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.
