Clemex sees big opportunities in the image analysis market
Software automates microscopic inspection in metallurgy, biological sectors

Nothing scares away investors more than when a company reports a loss. Yet that's when pros often swoop in, snapping up shares at bargain prices. That may be what's happening at Longueuil-based Clemex Technologies Inc.

"I believe that there is hidden value in the company," said venture capitalist Raffaele Gerbasi, who picked up 3.6 million Clemex shares earlier this year, bringing his stake to 22 per cent. "Clemex didn't do that great last year, but neither did most software companies. But I am very impressed at how Clemex maintained its revenues throughout the downturn. Not many others can say the same."

Clemex operates in a highly specialized market. The company develops and manufacturers image analysis systems, which enable industrial and research organizations to analyze images taken from a microscope of substances ranging from blood cells to diamonds.

But its biggest market is metallurgy, which provides close to three-quarters of its revenues. Metals are made up of tiny grains. The size of these grains determines its strength and flexibility, Smaller grains make stronger metal, larger grains make for a more flexible product.

Clemex systems enable technicians in industries ranging from automobile manufacturing to aerospace to scan metal samples and welds to ensure quality. Clemex distributes most of the hardware. But its most important contribution is the software, which automates a process, that in many companies is still being done manually.

It's a growth industry, with huge potential down the line said one industry expert. "As hardware prices drop, it becomes increasingly feasible for companies to automate their microscopic inspection," said Len Yencharis, editor-in-chief of Advanced Imaging magazine. "Clemex's product is particularly promising because it can be used in such a wide variety of industries."

Jim Grandy, a leader in the image analysis division at GE's global research center agreed. Grandy has been analyzing competitive products for almost two decades and says that Clemex's is the best.

"Their product provides a unique blend of power features and user friendly attribute," said Grandy, who has 14 Clemex systems over the years. "They also provide excellent support, which is a big weakness with some of its competitors."

That said, Clemex, which went public in 1998 on the Alberta Exchange is a quintessential penny stock. It's lightly traded and its share price can fluctuate drastically based on just a few small trades. It's so small that not a single analyst covers the stock.

Gerbasi, whose day job is as president of Sunrise Telecom's broadband division, got wind of Clemex through his friendship with its president, Clement Forget. During the late 1990s, the two were members of an exclusive club formed by presidents of high-tech startups.


However the club eventually petered out as members went bust, sold out or closed up shop, but Forget and Gerbasi stayed in touch. During a round of cost-cutting several years ago, Forget had to let go of a skilled programmer and he suggested that Gerbasi take him on. The programmer, no longer employed by Forget, told Gerbasi that the Clemex software was the best in the industry.

After that, Gerbasi began to quietly monitor Clemex's performance and when the opportunity came to take an equity position in the company came, he jumped. Much of the reason was because of his confidence in Forget.

"He is a good salesman and a hard worker," Gerbasi said. "He has built up an excellent client list, including Boeing, Pratt and Whitney and GE., the who's who, of high tech manufacturing. When business investment starts to pick up, Clemex could be a big winner."

For his part, Forget never thought that he would be running his own show. He had been working as the Quebec rep of Clemex competitor Leco Corp, but when the company closed its Quebec office, he was left without a job.

He got together with a couple of partners and invested his $150,000 severance package and about $350,000 he got from a now defunct government agency, into the development of his own proprietary image analysis software.

Today, Clemex markets turnkey systems that include a microscope, sample preparation kit, computer and software. The systems are not cheap, and can run between $20,000 and $100,000. But they can vastly increase lab productivity and efficiency by automating a process that is traditionally done manually by a technician making decisions based on his naked eye.

Forget estimates that only a small fraction of microscope users currently take advantage of image analysis software. But new users have to be trained, and the systems are complex to explain, which makes them a hard sell.

Nevertheless, Forget sees a potential market of about $250 million among metallurgy companies in the northeast U.S. alone. And with Clemex sales running at about $6 million a year, that leaves a lot of room for growth.

Forget admits that cash is tight right now. Clemex's full year loss should come in at close to $1 million, but he expects a turnaround next year. Gerbasi for his part is not worried and has said he will put even more money into Clemex.

He knows a good deal when he sees one. In the 1980s Gerbasi founded Avantron Technologies, a cable testing manufacturer and built its sales up to about $6 million, before selling the company to Sunrise Telecom for $11 million in early 2001.

He sees a lot of parallels between Avantron and Clemex. Both were Canadian based companies with superior technologies, competing against larger American competitors. But Gerbasi denies that he is trying to make a quick profit.

"My block of shares is too large, it would be hard for me to sell. Plus I am an insider, so there are restrictions," Gerbasi said. "Realistically it takes three or four years of solid revenue and profit growth for an emerging company to make an impact and I'm willing to wait. I'm in it for the long haul,"



o Clément Forget founded Clemex Technologies in 1991 with $150,000 settlement money he received after he was laid off by a former employer.
o The company sells turnkey inspection systems that include a microscope, sample preparation equipment and computer. But the heart of the system is its proprietary image analysis automation software, which makes it easier for technicians to identify flaws in a substances ranging from metals to blood cells to diamonds.
o The company's sales have more than doubled since 1997, but hit plateau the last few years, mostly due difficulties in recruiting and training sales staff.
o The slow economy and drop in business investment hit Clemex hard. Though revenues remained stable, the company lost money because of margin cuts.
o Earlier this year, Forget convinced venture capitalist Raffaele Gerbasi, to take an equity position in Clemex. Gerbasi stated he will invest more money in the near future.


Photo caption: According to Clément Forget, president of Clemex Technologies Inc., the company's image analysis software can help laboratories significantly reduce inspection time by automating the process.



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