Blind-sided by science
Friday, 5 September 2008
Last Updated: Monday, 8 September 2008
By Tim Treadgold
Smart scanning technology, tailored to modern security threats, has suffered from being almost too brilliant for its wider market.
A brilliant piece of technology is always a good foundation on which to build a business. But if your product is so good that it struggles to do the job on time and is so expensive that customers can’t afford it, you’ve got problems.
These are some of the issues that have slowed the development of QR Sciences, which has been trying for a decade to convert its extremely smart technology into profits.
In theory, the products from QR should be operating in every airport and other high security area in the world, because there is nothing to match them in identifying explosives, drugs, weapons and other threats.
In reality, the technology wins prizes for its brilliance, but is almost too clever for its own good.
“Each machine is like a work of art,” says the frustrated chief executive of QR, Rick Stokes. “If we could mass produce them, they would be half the cost.”
The machine he’s talking about is one using a weird science known as quadrupole resonance. A favourite of Russian weapons researchers in the 1970s, quadrupole resonance (or QR) is closely related to magnetic resonance imaging (MRI) which is used in medicine to provide a detailed image of a human body.
In both commonly used acronyms, QR and MRI, there’s actually a letter missing at the start; N for nuclear. In both cases the N was dropped because of public fear about all things nuclear, even though neither science uses ionising radiation.
The trick in QR and MRI is to use radio frequency or magnetism to identify different chemical compounds or internal body structures. In science fiction, both are the equivalent to Superman’s X-ray vision – they “see” through things.
QR is able to identify 10,000 different chemical substances by measuring activity inside an atom, with the primary targets at airport security being chlorine (the fundamental building block in many drugs) and nitrogen (the building block for explosives).
A drawback in the science is that analysing a suitcase passing through a QR machine takes time. “The scan time is around 12 seconds, and that means a rate of 200 cases an hour versus 700-to-800 for an X-ray machine,” Stokes says. “Going slow means people get the shits on.”
Work on QR in Australia was originally centred on Curtin University, and led through the 1990s by a group of émigré Russian scientists. The focus back then was in detecting land mines and aviation security.
After the terrorist attacks in New York and Washington on 11 September 2001, it was expected that QR Sciences and its explosives detection capacity would take the security world by storm. It didn’t.
“If you think back, the terrorists used planes as their weapon,” Stokes says. “If they had used explosives we would be in cream.”
Black humour aside, the key point from Stokes is that QR is a company that has struggled to tame the science behind its business, and also faced a series of internal management and ownership struggles as different groups of investors have fought for control of a company with the potential to be a world leader.
The result is a business that has been shunned on the sharemarket. “Everyone hates us,” Stokes says. “We’ve been promising success and not delivering. We’ve raised money at $2 (a share) and now we’re priced at 10c.”
Well, that’s not quite right. QR was trading around 10c when SmartCompany paid him a visit at his office/warehouse in Port Melbourne. The stock is now up to 13c, perhaps in recognition that value might be unleashed by the latest in many corporate restructuring moves that have bamboozled outsiders.
In essence, QR is a series of businesses under one name. Stokes joined when QR merged with his Melbourne-based closed circuit television and security monitoring business, currently the most profitable division in the group.
Marketing the smart products, such as a newly-released shoe scanning device and a machine for seeing through plaster casts on injured travellers, is handled by QR’s long-term US-based managing director, Kevin Russeth.
Overseeing it all as chairman is the former head of the National Companies and Securities Commission (predecessor to ASIC), Ray Schoer.
To an outsider, understanding QR’s corporate structure is almost as complicated as understanding the science from which it grew, and Stokes makes it perfectly clear that he’s tired of the shuffling, with the latest move involving a transfer of the intellectual property inside QR to a US subsidiary, Diversified Opportunities – a move that might be a precursor to a sale or float in the US.
“There’s no doubt that our technology is undervalued, and that we have to create value for our shareholders,” he says.
“We’ve now cut our research and development costs, and cut the number of staff in our Perth facility from 35 to eight. Any research we undertake has to be funded by external clients.”
One of the latest to fund a research project is the National Security Science and Technology unit of the Prime Minister’s Department. It has chipped in $840,000 for QR to work on the next generation of screening solutions. Other R&D contracts have been allocated by British and American government agencies, including the all-powerful US Department of Homeland Security.
The prestige of that work has done little for QR’s bottom line. Last week, the company reported a 39% increase in group turnover to $19.9 million (mainly from Stokes’ old CCTV business unit), but a loss of $33.6 million after a writing down the value of intangible assets “due primarily to a lack of known future cash flows from revenue opportunities for the QR intellectual property” – which is being transferred to the new US subsidiary.
“Getting the QR science into the US could be our chance to hit the big home run,” Stokes says.
But, until the company does that, it remains a marvellous example of a business that really does own the world’s best mousetrap but is yet to find a way to sell enough of them.
Explosives detection machine
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