Enablence Technologies Inc. is approaching the end of a bridge loan that has been key for the company as it reports mounting losses and less cash.
The company’s most recent annual report, released Oct. 28, indicated financial problems with declining revenues and increased losses.
Revenue decreased to $4.6 million (all figures in U.S. dollars) in the 2014 fiscal year, from $7.5 million the prior year. The report showed a deeper loss of $16.2 million over the course of the year, compared to a loss of $15 million in 2013.
The company said lower revenues were due to a combination of factors affecting its market and ability to serve customers.
“The decrease was due to a combination of the impact of losing traction with certain customers early in the year, due to our unstable financial situation at that time, as well as the transitioning from certain older products to new products,” the company’s annual report said.
The company’s current $1.5 million bridge loan expires on Dec. 15, 2014.
Enablence is an Ottawa-based telecommunications company that designs and manufactures equipment for fibre optics networks. The company sells small subsections of the sprawling optics systems that telecom providers create.
Enablence was established in 2003, after securing a number of patents from the National Research Council of Canada to produce small components of fibre optic systems made at the time. The company joined other successful startups in Kanata, and worked on converting its patents into marketable products while researching new, profitable designs.
“Historically, Ottawa is very research intensive,” says Micheal Darch, a contractor at Invest Ottawa who wrote for several years about the Ottawa technology sector. “There remains significant strength in communications technology research today.”
Enablence first focused on passive components, such as resistors and transformers. In recent years, the company shifted gears to develop and sell components such as TOSA/ROSA receptacles, which play a key role in converting information from light in fibre optic cables into electrical pulses for conventional network cables.
TOSA/ROSA receptacles, along with other similar essential components, require a meticulous technical design, and considering that fibre optic networks are indispensable today, successful companies are profiting from these tiny parts.
“In general, the further down the food chain a product is, the higher the margins,” says Daryl Inniss, an analyst at Ovum Analyst House. “Gross margins (on Enablence products) should be higher than 30 per cent.”
The company’s profit margins are far below what analysts estimate a healthy company of its kind should have.
In the 2014 fiscal year, Enablence faced a negative 76 per cent profit margin, meaning that it cost the company far more than a dollar to produce each dollar in sales revenue. The company‘s annual report attributes its product margin issues to multiple complications that stem from low sales.
“The unfavourable Gross Margin is primarily due to … the impact of the fixed component of production costs on the low volume level of sales,” the company in its annual financial statement.
Enablence could seek further financing to cover operational costs. The company did not return calls and could not be reached for comment for this story.
“They’re in the hole, and raising their revenues is not going to pay off their debt,” says Inniss. “The question becomes, what assets do they have that will secure any money that [investors] give?”
Since the company’s insolvency struggle two years ago, Enablence has gone through a corporate turnover. The current CEO, Evan Chen, has been with the company for less than a year, while the founder, Arvind Chhatbar, left the CEO role in 2010.
“They’re complicated, and they’ve had a complicated history,” says Inniss. “They kicked out their last CEO not a long distance past … roughly a year ago, a Chinese company took over.”
Enablence’s office in Kanata is a suite in the midst of dozens of high-tech startups on a sprawling campus surrounded by empty, undeveloped fields. Over its 12-year existence, there has been a shift in how Ottawa tech companies are structured as they outsource production to cheaper countries and focus on software.
Enablence, on the other hand, is still focused on hardware.
“A lot of the hardware manufacturing stuff is moving offshore, Canadian firms are going to have their own niches,” says David Wolfe, professor of political science at the University of Toronto who studies the Ottawa tech sector. “Ottawa is in a reinvention stage.”
“Modern technology companies are far more software intensive,” Darch agrees. “There’s a lot less concentration on hardware, and a lot more on software.”
The Ottawa’s company’s manufacturing and design work has been moved from Ottawa to China and Silicon Valley.
While Enablence continues to spend $4.7 million each year on research and development, it would be important for the company to make a technological breakthrough that it could easily bring to market and sell at a sustainable profit margin.
“The optical components market is a variable costs business, which means if you’re not selling anything, you shouldn’t be buying anything,” says Inniss. “The problem isn’t their costs, it’s their revenue.”
Enablence’s research and development in Ottawa has led to significant costs, while its financial reports have shown a difficulty bringing new technologies to market. In the company’s 2013 fiscal year, Enablence did not bring any new products to market with the $4.8 million it spent on research and development.