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VENTURES: How To Stem Losses - Go Dutch


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JOHN Daniel Holdings (JDH), the Stellenbosch-based venture capital investor, appears to be determined to back a concept that has cost the company a bucket-load of capital in the last five years.

JDH last month re-committed to its investment in Lazaron, its stem cell storage and research operation, by launching a bid to buy complete control of the struggling business after it signed up a joint venture with a European partner.

Tyger Valley-based Lazaron Technologies raised some R7 million from public investors in 2005 with promises that its storage facilities (holding stem cells from newborn children) would almost immediately generate R13 million in revenue and profit of R1.3 million.

The profit claim initially seemed reasonable because the model was based on a simple formula of collecting and storing stem cells for a one-off fee of R6 500 and storage cost of R120 a year.

Basically Lazaron needed to sign up around 2 000 clients in the 2006 financial year to make its original forecast. It didn’t…not by a long shot.

Since 2006 Lazaron has generated collective revenues of R14 million (remember the initial forecast was for R13 million in the first year of operation) and generated losses of around R3.5 million.

For the last three financial years Lazaron’s turnover has been stuck at R2.3 million with losses coming in at R770 000, R1.2 million and R1.2 million respectively. That, at a glance, hardly seems like a viable business model – both in terms of critical mass and a constructive trading margin.

Surprisingly JDH – which recently saw the introduction fits of Golden Oak and then Escalator Capital as major shareholders – has opted to back Lazaron to the hilt.

Last month JDH proposed increasing its shareholding in Lazaron via a partially underwritten rights offer to raise some R4.4 million for the company.

The rights issue does not only bring in fresh capital, but rather sees the conversion of JDH’s R1.5 million loan account in Lazaron.

The ‘re-capitalisation’ is also a requirement of a recently announced joint venture with Amsterdam-based Cryo-Save NV (who appear to be wary of investing hard capital at this delicate juncture).

JDH currently holds a 27.45% stake in Lazaron, and could increase its stake in Lazaron to a maximum of 82% assuming the minimum loan account balance of R1.5 million is settled by the issue of new shares.

The rights issue terms infers a value of less than R3.5 million on Lazaron – a bit of a shocking statistic considering initial share offer in 2005 raised some R7 million.

Much now seems to hinge on Lazaron scoring from its tie-up with Cryo-Save in a project which will provide for the harvesting and banking of stem cells from both cord blood as well as cord tissue.

Aside from JDH having to convert its loan account into shares, the joint venture also requires that “the major portion of the going concern undertaking of the Lazaron business be disposed of to JDH at a purchase price of R1 million”. This business will then be injected “as a capital contribution” into the joint venture with Cryo-Save.

So will the Cryo-Save venture really make a big difference to Lazaron’s rather (to date) insipid business model?

Cryo-Save, judging from its year to end December 2010 annual report, is a fair size business with turnover of 40 million euros (R400 million) and profits of 2.5 million euros (R25 million).

The company has operations all over the world (40 countries, including Europe and India), and obviously sees South Africa as a springboard to the rest of Africa.

One of the first spin-offs of the joint venture (and the rights issue) is that Lazaron’s laboratory in Cape Town will be upgraded to cater for the increase in volumes.

The next thing to watch for is whether JDH’s operating results in 2012 show tangible evidence of additional volumes – something that might prompt Cryo-Save to upgrade from being a joint venture partner to an equity partner.

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