Tuesday 22 January 2013

The Dragonfly Affair

Meet Dragonfly Games: a small Winnipeg-based developer of educational video games for children, including children with special needs. A small but growing high-tech company with endless potential but a need for capital. Exactly the kind of company we would like to see grow and employ people here in the province.
In 2005, Dragonfly was approached by the Province of Manitoba and encouraged to apply for the MFS (Manitoba Film & Sound) Tax Credit program. The work they were doing was considered "highly desirable" by the Province and this MFS Tax Credit was promised to be a "highly reliable program" that Dragonfly could use for securing financing from other sources, and could be used to apply for matching funds under other programs.
Late that year, budgets were submitted, hands were shook, and the two parties signed a contract. Relying on this Tax Credit, as they were told they could do, Dragonfly applied to Telefilm Canada for a matching equity contribution. Final applications were made with revised budgets, as directed by government employees, and in January 2006 a Certificate of Acceptance was provided to Dragonfly by the Government.
Everything was in place. Dragonfly was going to get a $168,000 capital infusion from the Tax Credit, and they would leverage this capital and a loan guarantee from the Province to get $100,000 in bridge financing from a credit union. The production total was just over $500,000.
In June 2006, despite the Certificate of Acceptance from the Manitoba government and all their assurances, the tax credit for Dragonfly was cancelled. The government suddenly decided that the video game business did not qualify. Lee Doerksen, the owner of Dragonfly, was forced to put up his house and business assets as collateral to continue doing business and sustain the bridge financing.
With Dragonfly now in a financial bind, the government came forward again with a new program -- the 'Manitoba New Media Production Grant' -- and Dragonfly had little option but to participate. The government promoted this new program using Dragonfly as an example, even holding a press event for television from Dragonfly's offices. The government publicly announced that it would help Dragonfly and companies like it succeed.
The New Media grant was to increase with the amount of qualifying labour for the grant. With these new assurances, the funding commitment from Telefilm Canada also increased, allowing Dragonfly to manage a total production budget of $1.1 million. Of that, approximately $350,000 was to come from the government's New Media program. An increase in bridge financing of another $100,000 was also required. They were back on track now, and with a larger budget than before.
As Dragonfly was engaging in the provincial funding programs, it was approached by Biomedical Commercialization Canada (BCC), a program funded by the National Research Council (NRC), Western Economic Diversification (WED), and the provincial government, for participation in their business incubator program.
With this program, Dragonfly would pay BCC $5,500 per month for business services, and BCC would provide additional services valued at twice that amount: $11,000 per month. This was made possible because BCC receives government funding in addition to the fees paid by the client. The promised services included a full-time employee and various professional services on a part-time basis, as well as office equipment, amenities, and other resources. The total value of these services was to be $16,500 per month or $396,000 over 2 years.
As you might have guessed, BCC did not come through with the promised services.  Dragonfly complained and asked BCC to document the services provided to no avail. The BCC and NRC "threatened, harassed and intimidated Dragonfly" in an effort to deter them from further complaints. Meanwhile it was suspected that BCC was submitting invoices to its funders to recoup funding for these services that it did not provide.
Dragonfly is not alone: they became aware of other clients who had similar complaints. A company called Health Media Network Inc is already embroiled in a lawsuit with BCC. In fact, all of the companies Dragonfly spoke with were very concerned that BCC was submitting invoices to its funders including NRC, Western Economic Diversification, and the provincial government, for services that it did not provide. To date, none of these departments have contacted Dragonfly for information on the matter.
It gets worse though: in 2007 "BCC and the NRC sought to persuade and coerce Dragonfly to hire a spouse of an NRC staff member." Dragonfly refused because the person was not qualified. This resulted in additional threats by BCC to withhold services, and later that year BCC and NRC terminated the contract and expelled Dragonfly from the program.
Dragonfly paid into the program, but did not get value for that money, nor did they get the additional assistance that was promised and that Dragonfly was counting on. They were, however, subjected to treats and coercion.
As mentioned, BCC did not provide Dragonfly with the level of services as promised and expected, but some services were provided and Dragonfly required an accounting of those services for it's financial statements. Dragonfly made repeated requests to BCC for an accounting of the services provided but all such requests were denied. Instead, BCC instructed Dragonfly to account for its services as if actually rendered. They were expected to make false reports to the Manitoba Department of Science, Technology , Energy and Mines (STEM), the government branch overseeing the New Media grant, and Telefilm Canada. 
...  Coincidentally (or not) STEM's Deputy Minister John Clarkson was on the BCC board.
Dragonfly was put in a difficult position of trying to report the value of services received from BCC, such as they were, without any documentation from BCC, while refusing to illegally misstate amounts and run afoul of CRA or Telefilm Canada.
In 2007 a staff member in the provincial government "openly and falsely accused Dragonfly of misrepresenting and falsifying its budgets". Because of this alleged fraud, the government announced that it would not honour its remaining commitments under the New Media grant program. 
They didn't stop there. Government representatives went to Telefilm Canada and told them about this, and Telefilm subsequently withdrew its funding as well. Government representatives also contacted Dragonfly's credit union, preventing Dragonfly from obtaining the financing it required.
All of this transpired as the government and BCC were in the process of proposing yet another program: Centres of Excellence for Commercialization and Research -- a program with some big-name backers designed to "marshall Manitoba's research and commercialization assets to create growth". This program, like the BCC program that failed Dragonfly Games, would also require investment by the client firms, but to an even greater degree, and it would require the client firms to fork over intellectual property rights.
Dragonfly eventually coaxed Telefilm Canada back to the table, and with a lot of unpaid labour, they were able to complete a scaled-back version of their project. However, for Dragonfly, the consequences of this government "assistance" were harsh. According to their statement of claim, "Dragonfly has been rendered and remains insolvent and unable to conduct business", the company's credibility has been tarnished, key employees have abandoned the company, creditors have gone after Doerksen's house and business assets to settle claims, and as a result Doerksen himself has experienced "extreme financial hardship".
All of this flowed from an attempt from a small, high-tech company to seek assistance to grow its business. It accepted assistance from a supposedly reliable government program and high-profile business incubator, and ended up in ruins.
Unfortunately many small businesses may be in the same position today, with little choice but to seek help from these same organizations, because there are few other sources of capital in Manitoba.
Disclaimer: most of the information above was taken from Dragonfly's statement of claim against the government and BCC, and from correspondence with the owner. As with every lawsuit, there are two sides to the story. This post portrays one of those. That said, I have no reason to doubt the accuracy of any of the information stated above.


Anonymous said...

Once upon a time in Manitoba an investment firm was created to provide venture capital for small business development in Manitoba. The company was called Crocus Investments.

Long story short during the years of NDP government and Manitoba Federation of Labour oversight most of the money that shareholder investors provided ended up in the hands of a small circle of local businessmen who already had access to other sources of funding.

Soon some rather strange loans were given, and the tangible assets didn't quite match up with the paper assets.

Eventually Crocus asked the Manitoba Security Commission for permission to not pay back the class "A" shareholders for their investments in Manitoba business.

Many years later after much court time and several lawyers making hundreds of thousands of dollars, the courts allowed the class "A" shareholder to get back about 1/3 of the money they invested.

The shareholders even had to pay the legal expenses of the people who had oversight of the business.

Nobody went to jail or was charged with any criminal act because it was all legal.

In fact the people even elected one of the businessmen who still refuses to pay back any money as mayor.

Welcome to Winnipeg, welcome to Manitoba - the socialist paradise.

bwalzer said...

In general, if you accept any sort of government assistance for a business you are then working for the people/department that gave you the money. Their needs are then your needs.

unclebob said...

This story spells out tragically the Manitoba way of doing business where the connected few make up the rules as they go along. To the extent that it involves behind the scenes manipulation, I find it presents parallels to the problems Marty had with RRC and the connected few. Considering the unwarranted cheer leading of Martin Cash for BCC, and Margo Goodhand's troubling email, on both fronts, I might lump in the FreeP with those few as well.

unclebob said...

When formal structures like banks fail to help (and that is quite regularly)Government is not the best or the only source of financing. Strategic alliances or creative structuring with other private funders should be considered. These work and I have done them for clients.

Anonymous said...

Just another example of our government screwing businesses in order to make themselves look good.

Remember the $25 million grant that the province announced to help fund the U of W's science complex? Well that was a 'grant' up until the cameras at the pres conference turned off. After that, the province indicated it could not provide a grant for $25 Million, but would instead provide the funds as a loan. Oh, and they would increase the U of W's annual funding by the amount of the loan payments. I guess that's what you have to do when the $25 Million would have caused you to run afoul of balanced budget legislation.


cherenkov said...

Anon: good synopsis of Crocus.

BWalzer: I don't necessarily agree with that premise.

Bob: Some innovative ways to coordinate private investment would be great.

Brian: It sounds like UofW got the money it wanted, just not in a transparent way.

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