In the world of high technology, every company strives to achieve new
innovations and set the standards in their own particular market niche. The
opportunities can be enormous, as we have seen over the years with companies
like IBM, Microsoft, Intel, and more recently Netscape. Investors who
understand the technological challenges and issues that are currently being
dealt with, and can identify tomorrows' leading companies, can be well
rewarded.
There is no more central issue today than that of data compression.
Technology is becoming more and more part of everyday life for both
individuals, and corporations. A growing amount of data is being moved,
stored, and manipulated. Processor and transmission rates have improved
dramatically, but the growth in document imaging needs has grown even more
dramatically. Virtually all Fortune 1000 companies now require company-wide
information management systems that include fax, document management, and
corporate Intranets. As the market for managing documents grows
dramatically, the focus turns to better imaging and storage solutions. One
company, which appears to have the innovations and resources in place to
play an important role, is Image Power.
Image Power is a very recent arrival to the world of public companies.
It was created in January when an inactive company called Redonda Industries
acquired all the equipment, assets, and intellectual property of a private
company working in the area of image compression and analysis.
Image Power's primary goal is to make digital images as small and
accurate as possible. The resulting smaller files will require less space
to store, be cheaper to transmit, and quicker to access.
A primary concern is standardization. To this end, Image Power is the
ONLY Canadian company which is a member of the International Standards
Organization (ISO), an international body working towards establishing,
among other things, world-wide standards for compression technologies.
Being a member of this organization, and having input into the topics
discussed and decisions made, allows Image Power the opportunity to be on
the cutting edge. Currently, the ISO is developing standards for
compression methods known as JBIG and JPEG2000.
JBIG is a relatively new compression technology that is most effective
with black and white images (text). A growing number of companies believe
JBIG should replace the existing standard (called Group III and Group IV) in
the faxing industry. They include companies such as Bell & Howell, Lotus,
Fujitsu, and Symantec, who have created (with eight others) the JBIG
Alliance. JBIG can produce better image quality with files that are 20-60%
smaller than Group IV. The first fax machines to support JBIG are now
being produced. Image Power is taking it one step further. They own an
exclusive world license to a technology that will be the core of what they
believe will be the next generation, JBIG2. JBIG2 is able to compress text
at 4 to 8 times that of JBIG. They are currently in discussion with the
ISO, and will be lobbying for the adoption of JBIG2 as the next standard.
If they are successful, the potential will be enormous.
JPEG is a standardized image compression technology designed for
compressing either color, or gray-scale images. It is widely used on the
Internet, along with GIF, and is considered superior for storing and
transmitting scanned photographs and computer-drawn images. Compression
ratios of up to 20:1 are possible. Image Power is actively involved with
the ISO's JPEG2000 initiative, which is the next generation of JPEG.
Similar to the situation with JBIG, Image Power believes that it has
developed proprietary technology which will be incorporated into the
JPEG2000 standard, and will join IBM, AT &T, and Xerox, as a key
patent-holder to JPEG2000. The ISO is recommending that JPEG2000 replace
the current JPEG standard by 1998. JPEG2000 will be able to compress color
images by up to 160 to 1. The compression ratio will be improved, the
quality of image will be improved, and there will be no loss in
transmission, as compared to the current JPEG. Furthermore, Image Power
technology is capable of converting JPEG2000 images into HTML for Internet use.
Another area that Image Power is focussing is the ability to analyze
and categorize documents. For example, using IPZs proprietary technology,
it will be possible to tear a page out of a magazine such as Business Week,
scan the page into a computer, and have the text compressed by JBIG2, the
pictures by JPEG2000, and to then store and send these files. Their
ability to segment and read various sections of a document will also yield
improvements in faxing technology. For example, a person carrying a pager
will be alerted when someone is sending a fax, and using IPZ technology,
will be notified who is sending the fax, and then be able to decide whether
to view it immediately or not.
Image Power plans to give away a product it will call a Power Viewer, a
plug-in software application that will allow the user to compress and view
documents created with Image Power technology. This will build the user
base, in much the same way that companies such as Netscape give away their
browser, but earn revenues from the needs of companies that build web sites
that must be compatible with the Netscape browser. Image Power plans to
earn revenues from selling its Power Accelerator, a card for high end PCs,
which will contain all of their compression and decompression software.
INUSTRY ALLIANCES: On Feb. 27, IPZ announced a $225,000 contribution from
Motorola Canada (Advanced Radiodata Research Center). Motorola has its own
wireless communications network called DataTAC, and while I haven't spoken
to anyone at Motorola, it seems reasonable to suggest that
they would not be funding IPZ unless they felt that IPZs products would
prove beneficial to Motorola's wireless customers.
In conversations with IPZ, I was told that companies charge for moving
data over wireless networks by the bit, rather than by time, as is the norm
for phone lines. That is why compression rates are so important for
wireless transmissions. With current compression levels, the cost of a
one-page fax is $4 to $13 per page, depending on content. Image Power
believes that with its technology, it will be able to reduce that cost
substantially, and thereby greatly affect the economics of faxing, email,
and document retrieval over wireless networks. According to independent
studies, the market for wireless data products will exceed $12 billion by
the year 2000.
Another key alliance for Image Power is the research department of
University of British Columbia, where Dr. Faouzi Kossentini leads a team
that researches into areas such as wavelets and DCT (discreet cosine
transformation), two principle techniques in data compression. Dr.
Kossentini is the Chairman of the Canadian ISO, and works on a contract
basis for Image Power.
THE PEOPLE: The primary force driving Image Power is the President, Stephen
Swift, who owned the private company that was vended into IPZ. He has
extensive high technology corporate management experience, plus technical
knowledge and expertise in hardware and software development, systems
engineering and algorithm development. His private company, Ancilla
Technologies, supplied the software application for Creative Labs' PHONE
BLASTER, creating the first voice-enabled modems.
Rashid Aziz, a director, was also involved in the early stages of a
tiny Vancouver company called Quadra Logic Technologies that claimed to have
developed photosensitive drugs for use in the treatment of cancer. Today it
is called QLT Photo Therapeutics (QLT.T $30.00- market cap. $750 million).
Mr. Aziz was also a director of Inflazyme Pharmaceuticals (IZP.V $3.00) and
IGT International Growth Tech., among others.
Derek Spratt, director, was previously a director of PCS Wireless Inc.
until March, '96, when he resigned to become involved with Image Power.
Bill Cooksley, a key employee, was the General Manager of the wireless
business unit at Motorola for nine years before moving over to Image Power.
Share Structure: The company has 15,849,312 shares currently outstanding, of
which insiders control approximately ???. There are another roughly 2
million warrants outstanding, as well as director options. At first, I felt
that this number of shares was on the high side, and I questioned management
on why they decided to not restructure the Company to a more manageable
number of shares. The answer I received was they felt that a consolidation
was not necessary, that there were a large number of significant investors
interested in the company, and that, in contrast to how many VSE companies
operate, they wanted to develop a large public shareholder base. At the
current share price of approximately $.32, a market capitalization of
roughly $6 million seems low, considering the potential.
Financials: The company has approximately $300,000 in cash, and its burn
rate is approximately $45,000/month. If all warrants and options are
exercised, the company would receive another $2.3 million.
There is a $200,000 note payable, but not due until early 1998. With
products scheduled to be available in the second half of '97, and various
licensing and royalty arrangements currently being considered, revenues will
hopefully fund future R & D expenses. Of course, we can't rule out some
dilution as a result of future financing.
Risks: Image Powers' products are only now emerging from the R & D stage,
the company is in the process of adding a marketing expert to its staff of
mostly software/hardware developers. There is no guarantee that they will
be successful. However, with patents on key technologies such as JBIG2 and
JPEG2000 and with their ability to analyze and categorize images, the
company appears to be well positioned to offer a significant contribution,
and to develop revenues derived from licensing fees as well and hardware sales.
It remains somewhat unclear exactly how many avenues the company will
be able to profitably exploit, and very few people have yet heard of Image
Power. However, this is what spells opportunity, as I see it. This
company satisfies all my prerequisites for a speculative investment: there
are people involved with a solid track record, shares can be purchased for
just pennies above the level at which the company has been financed, the
technology is potentially cutting edge, and the potential upside far
outweighs the downside. That said, I do not believe that shares should not
be purchased for a quick ride. It will take time for the fundamentals to
develop. |
