Overview

As is often the case with the equity markets, while investors seem to buy stocks up to the point where they are overly expensive, they are now selling them at levels where they are exceptionally cheap. Recent devastating occurrences have certainly made investors feel a lot more uneasy about holding equities and it really shows on the exchanges.  The major indices have erased ALL of the gains they had built up during the high tech bubble and are now trading at levels not seen since October of 1998.  

If you thought that trading in Blue-Chips was bad, there is so little interest in the Small- and Micro-Cap equity markets that even companies with profitable business models or potentially great products are not even on most investors’ radar screens.  And why would they be?  If your “stable” blue-chips can’t even hold their value, why would you look at a speculative, illiquid stock?  Unfortunately, the micro-capitalized companies will likely have difficult market conditions until the Large-Caps are on much more stable footing.  But do not despair, it is not a question of if, but rather when, this will occur.

Given the market’s performance over the last couple of weeks, our portfolio of Micro Cap stocks has held up reasonably well.  The Micro Cap portfolio underperformed the TSE200, and basically matched the performance on the CDNX Technology and Wilshire Small Cap Indices.  The GC Portfolio did outperform the Russell 2000 index by 2% and the NASDAQ Composite handily.  However, a loss of 19.0% in one quarter is nothing to be proud of, but the portfolio did perform well compared to some of its peers.

The performance of the individual stocks within the portfolio left much to be desired, with only Omni-Lite Industries having a positive quarter.  Partly supported by its current share buy-back and partly by good fundamentals, OML was up 31% in the quarter.  Both Proginet and International Wex Tech ended the quarter exactly where they began it as Proginet, too, announced a share buy-back that will begin October 3^rd.  Losses were greatest in Alternative Fuel Systems where the lack of new sales is starting to weigh heavily on the Company.  Cardiome Pharma, Imaging Dynamics and IP Applications all had greater than 30% losses.

Over the fourth quarter of 2001 there should be some meaningful announcements from several companies, notably Cardiome Pharma’s phase I results, International Wex’s meeting with the Chinese SDA and potential sales for Resin Systems.  If the overall equity markets are, at the very least, able to hold their current levels, some of the MicroCap Portfolio Companies could have significant potential from these levels.  Perhaps, finally, all the negative news has been discounted by the markets.

Alternative Fuel Systems, Inc. (TSE-ATF)

Over the last three months Alternative Fuel Systems has announced sales contract expansions with EcoMex, a conversion outfitter in Mexico City , additional sales of their pressure regulator to some Original Equipment Manufacturers and field trials for the new Cummins platform in Australia .  However, meaningful new sales have eluded the Company and the regularly scheduled shipment to IDEM, the Iranian DaimlerChrysler licensee did not go as planned in Q2, and is not expected to go in Q3 nor Q4.

Alternative Fuel Systems (AFS) develops and commercially supplies advanced technology, fuel management systems and reverse-flow catalytic converters.  These systems allow for diesel and gasoline burning engines to use natural gas and have been shown in real world trials to increase both horsepower and torque over a base test engine.  The maintenance of horsepower and torque in an alternative fuel engine is currently one of the greatest challenges facing the fuel conversion industry.

In response to these slow sales, AFS's stock price has been hammered down, from a high in this last three months of 81 cents to a 52 week low of just under 30 cents.  Our original target price of $3.50 has based on three main factors, none of which have materialized to the extent we had assumed:

1.       That Alternative Fuel Systems would be able to sign meaningful supply contracts to OEMs or Large Fleet Management firms for their line of Natural Gas Conversion systems.  Regulator sales to OEMs have begun and management is hopeful that additional components will be added.  However, there are no sizable contracts at this time.

2.       Continued shipments to IDEM, generating $825,000 per quarter in revenue, have, temporarily, ceased.  Shipments to the Iranian Daimler-Chrysler licensee have been suspended until IDEM has set up their assembly line, which is expected for the second quarter of 2002.  At that time shipments are expected to continue.

3.       That the equity markets would still be interested in Small and Micro-Cap equity stories.  There is so little interest in Micro Caps right now that a couple thousand shares can move the markets with double-digit percentage changes in either direction.

What does the future hold for AFS?  Luckily, the Company was able to raise significant capital while their stock price was high leaving them with approximately $10.5M in available cash and no significant debt.  These reserves will it allow to operate for almost 3 more years at its current burn rate.  In our financial projections we have modeled that AFS continues to ship product to IDEM, but not until the second quarter of fiscal 2002.  Add to that the contract from EcoMex, which is to begin in the fourth quarter, and further pressure regulator sales, which are under a licensing agreement from their developer, and AFS could generate almost $9.5M in revenue next year.  However, if the IDEM contract is impaired, or regulator sales are not as robust as expected, revenue and earnings will be substantially lower.

Therefore, given the tenuous outlook for sales over the next six months we are lowering both our Earnings and Target Price recommendations.  Our Twelve Month Target Price is $1.00, down from $3.50, which had assumed an OEM Contract and  investor interest in Micro Caps.  We are going to maintain our Speculative Buy recommendation, as the potential increase in stock price from its current level to $1 is approximately a 180% return.   

To read our March 5th, 2001 Research Report on AFS, please click here.

Cardiome Pharma (T-COM) 

Focused on the development and commercialization of treatments for cardiac arrhythmia, Cardiome Pharma is a BC-based company.  With three projects all focused on different aspects of cardiac arrhythmia, the Company is now attempting to diversify their revenue stream as they continue testing their lead products.  Currently, there are very few products available to Cardiologist that provide positive results to arrhythmia patients, yet limit the severity of associated side effects.

Of the three products currently under development, RSD1235 is the most advanced along the developmental pathway.  Targeting acute atrial arrhythmias, RSD1235 has shown a very promising safety profile on both canine and human subjects up to this point in its preclinical testing.  Having recently completed Phase I clinical trials, the results of the testing should be available shortly.  We can only assume that the results were positive as the Company has undertaken plans for Phase IIa, which is to begin during the Fourth Quarter of 2001.  If the results of IIa are confirmed to be positive, we should expect that Cardiome will begin actively marketing the compound to major pharmaceutical companies in an effort to help fund the development or license out the technology as the clinical tests become progressively more expensive.  Alternative delivery methods and target groups are also being researched in hopes of broadening the market appeal of the compound.  Results from Phase IIa should be available late in the First Half of 2002.

The second of Cardiome’s lead products is RSD1122, also targeted at atrial arrhythmia, this product was licensed to AstraZeneca for chronic arrhythmia.  Although licensed to AZ almost a year ago ( October 16^th, 2000 ), they have yet to begin clinical trials on the compound.  AZ has chosen to redo almost all of the pre-clinical tests to ensure the validity of Cardiome’s results.  Obviously, this has delayed the launch of clinical trials, and with it the milestone payments that must be made to the Company at the 1) declaration that the compound is a clinical candidate and 2) at the commencement of Phase I clinical trials.  Cardiome has mentioned that they expect the two announcements to be made in very short order of one another, and we are hopeful that the announcement will be made by the first quarter of 2002.  Together these two announcements would bring approximately US$3.5M into Cardiome’s coffers, and although not desperate, the Company could do with a little more cash.

Finally, the third announced candidate is Kv1.5, which is also targeting cardiac arrhythmia, but in the relatively new field of atrial specific ion channels.  Although still in preclinical testing, Kv1.5 is expected to conclude preclinical before the end of the year, and, pending approval, begin Phase I testing in the first half of 2002.  This compound has not yet been licensed to a major pharmaceutical company.

In an effort to increase and diversify their revenue stream, Cardiome has begun two projects in hopes of offering their laboratory facilities to other pharmaceutical companies in two potentially lucrative aspects.  In-Licensing would allow Cardiome to begin testing promising, but orphaned, compounds from major companies.  Generally, they will seek compounds that have been put aside due to budget restrictions or lack of a scientific backer and move these compounds along the preclinical and then early clinical track.  For this, Cardiome will be paid for the development, and possibly receive licensing revenue if the product is taken to market. 

The second source of additional revenue could come from Lead-Optimization, which would use Cardiome’s laboratory facilities to narrow down potential drug compounds for other drug companies.  With tens to hundreds of variations of complex, yet similar, compounds, Cardiome plans to offer rapid testing of these compounds on a toll contract basis.  Gross margins on both In-licensing and Lead-Optimization are very attractive to the Company and would help mitigate some of their cash burn.

Financially, we have estimated that revenues will grow dramatically through fiscal 2002 as Milestone Payments from drug development begin to arrive and the revenue diversification programs are rolled out.  However, due to the cost of having two products in clinical testing in 2002, the expenses incurred will continue to outstrip the revenues earned, resulting in a loss of 22¢ per share in 2001 and a continued loss in 2002 of 14¢ per share.  Even with these influxes of cash, we expect that Cardiome will need to source some additional financing by the middle to late part of next year.  However, if the clinical and pre-clinical testing continues and the results are positive, there will be little dilution to existing shareholders as the stock price would likely be substantially greater than it is today.

Looking to the future, the Company has three products in various stages of development, each with significant market potential, plus some of the cash burn will be mitigated by the revenue diversification projects.  Therefore, we are maintaining our Speculative Buy recommendation on Cardiome Pharma, with a twelve month target price of $2 on their stock. 

To read our May 31st Research Report on Nortran Pharmaceuticals, now Cardiome Pharma, please click here.

Computer Modelling Group (CDNX-CPU)

On September 18^th, 2001 we issued a research report on Computer Modelling Group with a new target price of $1.40.  The lower price target for the Calgary-based developer of simulation software for the Oil and Gas industry was as a result of the lower near term earnings as the Company begins its expansionary plans.  However, reported EPS will be dramatically different as a result of the on-going share cancellation.

As we reported in our Third Quarter Micro Cap report, CMG finalised an agreement with the CMG Reservoir Foundation to retire up to 1.2 million shares.  As a result of the accounting for the retirement, the first quarter of fiscal 2002 ( June 30^th, 2001 ) resulted in an increase in earnings of 9 cents a share over operational earnings.   As further shares are cancelled, this increase in accounting earnings will persist, with a total potential difference for fiscal 2002 of 13¢ per share, and 3¢ for the year ending March 2003.  We have denoted the difference in earnings on the chart to the left by reported EPS in the first EPS column and operational EPS in italics in the second column.

As the Company begins its expansionary plans we expect that the internal costs will begin to rise before the corresponding increase in revenue is seen.  This expansion is an investment towards the future in people, new R&D and sales channels.  However, near term earnings are likely to suffer slightly before they improve.

Overall, the outlook for Computer Modelling Group is still very positive, just not quite as rosy as originally anticipated over the next four quarters.  Revenue from software license sales should remain strong, consulting income will augment core revenue and on-going product improvement will encourage software users to renew their software licenses, further increasing revenue streams.  We will maintain our Buy recommendation on CMG, but have lowered our twelve-month target price to $1.40 from $2.  Long-term, the market potential for Computer Modelling Group looks excellent.

To read our most recent Research Report on CMG, please click here.

Imaging Dynamics (CDNX-ID)

Imaging Dynamics recently completed a $2.5 million financing that was fully subscribed, principally by institutional investors.  Being able to close an offering of this size in this market is an achievement by itself, but for a Company that has been hampered by delay after delay in commercially launching their product, it may indicate that the Company may have finally turned the corner.

ID has developed and is now marketing a digital x-ray unit and acquisition workstation to the medical community.  Priced at levels below most of their competition, ID has expanded their product offering from solely a digital x-ray unit to include an image acquisition workstation and even an x-ray generator if the customer would like to upgrade their entire x-ray station.  The Company has made sales to several institutions across North America , in Europe and Australasia .  The very first shipments of finished product began last quarter, with a further 3 to 5 units being shipped by the end of September, beginning of October. 

Although we are pleased that shipments to fulfil customer orders have continued, the current production rate is below our original expectations towards delivery of the over 40 unit backlog that currently exists.  ID’s management did acknowledge that there had been problems in establishing manufacturing, but that they were taking steps to bring the process up to speed.  Production predictability will have to be clearly established if significant future sales contracts are to be signed.

The next big event for ID will be the Radiologist Society of North America’s annual Conference and product show in Chicago ’s McCormick Place , November 25^th – 30^th.   RSNA will provide Imaging Dynamics the opportunity to present their technology along side industry leaders such as Canon, Swissray and GE Medical.  ID’s high image quality and low total cost should give it an excellent value proposition to the attending radiologists and medical product buyers.  Recent numerous sales by some of ID’s competition may also indicate that the market for digital x-ray equipment may finally be developing.  Up to now this had been our greatest concern with the future of the Company as buyers of medical equipment did not appear to be buying digital x-ray equipment, even though it is the last major segment of the medical imaging market to enter the digital age.

Corporately, the Company will hold their annual general meeting in October to vote on the proposed share consolidation.  The One-for-Five consolidation should not have a dramatic effect on the stock, but will reduce the number of outstanding shares from just under 55 million shares to approximately 11 million.  Management feels that this will clean up the capital structure, but it will also magnify the loss per share as there will be only 20% of the number of shares over which to spread the loss.  However, if equity markets are efficient, the stock should trade at around 5 times its current level, or around $1.25 per share post consolidation.

Overall, there are finally some positives to look at for Imaging Dynamics.  There is approximately $1.9M in cash available to the Company as of September 30^th, 2001 , commercial manufacture has begun and the RSNA Conference will allow the Company to showcase their Xplorer 1700 digital x-ray package.  However, on the negative side the digital market for x-ray equipment is still very young and channels undeveloped.  Plus, although young, the market is already competitive with many large corporations with deep pockets are also in the market.  And finally, the construction and delivery of Imaging Dynamics’ finished units is approximately 6 months behind schedule. 

Therefore, we are going to maintain our Hold recommendation on Imaging Dynamics, but with a positive, long term outlook.  Our 50¢ twelve month target price will also stand.  Hopefully, the RSNA show in late November will be successful in terms of new sales and the delays that have plagued manufacture of the Xplorer 1700 will be resolved.

To view our most recent Research Report on Imaging Dynamics, please click here.

International Wex Technologies (CDNX-WXI)

Near the end of the quarter, International Wex Technologies announced that they had received a request from the Chinese State Drug Administration (SDA) to attend a further meeting.  The meeting, scheduled for September 28^th, will be to discuss the chemical, manufacturing and control procedures involved in producing their compounds.  We are hopeful that this is the next logical step in the preparation for ultimate approval of sodium channel blocking products.

International Wex Technologies is a Vancouver, B.C.-based company with a subsidiary, Nanning Maple Leaf Pharmaceuticals, located in Nanning , China .  IWT has developed a portfolio of products using tetrodotoxin, an organic compound extracted from the Puffer fish, or Fugu.  The products are currently aimed at treatment of chronic pain, heroin addiction and for anaesthesia. 

In an effort to increase the potential for a fast tracked approval for their product, IWT has increased the priority of their Tectin™ compound for the management of chronic pain, particularly in cancer patients.  IWT’s medical advisory board recommended the change in strategy due to the greater financial potential in pain management.  Tectin’s excellent pain management and non-addictive properties make it a natural replacement to morphine and other opiate-based drugs.  The Drug Addiction  program has not cancelled, just delayed as the Company pursues the greater near term potential of pain management.

Looking forward, there are two principal milestones which we are watching for carefully.  First, we are very hopeful that the approval from the Chinese SDA comes within the next 6 months.  IWT has a Letter of Intent from the Chinese Detoxification Centres to purchase substantial quantities of Tetrodin™, the Methadone–therapy replacement for heroine addiction.  If the approval for the drug is granted, revenues in the tens of millions will be easily achievable in the first year in which the contract is enacted.  Secondly, the clinical Phase IIa trials for Tectin, the pain management compound are scheduled to wrap up before the end of calendar 2001.  If the results for Tectin as positive, IWT will more actively market the compound to major pharmaceutical companies for development assistance and potential licensing. 

Therefore, we will maintain our Speculative Buy recommendation on International Wes Technologies, although the speculative component is beginning to diminish, with a twelve month price target of $4.

To read our March 2nd, 2001 Research Report on International Wex, please click here. 

IP Applications (CDNX-IAP)

On August 15^th, 2001 , the provider of back-office management reporting and procurement software to Internet Service Providers announced a promising five year agreement with Sprint Communications (FON-NYSE) to bundle IP Application’s iTAPP suite of software to their ISP clients.  Although no sales or licensing minimums were contained in the contract, the iTAPP engine provides a value-added service that other wholesale ISPs currently do not offer.

Revenue growth within IPA’s existing clients has grown above the Company’s targeted $2 per end-user.  This higher revenue arose from increased usage of IPA’s services by the client ISPs, an implicit endorsement of the services that they provide.  The higher end-user revenue resulted in first quarter 2002 (June 2001) revenue being 60% higher than we had expected. 

Looking forward, we are expecting strong growth from additional revenue from existing clients, plus the growth from the rollout of services to Sprint’s clients.  Even modest revenue growth projections result in dramatic increases.  Given these modest projections, we forecast that IPA will return to profitability in fiscal 2004, likely during calendar 2003.

We published a Research Update on IP Applications on September 18^th, and issued a twelve month target price of 70¢ on a Speculative Buy recommendation.  We stand by that recommendation.

Our September 18th, 2001 Research Report on IPA can be viewed by clicking here.

Microbix Biosystems (T-MBX)

It has been a quiet quarter from Microbix, since their third quarter earnings announcement in July.  Microbix creates and then markets generic biological samples and products to scientific facilities around the world for the development of therapies based on these biological compounds.  We are anticipating that the year-end 2001 earnings for the period ending September 30^th, 2001 will be 1.3¢ per share on revenue of $3.25 million.

Although the biologicals business is profitable for the Company, the real potential is based on their Urokinase product, a generic version of a blood-clot dissolving compound.  The facilities for the product are still being planned and are “on track”.  Our current estimation for the commercial launch of the Urokinase product is in 2004.

For the next several months, until plans for the commercial launch of the Urokinase product are more advanced, the Microbix stock will likely trade in its current range.  Long term, there is great potential for the stock, but for the next little while there will be little news upon which to trade this stock.  Therefore, we are temporarily suspending coverage on Microbix pending further development on the Urokinase product.

Omni-Lite Industries (CDNX-OML)

The normal course issuer bid to buy back up to 495,000 shares of OML stock is well under way with over 35% of the maximum amount being repurchased by the end of the quarter.  Add to this the announcement on September 21^st that an additional 500,000 escrowed shares will be returned to treasury, resulting in almost 10% of the outstanding shares being removed from the float since May.  The float gets smaller and the EPS gets larger, existing shareholders should be pleased.

Omni-Lite Industries is a manufacturer of fine tolerance, high strength components for the automotive, aerospace, military, sports and recreational, and commercial markets.  Using a technique called cold-forging, composite and metallic components are produced at rates of up to hundreds per minute.  In recent shipments to Fairchild Aerospace Fasteners, Omni-Lite’s components received quality ratings of 98%, and acceptance rates of 100% with zero defects. 

After the recent developments in September, we are slightly concerned about the Company’s customers and their demand for components; in particular the Aerospace and Automotive divisions.  Respectively, massive layoffs and little current demand and this may result in lower future earnings for Omni-Lite.  However, the projects that the Company is involved in are generally newer, more developmental projects or as replacements for existing components.  Plus, over one third of current revenue comes from the military contracts, for which demand is still high and potentially strengthening.

Therefore, based on the nature of the contracts that Omni-Lite is currently producing for we are going to maintain our revenue and earnings target that we issued in our June 26^th Research Report and thus the Speculative Buy recommendation and the $2.50 target price. 

To read our most recent report on Omni-Lite Industries, please click here.

Procyon BioPharma (T-PBP)

With four products at various stages in the development pipeline, Montreal-based Procyon has a well diversified product base upon which to build their business.    The four current products include cancer diagnostics, cancer therapeutics, and scar management and are in a variety of preclinical and clinical trials.  Two of the products have been licensed or are under developmental agreements.

Since our December 2000 Research Report on Procyon, the Company has progressed with filing Investigative New Drug Applications (INDs) in both Canada and the US for a number of their products.  Antinuclear Auto-Antibodies (ANAs) are a small particle of nuclear matter that binds to the surface of cancerous cells and can assist the body’s immune system in identifying these cancerous cells.  ANAs have been in preclinical testing for several months and the Company plans to file their IND for the platform technology by the middle of 2002.  They have sourced a consistent supply of the compound for the trials from Biovation and the Good Manufacturing Process approval has been completed. 

Prostate Secretory Proteins (PSP⁹⁴) has completed some pre-clinical and toxicology testing and the results have been encouraging.  PSP⁹⁴ is a naturally produced peptide that binds to cancerous prostate cells and can be used as both a diagnostic and therapeutic product.  Meetings with the FDA prior to filing the IND have been completed and the Company expects to file the IND by the end of the year.  Clinical trials will then begin shortly afterwards in US or Europe .  The diagnostic aspect of the potential treatment will be targeted to be partnered with a larger pharmaceutical company some time in 2002.

Licensed to IMI in March 2001, Colopath is a non-invasive test for colorectal cancer and is currently planned to be marketed jointly with IMI’s own test.  IMI is currently in talks to begin clinical testing of the diagnostic tests and hopes to launch the product commercially by early 2003.  The cost of the tests is being covered entirely by IMI and has no cash draw on Procyon. 

Fibrostat, the topical scar management cream, is scheduled to undergo Phase II clinical testing as we write this newsletter, the results of which will hopefully be available by the end of the year.  Commercialization of the treatment is planned to occur between late 2003 to the middle of 2004.  The Canadian rights to Fibrostat are licensed to Biovail, who is paying a large portion of the development costs.  Procyon hopes to have the U.S. rights assigned to a partner by the end of the year.  Of the four projects, Fibrostat will likely be the first product to move the price of Procyon’s stock, as an announcement of a U.S.-based partner for the development and marketing of the product will reduce some of the Company’s cash burn. 

Overall, we like the opportunities that Procyon’s management has created.  Although three of the products are targeted towards cancer detection and treatment, each of the products is aimed at very different, and potentially lucrative, market segments.  Due to the minimum of 18 months before the closest product nears commercialization, there is little near-term interest in the stock.  That said, if Procyon is able to sign a US partner for Fibrostat in the near future and receives some milestone payments from Biovail as they complete Phase II trials, the stock could move up.  Further positive developments in the Company’s other products would also be of some benefit.

Therefore, we are lowering our target price on Procyon Biopharma from $3.50 to a near-term target of $1.50.  This is based on a meaningful U.S. licensing agreement for Fibrostat, positive clinical trials (towards commercialization) for Colopath and positive results from the early state clinical trials for PSP⁹⁴ and the ANAs.  Given the potential price appreciation from its current level, we are maintaining our Speculative Buy recommendation. 

To read our December 5th, 2000 Research Report on Procyon Biopharma, please click here.

Proginet Corporation (CDNX-PRF.U)

On September 20^th, when Proginet announced their financial results for the fiscal year ending July 31^st, 2001 , they were in-line with our expectations for both revenue and net earnings.  Unfortunately, those results were reduced from previous expectations earlier in the year.  The developer of managed file transfer and password unification, Proginet’s software is currently being used by over 600 customers in 29 countries around the world. 

Over the last several months, Proginet has been actively marketing their services in trade related press and then measuring the feedback and response to those advertisements through their website and the sales leads that they spawn.  The advertisements have generated significant leads for the Company, up over 500% from the same period last year, but only limited sales up to this point.  The sales cycle for Proginet’s software has typically been 6-9 months, so the real test for the conversion of leads into sales will be over the next two quarters.  If new sales are up dramatically in the first and second quarter of fiscal 2002 (quarters ending October ’01 and January ’02) we will know that the advertisements are working.  However, if sales continue along at their current rate, we would expect only an increase of just over 7% compared to FY2001’s revenue.

Proginet also announced that they would be buying-back up to 1 million shares, or just over 7% of the outstanding float, on the open market.  With the current price at around 25¢, this might be a good use for excess cash, but as we await the full annual financial statements, we anticipate that the Company had under $1M of cash in reserve as of the fiscal year end.  We hope that if the market for their software softens with the rapidly approaching North American recession, that they do not feel compelled to use up their cash pursuing the buy-back of all one million shares.  Create sales and a consistently profitable business model and the stock price will move up on its own.

The next three to six months will be very telling towards the ultimate success of Proginet’s marketing efforts.  We will be watching closely for the make-up of their revenues (new sales versus maintenance revenues) to determine whether its Value Added Resellers are selling Proginet’s software, or if (as we suspect is the case) the Company is selling principally all of its own product.

Given the speculative nature of the next 3 to 6 months we have reduced our recommendation to a Hold, with a six month target price of 50¢.  During that period, we will hopefully get a much better idea as to the market’s appetite for Proginet’s software and effectiveness of their marketing.

Rainbow Group of Companies (CDNX-RBP)

As we await the finalization of the proposed merger between Rainbow Group and QWIPTech, there have been some recent developments in the story about the maker of Infrared visioning equipment.  Originally designed for military use, the Quantum Well Infrared Photodectector can detect very slight variances in temperature from significant distances.  These characteristics allow the technology to be used for military applications, non-destructive testing, medical imaging and public safety.

In connection with the merger between QWIPTech and Rainbow, the Company is currently finalising a preliminary prospectus that should be available by the end of September.  We expect that the funding and closure of the merger will, hopefully, be completed by the end of the year.  At that point Rainbow will own 100% of QWIPTech, but the number of shares outstanding is forecast to increase to almost 60 million shares, although many of these shares will be under escrow, released over a 7 year period.

On the manufacturing side, QWIPTech continues to produce their 320x256 units and expect to be testing this newest batch within the next two weeks.  A larger 640x512 sized unit is currently under development, as are additional colours.  The current chip produces images in only greyscale and additional colours would offer greater flexibility to the user to distinguish characteristics of the image.

Other recent announcements by the Company have included:

·         August 20^th – The granting of a patent for the new Slotted Quantum Well Sensors.  The new design reduces the amount of dark current by a factor of three, greatly increasing the efficiency of the chip.

·         August 9^th – In early August, Rainbow announced that they had set up a subsidiary, through QWIPTech, to pursue opportunities in the transportation industry, specifically road safety. 

We are currently expecting that Rainbow’s third quarter ending September 2001 will be released in November and will not reflect the full revenue of QWIPTech until the merger is finalised.  However, we are expecting that the third quarter will show revenues from the Microwave Bonding Instruments contract that was announced in June and perhaps some smaller contracts that were not specifically announced.  A loss will likely persist, but revenue will have started to be earned.

To read our Research Brief from March 22nd, 2001, please click here.

Resin Systems Inc. (CDNX-RS)

Since the closure of our underwriting for Resin Systems in July, the developer of a high strength, environmentally friendly composite resin has several companies very close to agreeing to sales – reportedly.  At their annual meeting in September, the Company did admit that, up to this point, they had assumed that potential customers would want to do their own testing, rather than have RSI do it.  This was obviously wrong, as they are now hearing, repeatedly, “What testing has been done, what are the physical characteristics and can we see the results?”

Given this lack of product knowledge, Resin Systems is now undertaking further third party testing with Alberta Research Council.  As more information about the physical characteristics of the composite resin are scientifically documented, Company management feels that closure of some sales will be imminent.  There are approximately 20 companies in Resin’s sales pipeline at various stages.  Multiple potential customers are on the cusp of closing meaningful sales, pending the outcome of this testing.

If the third party testing reinforces the results that the Company has been touting all along, revenues from product sales could begin in October, with significant sales beginning in mid-November or December.  To meet this expected demand, RSI has established a raw chemical supply agreement with Huntsman Chemical (the largest private chemical company in the U.S.) and is working on finalising the details for a toll manufacturing agreement with a large chemical mixer, also in the U.S. 

For our valuation model, we have assumed very conservative revenue growth, as the value and likelihood of the near term contracts are almost impossible to determine.  If even one of the major contracts upon which RSI is currently working, closes, our projections will have to change dramatically.  Therefore, we will issue a Speculative Buy recommendation on Resin Systems Inc., with a twelve month target price of $1 and a positive outlook.

Robert Peets, MBA CFA

This memorandum is for information purposes only. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. This report is not to be construed as an offer or solicitation to buy or sell any of the securities herein named. The inventories of Golden Capital Securities Ltd., its officers, directors or shareholders may from time to time include securities herein named. Golden Capital may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this report. E & O.E.