Guarantee program on new course

SUCCESS STORY: NuLabel Technologies' leadership team, from left: President Max Winograd, Vice President of Engineering Michael Woods and Chief Technology Officer Ben Lux, has received loan guarantees from the state, but unlike 38 Studios, the tech startup has attracted outside investment as well. / PBN FILE PHOTO/RUPERT WHITELEY
SUCCESS STORY: NuLabel Technologies' leadership team, from left: President Max Winograd, Vice President of Engineering Michael Woods and Chief Technology Officer Ben Lux, has received loan guarantees from the state, but unlike 38 Studios, the tech startup has attracted outside investment as well. / PBN FILE PHOTO/RUPERT WHITELEY

The $1.5 million loan Rhode Island guaranteed for NuLabel Technologies Inc. of Providence last August bears little resemblance to the $75 million taxpayer-backed financing package delivered out of the same program to Curt Schilling’s 38 Studios LLC a year earlier.
The results couldn’t be much more different either.
Where Schilling’s video game company has spent the entire $49.5 million in cash provided by the loan and is now looking for up to $14 million in state film-tax credits to avoid collapse, NuLabel hasn’t spent a penny of its loan because of the private capital it raised.
“We are doing awesome,” said NuLabel President Max Winograd. “We haven’t touched the line of credit yet because we had an equity infusion that we can run on.”
NuLabel’s story is similar to what’s taking place in North Kingstown, where The Corporate Marketplace Inc., which runs corporate-incentive programs, has drawn down only $1 million of the $4 million state-guaranteed loan approved last October.
“We are going gangbusters,” said Corporate Marketplace CEO Chris Crawford. “We continue to grow at 40 percent month over month and are now profitable.”
As PBN was going to press last week, various media outlets were reporting that 38 Studios had laid off its entire staff of nearly 400. In a press conference May 24, Gov. Lincoln D. Chafee said that the state had been unable to confirm the layoffs, but had offered assistance of a R.I. Department of Labor and Training response team to the company.
“It is not a good situation,” Chafee said.
The prospect of a 38 Studios collapse, which would leave Rhode Island taxpayers on the hook for more than $100 million in principal and interest payments (less $23 million held in reserve) has raised questions about the future of the state’s $125 million Job Creation Guaranty Program.
Counting the guarantees already made, the state currently has $44.5 million worth of guarantee capacity to invest in new companies looking to grow in Rhode Island.
In October, when the EDC approved the loan guarantee for The Corporate Market Place, EDC Director of Financial Programs Earl Queenan said 14 companies who had applied for financing were “in the pipeline” of vetting and review.
Then-EDC Executive Director Keith W. Stokes, who has since resigned amid criticism of his part in the 38 Studios deal, said the quasi-state agency was anxious to put that capital to work for the economy. But since that October meeting no new loan guarantees have been made and none of the companies looking for guarantees has been named.
Last week EDC officials declined to say how many companies are still in the Job Creation Guaranty pipeline, but gave assurances that the program was still very much alive.
At least one state lawmaker, Sen. James Sheehan, D-Narragansett, has introduced legislation that would create a new state office with oversight and audit powers over the EDC and any company that receives public backing, which could make the program less attractive.
But as the NuLabel and The Corporate Marketplace loans show, the loan-guarantee program in place since Gov. Lincoln D. Chafee, a critic of the 38 Studios deal, took office is far different from the one used to lure Schilling’s video game startup.
Shortly before NuLabel was approved, the EDC capped future loan guarantees at $10 million and a lively discussion among board members began about how to focus the program.
In the end, the two post-38 Studios guarantees mixed the established-company model supported by Chafee and board Vice Chairwoman and CVS Caremark Corp. executive Helena B. Foulkes and the tech-startup model favored by board members such as Jack Templin of Betaspring.
The EDC also put in place a committee to vet the finances of companies applying for loans that Crawford said subjected TCMPI to an 18-month wait and due-diligence process “more exhaustive than any bank.”
Unlike 38 Studios, which at the time it was lured to Providence was “pre-revenue,” TCMPI had been in business in Rhode Island since 2002, with $18 million in annual revenue in 2010, and had already paid back two loans from the state Small Business Loan Fund.
“We were the poster child for how the program was supposed to work,” Crawford said.
Since The Corporate Marketplace’s loan closed late last year, the company has hired 11 new workers (six start at the end of May) putting it on pace to hire more than the 45 new employees required in the guarantee by 2014, Crawford said.
Another major difference between the 38 Studios loan guarantee and subsequent deals was the level of the private follow-on investment both The Corporate Marketplace and NuLabel secured with the state-backed financing.
Along with the $4 million backed by the state, Bridge Bank of California agreed to extend The Corporate Marketplace an unguaranteed $2 million as part of the deal. The company had previously received a $2 million investment from venture-capital firm Ascent Venture Partners in exchange for 30 percent equity. NuLabel, which develops technology to make backless adhesive labels, secured equity investments from a group including Providence-based Cherrystone Angel Group just before the EDC approved the $1.5 million guarantee.
38 Studios, on the other hand, had been turned down by venture capitalists before it began talks with Rhode Island.
Chafee has identified 38 Studios inability to secure private capital as the primary problem behind the company’s current predicament, which includes an unspecified number of layoffs.
Of course, the state officials who approved the 38 Studios guarantee knew at least some of the risk involved with a video game startup and included a separate set of fees the company would pay to the state, like the $1.1 million fee the company recently paid two weeks late, on top of principal and interest.
The deals for The Corporate Marketplace and NuLabel didn’t include guarantee fees, leaving those companies without an extra drag on their cash flow.
Both the The Corporate Marketplace and NuLabel loans included a pledge against the personal holdings of the company’s chief executives, which was not the case with Schilling.
Chafee has instituted an unofficial gag order on the EDC board since 38 Studios ran into trouble and calls to six board members about the future of the program were not immediately returned last week. One board member, Banneker Industries CEO Cheryl Watkins Snead, declined to comment.
Board member Stanley Weiss, owner of Stanley Weiss Collection antiques in Providence, who was not on the board when 38 Studios was approved, expressed skepticism about the guarantee program and said he would prefer to see the same resources invested in redeveloping urban historic districts.
“I was dead set against it,” Weiss said of the 38 Studios deal.
Crawford said the nature of the loan guarantees his company and NuLabel received points to the 38 Studios deal being a politically motivated outlier pushed by then-Gov. Donald L. Carcieri, who has declined comment on the firm’s recent problems.
“The EDC is really getting hammered on something that isn’t really their fault,” Crawford said. •

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