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Staged financing protects investors in tough market

Tracy Tjaden

A private technology company in Vancouver has beaten the odds to secure $3.1 million in new financing, but there's a catch.

Calgary-based ARC Financial Corp. and Noram Engineering and Constructors Ltd. have agreed to invest the cash in Membrane Reactor Technologies Ltd., a local firm developing a method to produce ultra-pure hydrogen.

However, the money will only flow if the company meets certain milestones, a strategy to protect investors who target early-stage technology companies.

"The investors are a little more cautious with their money," said Kevin Dodds, MRT's chief financial officer.

"They're not going to give you all the money in day one. They'll give you portions of the money as you do the things you say you will do."

Allan Fowler, vice-president of ARC Financial, said his company frequently uses staged financing to reduce risk. The private investment firm targets emerging technologies in the energy sector.

"This way, the company has to reach certain benchmarks and we have a high confidence it will," Fowler said. "The capital markets are very difficult so capital providers are trying to find ways to mitigate risks going into any investment."

Richard Osborn, a partner at Vancouver's Greenstone Venture Partners, says the milestone-based payments have become more popular as the venture capital market has tightened. "It's definitely coming back into vogue in Canada. B.C. is particularly fond of it," he said.

MRT is a development-stage company working to commercialize its proprietary technology, a method of producing ultra-pure hydrogen for industrial markets and the burgeoning fuel-cell market.

Hydrogen is commonly used in industries as part of an extraction process, such as the extraction of certain metals from gold in mining or in the oil sands. However, some industries require high-purity hydrogen, such as the chemicals market, the electronics industry, metals refining and many public utilities.

Also, in fuel-cell technology, pure hydrogen will allow the fuel cells to operate more efficiently.

Fowler said demand is strong for industrial companies who currently must pay to transport high-purity hydrogen to their sites. MRT's technology would mean an upfront investment in the technology but cost savings over the long term by sidestepping the transportation and compression costs, he said.

"Now it's produced at a remote site and transported to an industrial user," he said. "It's an expensive system because you have to liquefy the hydrogen or compress it and transport it. The whole chain is an expensive process."

Dodds and Fowler would not give details on the milestones or say when they expected the full $3.1 million will be in place. But Dodds said the funds would be used to complete construction of the company's commercial demonstration unit, expected to be up and running by the end of this year at the National Research Council's fuel-cell innovation centre in Vancouver.

"Once it's working, we will be able to bring potential customers in to see the unit," Dodds said.

He added that the fact MRT closed the financing deal shows the company's technology is headed in the right direction.

"Money is hard to find these days and the guys who have it know they can be patient," Dodds said.

He added that MRT expects to be selling its hydrogen purifiers by the end of 2003.

Dodds said there are currently two other technologies on the market for purifying hydrogen, one uses electrolysis and the other a steam-methane technique. MRT, he said, provides an integrated process that produces the same results for less money. "We have a reactor and membrane system that gives the purity, it's all in one integrated unit."

Noram Engineering is a Vancouver technology and engineering company specializing in energy, nitration, wastewater treatment, sulfuric acid and other electro-chemical applications.