensation of $512,000 still topped the company's payroll.

[3]---------------------------------------------------------------
AideRSS hires Carol Leaman as CEO
February 28, 2008

Two months after closing a VC/angel round of funding, AideRSS has hired Carol Leaman as its new CEO. She was previously the CEO of venture-backed RSS Solutions (which, unlike AideRSS, had nothing to do with RSS feeds) from 2004 to 2006 and, before that, the president of Electrohome-owned Fakespace Systems, which she had joined as finance VP in 1998. After RSS Solutions, Leaman was interim CEO of a non-tech company in British Columbia and then became the first executive-in-residence at Communitech about a year ago (disclosure: she and I worked together at Communitech).

AideRSS was founded in 2007 by Kevin Thomason and Ilya Grigorik, and in less than a year they have closed a seven-figure round of funding and attracted some well-known members of the Waterloo tech community to their team (including Communitech's second EIR, Ron Neumann).

[4]---------------------------------------------------------------
New CEO at Arise
February 25, 2008

Bart Tichelman is the new president and CEO of Arise, succeeding founder Ian MacLellan, who becomes CTO. Tichelman has been on Arise's board of directors since 2000 and had been CEO of Oregon-based Serveron Corp. for nearly five years, until the company was acquired a couple of months ago.

He has worked in the energy industry for more than 10 years, working as CEO of British Columbia's Statpower Technologies from 1996 to 1999 and then becoming COO of Burnaby-based Xantrex Technology when it acquired Statpower in 2000. MacLellan, in addition to his role as CTO, has also been appointed vice-chair of the board.

[5]---------------------------------------------------------------
Atria to acquire Hydro Ottawa's telecom business for $63 million
February 24, 2008

Following its acquisition of FibreWired Hamilton last month, Atria Networks has announced its biggest deal yet. It will pay $63 million to acquire Telecom Ottawa, the telecom company owned by Hydro Ottawa.

Telecom Ottawa was founded in 2001 and runs a 1,250-kilometre fibre optic network in the Ottawa region and Cornwall. According to the Ottawa Business Journal, it reported earnings of about $8 million on revenue of $16 million in 2007.

Telecom Ottawa can still receive competing bids for the business, although Atria has the right to match any offer and would be paid $1.25 million if a different offer is accepted. Much of the acquisition price covers debts and other liabilities of Telecom Ottawa. Hydro Ottawa expects to end up netting about $20 million for the business.

[6]---------------------------------------------------------------
Com Dev to acquire California business for US$12M
February 12, 2008

Com Dev will pay US$12.2 million to acquire the California-based passive microwave devices business of L-3 Communications Electron Technologies Inc. (ETI). The deal is expected to close in the next three months.

The 65 employees now based in Torrance, Calif. will be transferred to Com Dev's new facility in El Segundo, which is less than 10 miles away. With the people and equipment being moved to El Segundo, Com Dev says it will save $5.5 million in capital expenditures that had been budgeted for the new site.

ETI was founded in 1959 as Hughes Electron Dynamics, part of Hughes Electronics. It was acquired by Boeing in 2000 and renamed Boeing Electron Dynamic Devices, and then sold to L-3 in 2005.

[7]---------------------------------------------------------------
RDM forecasts huge nine months after "disappointing" Q1
February 6, 2008

RDM just broke even in the quarter ended December 31 (Q1 08), reporting an operating loss on sales of $7.1 million. Revenue was down 6% from the previous quarter and 40% from a very strong Q1 last year, when the company caught up on an order backlog for its scanners.

The bigger news, though, was the company's forecast for the remainder of the year. Three months ago, RDM had forecast that annual revenue growth would continue at the same pace as over the last two years, when it achieved 39% and 25% growth. The company has now cut its sales growth forecast for 2008 to 10-15%, which is a big reduction in just one quarter (and the markets responded negatively to the announcement), but even these lower targets will require RDM to achieve about 40% year-over-year growth over the next three quarters. In the conference call, CEO Doug Newman called it a conservative estimate. The company expects to achieve those numbers even though one of its large pilot projects has been delayed and may be pushed into the next fiscal year.

In Q1, which Newman described as disappointing overall, RDM's revenue from its digital imaging and electronic payments businesses declined 9% from the previous quarter and 42% from last year. The volume on RDM's ITMS network grew to 2.1 million transactions a week, up from 1.8 million in Q4. The number of end user locations for ITMS grew to 10,000 from 8,400 in the previous quarter. Most of RDM's revenue continues to come from scanner sales, and the company shipped 10,700 units in the quarter, down from 11,800 in Q4.

Gross margins were flat from the previous quarter, but that was due to a one-time licensing deal for $610,000 on which there was minimal expenses. Back that number out, and RDM's margins would have shown a significant sequential drop. The company said the lower margins will likely continue in Q2.

Operations generated $1.1 million in cash, with nearly $500,000 spent on furniture and equipment. RDM ended the quarter with $18.0 million in cash. The company says it is continuing to look for acquisitions.

[8]---------------------------------------------------------------
Former VideoLocus execs form Avvasi
February 2008

Some former members of the executive team at VideoLocus have started a new company, called Avvasi. Little has been disclosed about the company, but the names on the founding team that have so far been made public are CEO Mate Prgin, COO/hardware engineering VP Alex Leyn and CTO/software VP Michael Gallant.

All three worked together at PixStream, and later at VideoLocus, which was acquired by LSI Logic in 2002. Leyn left LSI to become GM of Nuvation's Waterloo office, a position he held until February. Prgin and Gallant remained at LSI until last summer. (VideoLocus' other two founders were Lowell Winger, who joined Magnum Semiconductor with its acquisition of LSI's Waterloo office, and Guy Cote, who is now chief scientist at Santa Clara-based Mobilygen.)

[9]---------------------------------------------------------------
Open Text sales climb 12%
February 7, 2008

Open Text reported earnings of US$10.7 million on sales of US$182.5 million in the quarter ended December 31 (Q2 08). Sales were up 11% from the previous quarter and 12% from last year.

Operations generated US$39.3 million in cash, and the company paid US$30.9 million to reduce the long-term debt it is carrying from the Hummingbird acquisition. That payment reduced the balance on the company's term loan to US$296 million, down from US$390 million a year ago.

Revenue in the quarter was split almost evenly between Europe and North America, with Asia-Pacific accounting for the remaining 6% of sales. About one-third of licensing revenue in the quarter came through partners, such as SAP, Oracle, and Microsoft. There were five licensing deals of $1 million or more and another eight in the $500,000 to $1 million range.

Open Text ended the quarter with US$159.7 million in cash.

[10]---------------------------------------------------------------
STOCK REPORT: Dalsa shares jump to 16-month high
February 2008

Following the announcement of Dalsa's strong Q4 results (see previous digest), the company's shares jumped to their best month-end price since October 2006. The 38% gain was the best calendar month performance for the stock since August 2002.

Also showing a recovery in February were Biorem shares, which regained all of their losses from the last two months and ended February exactly where they were at the end of November.

For the month of February:

Biorem [TSXV: BRM] +76%
Dalsa [TSX: DSA] +38%
RIM [TSX: RIM] +9%
--S&P TSX VENTURE INDEX +8%
Com Dev [TSX: CDV] +8%
ATS [TSX: ATA] +5%
--S&P TSX COMPOSITE INDEX +3%
Open Text [TSX: OTC] +2%
MKS [TSX: MKX] +1%
===============================
Descartes [TSX: DSG] -6%
TurboSonic [OTCBB: TSTA] -7%
Arise [TSX: APV] -9%
Virtek [TSX: VRK] -9%
RDM [TSX: RC] -15%
Sandvine [TSX: SVC] -21%

The market didn't respond well to RDM's results and forecasts and its shares have now lost over half of their value (-52%) over the last four months. Sandvine shares have seen a similar drop (-56%) over the last five months, while Descartes shares have lost nearly a quarter of their value since the beginning of October. At the other end of the scale, ATS shares are up 50% over the last three months.

Companies with core operations outside the area:

Ansys [Nasdaq: ANSS] +7%
NCR [NYSE: NCR] +3%
===================================
McAfee [NYSE: MFE] -1%
Adobe [Nasdaq: ADBE] -4%
Sybase [NYSE: SY] -6%
AMIS [Nasdaq: AMIS] -7%
Oracle [Nasdaq: ORCL] -9%
Blue Coat [Nasdaq: BCSI] -13%
Agfa-Gevaert [Brussels: AGFA] -14%
Google [Nasdaq: GOOG] -16%

[11]---------------------------------------------------------------
Miscellaneous Tidbits

• Kevin Tuer, the former co-founder and CTO of HandshakeVR, has joined Communitech as its latest executive-in-residence, joining Ron Neumann (and, briefly, Carol Leaman; same disclosure as above: this is the group that I work with at Communitech). In addition to providing assistance to tech companies, Tuer will be heading Communitech's initiatives involving the local R&D community.
  
  
• Covarity has signed a multi-year deal with HSBC Bank Canada, which plans to start using Covarity's loan management software in the fall. Covarity CEO Rod Foster told The Record that it was the company's biggest deal and that it plans to hire 20 or more people before the end of the year, bringing the total to over 50.
  
  
• Don Bowman is now CTO at Sandvine. He succeeds Marc Morin, who is still listed as a member of the executive team on the company website, but without a title. Bowman is a co-founder of Sandvine whose title was previously consulting systems engineering VP.
  
  
• Primal Fusion is the new name of the company formerly known as Terapath and Indimensions, led by Yvan Couture and founded by Peter Sweeney. It moved to a spacious new office in December and has recently said that it is "about to come out of stealth mode."
  
  
• PrinterOn's PrintSpots mobile printing software is now being embedded in a line of Wi-Fi-enabled printers made by Ricoh.
  
  
• Ed Corbett is the new CFO of Biorem. He previously worked in finance roles at RightNow Technologies and Serco, the company that runs the driver examination services for the Province of Ontario.
  
  
• A where-are-they-now note: Ian Suttie, former senior executive at SST, Maplesoft, and PrinterOn, was just named marketing VP of Toronto's Truition, an e-commerce company.