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The small cap ranks are peppered with ambitious companies with incredibly exciting technology. They have usually raised a small fortune from investors and, regardless of the realities they face, continue to pursue their as-yet-unrealised dreams. James Crux examines five perennial loss-makers and weighs up their profit prospects

Forbidden Technologies – steer clear
Founded by current chief executive (and Eidos co-founder) Stephen Streater, Forbidden Technologies floated in 2000 and has posted nothing but losses on scant revenues during its time on AIM.

The group is now a developer of a range of internet video editing and publishing products and during the year to December 2004, its ‘fifth year of development’, losses burgeoned from £541,011 to £642,516 on revenues of £76,788.

Since its early days, the company has been refining technologies to capitalise on the widespread availability of higher-speed computers, broadband and mass take-up of 3G mobile phones. Prior to its online video editing focus, the group used to be involved in video compression technology. However, it insists commercial interest in its current product portfolio is growing. In a decent endorsement, the company announced that NATS Post Production, an established facilities house, is the first reseller of FORscene, its state-of-the-art post-production tool for internet and mobile video in the broadcast production area.

However, while it is clear that Forbidden is starting to build meaningful commercial relationships, a profitable business looks some way off. If your fingers aren’t already burnt, steer clear.

Torotrak – worth a flutter
Tech-savvy readers will be familiar with Torotrak, the high-risk and high-profile developer of a unique Infinitely Variable Transmission (IVT). This impressive product 'delivers unprecedented improvements in fuel economy and emissions reductions' in cars, trucks, busses and off-highway vehicles.

Chief executive Dick Elsy (the ex-Jaguar man who has transformed the group) claims that IVT delivers energy savings of around 20 per cent – a sufficiently attractive saving that ensures Torotrak receives a lot of interest from the major car and engine makers. The long-term plan is to generate royalties from the sale of licences to these high-volume manufacturers.

As things stand, Torotrak has signed a deal with 'a major supplier of transmission and axle systems to the off-highway market' to exploit the IVT technology. What this will eventually lead to is hard to tell.

Another confirmed customer helping with the ‘development’ of the product is an off-highway vehicle manufacturer. On the car front, there are many development plans on the go, the latest of which was the installation of the most recent prototype IVT product in a target customer’s vehicle.

All of the above is undoubtedly promising, but the actual high-volume manufacture of vehicles with Torotrak technology is still quite a distance away.

Annual numbers to March revealed pre-tax losses of £5.9 million, although over £500,000 in sales was generated from consultancy work. The results also showed £7.3 million cash sitting on the balance sheet, which, combined with the reduction in its cost base, should be enough for the foreseeable future. Worth a flutter if you’re keen on exceptional risk and you believe that Elsy can turn this ship around. But before you leap, take a look at the losses it has racked up over the years.

We've seen enough at Superscape
3D mobile games publisher Superscape is a venture that has truly tested the patience of investors. Despite posting losses in the region of £22 million in the last three years, the group was able to raise another £20 million at 38p in an Evolution Securities-backed placing. Within eight weeks of getting this cash, it announced that, following delays in the launch of new games by mobile operators (Superscape has a portfolio of branded mobile games), it would not hit the numbers the market
was expecting.

In this depressing trading update (the latest in a long line) the group admitted that it was weighing up its strategic options, a statement that prompted analysts to slash revenue forecasts and put off predicted profits for the perennial under-performer.

Last year to January, pre-tax losses hit £5.5 million. Evolution Securities’ Assad Malic has cut this year’s revenue forecast from £13.5 million to £9 million and dramatically widened his pre-tax loss estimates to £5.4 million.

Alarmingly, he is taking a ‘cautious view’ on 2007 – revenue forecasts have been slashed from £29 million to £18 million and pencilled-in profits of £7.8 million are now looking like £600,000 of losses.

Bulls might point to last year’s 267 per cent top-line leap and the fact that Superscape’s games are available for download from major network operators. Its recent $3 million acquisition, Penultimate Games, has also apparently brought ‘quality, high-margin additions’ to Superscape’s 2D games catalogue.

Having listened to these kind of arguments for over eight years, we’re certainly not convinced. If you’re holding the stock, sell. If you’re not, avoid.

Risky ride at Raft
The profit and loss account of risk management software play Raft International, currently trading at a 52-week low, has been covered in red ink since fleeting profits of £171,000 were turned five years ago.

Last financial year saw pre-tax losses remain flat at almost £1 million, on revenues of £7.2 million. Profits of £669,000 were forecast for the current year to October, yet a disappointing first half has put the kibosh on those estimates.

Although Raft flagged up a record sales pipeline, as energy companies and financial institutions got to grips with regulatory pressures, chairman David Priestley warned of a persistently long sales cycle causing delays to purchasing decisions. Twinned with ongoing investment, he warned profits would not turn up this year.

However, Raft has more investment pros than cons. In the undoubtedly growth areas of credit and operational risk management it has clinched a growing band of blue chip clients, including North American energy giants Mirant Energy and Powerex Corporation. Compliance pressure in the wake of Sarbanes-Oxley and Basel 2 should see more spend on its products further down the track. Moreover, at the interim stage, the company was debt-free with cash resources of £900,000. Worth a punt.

Profits forecast at FFastFill
FFastFill joined AIM at 175p in 2000 and, like all the others on this page, has distinguished itself by its ability to rack up annual losses (over £10 million in the last three years alone). The shares currently languish at 6p, giving it a market cap of £14.6 million. The question is, is this too high?

Many commentators don’t think so. In fact, some are even forecasting break-even this financial year, thanks to the strategic changes initiated by management duo Keith Todd and Nigel Hartnell, who took over the reigns two and a half years ago.

‘We came in and stabilised the company, switched strategy from a straightforward software company to an application services provider to the derivatives community, and brought on institutions through a £4 million funding,’ recounts Hartnell. ‘Some of those institutions have followed their money on the progress we’ve made,’ he adds (FFastFill recently raised a further £3.1 million).

To be fair to the company, the last year was one of real progress, despite it posting wider losses of £2.9 million (£2.5 million) on a 63.2 per cent revenue jump to £4.3 million. FFastFill achieved a market-leading position, and, in what must be considered a significant breakthrough, it completed a tie-up with Reuters. This enabled it to sign application services contracts with international banks including HSBC and Bank of America.

The acquisition of Future Dynamics, an unlisted rival for £2.7 million in shares, has doubled revenues and widened the customer base.

According to management, the product problems that blighted progress in the past are long gone and recurring revenues are building up. If, as forecast, FFastFill moves into the black this year to March, the shares could begin to look cheap. If you invest, monitor events closely.