Special Situations: Gener8 is well known for its 2D to 3D conversion technology and work, but it has also been quietly developing a big data product to facilitate tracking its own 3D movie conversion process. What is the growth potential for these products?
Rory Armes: Our story started with inventing software for 3D movie conversion. Our big data visualization tool, Cumul8, emerged out of technology we developed to convert 2D films to 3D format. Cumul8 was a tool that helped track the immense amount of information needed to complete each frame of a movie. Cumul8 helps the team understand quickly "where the film is at."
Our 3D division is focused on post-production for prereleased theatrical films for Hollywood. But box office growth for 3D has expanded far outside of North America, into China, India and Europe. Studio budgets for creating 3D films have increased, especially for action/adventure-style blockbusters. And big-time international directors are chomping to work in 3D.
Now we know that our high-quality film conversion software also has applications beyond entertainment. The 3D software can produce visual displays for medical, educational and industrial uses, and can be used to make visual sense out of complicated seismic data for the oil and gas sector, as an example. There is growth potential in a number of areas beyond simply film.
SS: When you talk about converting 2D into 3D, does that mean that the director shoots the movie in 2D, and then you convert it into 3D? Or are the filmmakers using special 3D cameras all along?
RA: There are two ways to create a 3D movie image. One is to film the action with two cameras; one camera is the left eye and the other is the right eye. The cameras are rigged to triangulate moving objects and that creates a 3D effect. We call that native filming. Avatar was filmed natively, with two cameras shooting each object. But, as is often the case, software solutions quickly surpass hardware solutions. We create the 3D stereoscopic effect by using software, as opposed to two-camera systems. Directors only need to use a single camera, and can get stunning 3D objects in post-production.
SS: Can you also convert films that were shot in 1940 to a 3D format?
RA: We can make any digital version of a movie into 3D. A good example is in Ridley Scott's 3D film, Prometheus. There is a background scene from the 2D film Lawrence of Arabia, which we converted to 3D to keep the full illusion of 3D for the entire Prometheus film.
SS: How did your software get from 3D filming into big data applications?
RA: It turned out that managing the logistics of our data-heavy film conversion business was a big data headache. We wrote a piece of software, which we named Cumul8, to manage the insanity of big data in the film industry. Interestingly, most of our software engineers and designers come out of the gaming world, where "visualizing" data is the key to success. It was a natural progression for Gener8 to unbolt Cumul8 as a second source of revenue.
Industry is simply desperate to visualize mountains of digital data. The problem is that most of the computer tools today are used to manipulate operations data. This software is typically a custom solution that helps manage the necessary tasks of a complex industry. The software that runs a business is not meant to deal with the visualization of larger collections of data for analytical purposes. These systems are working, are collecting more data faster, but are not able to visualize the mountains of data or tell a quick story of what is truly happening in that second. That void has opened up a new, $50 billion, fast-growing industry for big data manipulation tools. The value of companies that can do this kind of work, like Tableau Software Inc. (DATA:NYSE) and Splunk Inc. (SPLK:NASDAQ), has rocketed into the billions.
SS: What are your backgrounds?
RA: I made video games for 20 years, both for my own company and also for Electronic Arts Inc. (EA:NASDAQ). But my main skills are the ability to set up an idea or a vision, and the ability to get programmers to create it. Ken has a strong background in corporate management, and I know how to lead the development teams.
My philosophy has always been to take a complex problem and provide a simple, well-articulated solution that allows decision making to move fast. We have created a design team around Cumul8 that focuses on that very vision. This team understands the deep complexity of how to bring out the data, and the visual designers are masters of transforming that data into a human interface form that is easy to read and gives the user an instant understanding of the situation. This is about taking all the knowledge from developing the top games and applying that to a broader industry.
SS: What about you, Ken?
Ken Scott: I am a chartered accountant with a long career in public practice. Rory was a client when we first met. I watched him take a talented group of software engineers that had been focused on gaming and inspire them to create these unique technologies, initially focused on 3D. In less than three years, we watched Gener8 go from being one firm in a field of 20 companies offering 3D conversion services to Hollywood to today, where only four of those companies are left standing. We are still the smallest and the least capitalized firm within that realm, but our 3D is recognized today as leading edge.
SS: Please explain.
KS: In converting pieces of, say, the Harry Potter film into 3D during post-production, it is vital to keep track of how each part of the complex process is progressing in comparison to every other part. We developed Cumul8 to tell us where each stage of the film was at in the conversion process. The product also allowed us to integrate what we were doing with the entire postproduction process, which incorporates multiple vendors to Hollywood. It quickly became apparent to us that we had a tool that could be used independently from our 3D product.
And more important, we realized our Cumul8 product could be used beyond the entertainment sector. It was literally industry-agnostic.
SS: How do you migrate preexisting data from any industry into Cumul8, so that Cumul8 knows what to do with it?
KS: What we offer customers is not data collection, but data visualization and data analytics, so that the user can interface with and control that data to make faster decisions. Cumul8 takes live data from any type of business and puts it into a useful visual form.
There are plenty of amazing companies that do a brilliant job of collecting data. As well, there are enterprise resource planning (ERP) systems that track the movement of data for every industry. The biggest opportunity we see is the "last mile," the ability to take all that information and give it back to the user in a form that is useable and understandable. Cumul8 goes through any current data collection or ERP system and helps bring the data to life—bring it out in a visual form that tells the right story. We have pilot projects working in the gaming sector and in the film sector, and are about to launch a large development effort in the manufacturing sector. We are very excited about manufacturing because we see an industry that deals in a process that works all the way from hand-and-hammers to precise lasers. Cumul8 is showing it can bridge the technical gap.
The cool thing is that the interface can be tailored to any level of the organization: Whether a production line worker, middle management or the CEO. Cumul8 enables each employee to extract relevant information from any data source and present it in a manner that's useful for their particular needs.
SS: How are you restructuring Gener8 to expand into these significant growth areas?
KS: In three short years, our 3D business went from ground zero to one of the leaders in the industry. Cumul8 has already been structured as a completely separate entity from the 3D division. Our senior management team oversees the whole Gener8 business, but Cumul8 is ramping up to go its own way. Today, both the 3D business and the Cumul8 business sit in the entertainment sector, because that is where we have been focused. But, as I mentioned, we are now applying Cumul8 to manufacturing. We believe we will see a quick expansion into the manufacturing area based on our early pilot talks with a number of different companies.
SS: You spun off the 3D division to a Chinese company?
KS: We knew we had to partner with a large postproduction company that could help take the 3D business to the next level. We went to China last year, initially thinking about building an outsourcing studio, and met Tianjin Fu Feng Da Movie & Television Technology Investment and Development Co. Ltd. (FFD; private), which made an offer to buy into our 3D business. We agreed to sell a majority interest in the business to FFD.
We will continue to maintain a 40% interest in the 3D side, and with that we will continue to manage and build the 3D business with FFD, as part of a bigger postproduction organization. The FFD partnership makes sense because that company shares the same vision for expanding the 3D world, not just in entertainment but beyond, into industrial, medical and education applications. FFD will enable Gener8 to learn and interact with the growing Asian entertainment market. To be No. 1 in this industry, we knew we had to partner with a company that could help us grow inside and outside of North America.
SS: What industries do you see as being the main customers for Cumul8?
KS: Our goal is to build Cumul8 with what we refer to as industry "pods." The first pod is the entertainment industry, where we already have visibility with our 3D business. The goal is to continue to develop the Cumul8 product within entertainment for application at the large studio level.
We are building another pod for manufacturing—initially concentrating on turning machine-readable data into real-time visualizations. Other industry pods will be added over time, such as mining—a natural, given that we are located in Vancouver. We plan for the mining pod to have a pilot initiative before the end of 2014. Other industries, such as the life sciences, financial institutions and oil and gas, are also targets.
SS: Is there a strong digital workforce in Vancouver?
RA: I started making games in 1988, and I have been hiring creators ever since. Our Rolodex is strong, and Vancouver is very strong in digital media. Vancouver stormed into the digital realm with Don Mattrick's Distinctive Software Inc. Don is now CEO of Zynga Inc. (ZNGA:NASDAQ). Don is considered the father of digital media in Vancouver.
We really are Silicon Valley North. There are many new tech startups here, and digital Vancouver is creating a culture in which 25-year-olds feel at home. I just read a National Post article about millennials. There is no such thing as work-life balance to millennials, it's all a mix. Vancouver does a good job of creating a culture where programmers can have fun and work hard. The millennial is used to playing video games. And Cumul8 visualizes data in formats that the millennial already grasps with ease.
SS: What is the story behind Reelhouse?
KS: The third slice of our corporate pie is a digital distribution model, created and developed within Reelhouse Media Ltd., a majority-owned subsidiary of Gener8. With Reelhouse, the team has been working on a solution to digital distribution issues in the film industry. Reelhouse started out as a platform focused on providing independent filmmakers a place to distribute their films and seek input and reviews from customers.
Reelhouse quickly garnered the attention of a major Hollywood studio. Today, a number of studios are looking at a "Reelhouse" solution for digital distribution because of the ongoing shift from hard copy distribution, such as buying a DVD at a big-box store, to buying or renting your movie straight off the Internet.
Reelhouse is not that different than our 3D or Cumul8 technologies. Reelhouse took a digital media problem, built a team, got the product out and within a year was one of a handful of leading companies in the space.
SS: Let us talk about your balance sheet. Gener8's revenue growth was great over the past year, but you showed a significant operating loss. Please explain.
KS: Gener8 was financed privately in its early stages. In our first three years, we launched three unique technology businesses, all three in different but highly disruptive sectors, and all three possessing leadership traits in their respective fields. And we accomplished this by raising only $12 million ($12M), of which approximately $8M was raised privately. The last $4M was raised through a public vehicle that we took over on the Canadian Securities Exchange.
SS: The Delon Resources Corp. (DLN:CNSX)?
KS: Yes. It was a reverse takeover (RTO). Since then, we have been financing the growth of our three businesses with revenues generated by the 3D business, also still in its infancy. Year-to-date sales for September 2013 were about $8.4M. We had a loss of $6M. Of that loss, $3.2M was due to the costs of the Delon RTO.
Also, if you look at operating efficiencies for the first nine months of 2013 over the prior year, they have improved significantly, and our sales revenue is growing.
SS: Do you have a debt load?
KS: The only debt is a shareholder loan payable to Rory, and we are not under any stress to repay it. To date, we have basically financed this company off our working capital.
SS: How has your stock performed since you went public on the Canadian National Stock Exchange (CNSX) a year ago?
KS: We went through a few share-pricing issues after going public. We need to be cognizant that until recently, capital raising in Canada has largely been focused into the resource sector. It was, and still is, very challenging for tech startups to garner attention for financings. Recently, our share price has recovered and settled in tandem with some good news during the past year. We completed a full-length feature film, 300: Rise of an Empire, which has had very good reviews; our Q3/13 results were break-even; we announced plans to partner with a Chinese postproduction business—all led to a recovery in our stock price. We believe the share valuation today reflects our three unique businesses.
RA: Our decision to go public was spurred by the need to raise capital through a public financing structure as opposed to a specific desire to be public.
SS: Do you have any big data contracts lined up already?
RA: We are working with clients in entertainment and manufacturing right now. Our own internal team was our initial pilot project and that created the basis for our SaaS (Software as a Service) product. From there, we have developed a number of pilot projects, which are helping us shape the focus of our underlying product. This will result in solid work in our growing sector list.
SS: It sounds like you're positioned to keep growing in terms of revenue. Do you have any plans to be listed on any other exchanges?
KS: Ultimately, our goal will be to move onto a bigger board. We would also consider moving to a U.S. stock exchange.
SS: What's the most important takeaway that investors need to know about Gener8?
RA: Our products are all very disruptive technologies. Similar big data-based companies are trading at very high share values. I am excited about where we are headed during the next 18 months. We have shown that we can design technology that is commercialized fast, and that we can hire seasoned managers used to running large teams with big revenue targets. I believe these add up to a very exciting future for our company.
SS: Thank you for your time today, gentlemen.
RA: Thank you.
Under the direction of Rory Armes, founder and chief executive officer, Gener8 has become a recognized industry leader in 3D stereo conversion. Armes is a former senior vice president at Electronic Arts Inc., where he headed game development in London, Sweden, Montreal and Vancouver. He was responsible for EA's largest franchises, including Need for Speed, FIFA, Harry Potter and NHL. Prior to joining EA, Armes was cofounder and president of Radical Entertainment, a leading developer of interactive entertainment. He was also a senior executive with Distinctive Software Interactive, a company acquired by EA.
Joining Gener8 upon its public listing, President Ken Scott is working to grow the company's reach and expand the market presence across Gener8's product lines. Scott is a chartered accountant and former partner at KPMG LLP, with experience assisting clients in growing their businesses across many industries, including media, entertainment and technology. In addition to a long tenure at KPMG, Scott has been a senior executive and CFO in industry for a few private companies. Scott has significant merger-and acquisition and financing experience.
1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the company mentioned in this interview: None.
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