By Jonathan Underhill
March 5 (BusinessDesk) - Powerhouse Ventures chair Russell Yardley says he'd buy more shares in the ASX-listed, Christchurch-based incubator, having acquired 72,252 shares at 30 Australian cents apiece last September.
That's below the 53 cents net tangible asset (NTA) backing assessed in the company's first-half results last week and the stock has since fallen further since Yardley was buying. At 22 Australian cents, the shares have slumped 79 percent from its initial public offering price of A$1.07 in 2016, when it raised A$10.2 million for its goal of "transforming seed-stage companies into real-world success stories" by focusing on first New Zealand university science and more recently Australia's.
"I think it is a very unfair discount. We've been brutally transparent about our position," Yardley told BusinessDesk. "I've made sure that the NTA is absolutely conservative. I'm quite happy to buy more shares in Powerhouse - certainly at these levels."
"Powerhouse has enabled the creation of 29 companies over the last decade. Only one of those has been liquidated, one other has been put on the shelf and there are two more that are likely to sell their IP and cease to exist," he says. "Twenty-five companies still have the potential for greatness."
The covering letter in the 2016 prospectus was penned by former chair Kerry McDonald, who wrote that he was "genuinely excited about the outlook for Powerhouse" but within months had resigned, citing family reasons and a substantial number of proxy votes recorded against his re-election at that year's annual meeting. Yardley is the third chairman since McDonald left, counting interim chair John Hunter and Blair Bryant, who resigned in June last year after his fellow directors called a special meeting to dump him for failing to disclose a bankruptcy in the US about a decade earlier.
Bryant's departure - his disclosure failing was made public by the NBR - is just one instance in a catalogue of bad news for Powerhouse since it went public. Managing director Stephen Hampson, with the firm since its inception in 2006, quit last August. Earlier that same month the company put one of its investments, HydroWorks, into liquidation, having written the value of its 24 percent stake down to zero. The liquidators subsequently said unpaid creditors faced a $12.6 million shortfall and the firm had little in the way of its own intellectual property.
In January this year, it removed the chair of another investment, 42 percent-owned Motim Technologies' John Cunningham and fellow director Miles Hockley, while also disclosing the departure of 30 percent-owned SolarBright's founding directors Pat and Nicola Martin. Powerhouse wrote off the value of its SolarBright stake and is now preparing for litigation after finding "irregularities" in the solar lighting maker's books a week after its founders quit.
Yardley calls HydroWorks "a horrible experience."
"When you look at a disaster all the lessons are about going back to basics," he said. "After HydroWorks we confirmed each of our investments has to be built on a business plan that quantifies the resources needed to achieve its goals. Milestones, explicit commitments."
But he also wants to counter what he says has been unrelentingly negative coverage from New Zealand's business media.
"Most New Zealanders would think Powerhouse was an absolute failure but that ignores successes like Invert Robotics and CropLogic," he said.
In January, Christchurch-based robot maker Invert raised $6.4 million from private investors in Australia and New Zealand including former Macquarie Group chief Allan Moss. Powerhouse owns 23 percent and the NZ Venture Investment Fund (NZVIF) owns 14.5 percent of Invert, whose mobile climbing robots with video feeds that can inspect industrial tanks without causing damage are used by Fonterra Cooperative Group and Synlait Milk.
Invert Robotics managing director Neil Fletcher, who came aboard in 2016, said the company "would not actually exist in the first place if Powerhouse hadn't put in its initial investment" but the company has since outgrown the need for mentoring and he treats it the same as any of its other 150-plus shareholders.
"We were out raising capital last year when HydroWorks went down and that was not particularly helpful," Fletcher said. "We asked Powerhouse to step away from our board at that time. It was tainting some people's view of the company." More recently, Yardley had "helped put me in contact with people I wanted to contact."
CropLogic, which combines field data, sensors and satellite imagery that helps farmers manage their crops better, raised A$8 million in an IPO last year at 20 Australian cents apiece. The ASX-listed stock was recently at 6 Australian cents and has tumbled about 60 percent in the past six months.
Ojas Mahapatra, chief executive of industrial gas detector developer Photonic Innovations that was spun out of the University of Otago, says the company "has grown from strength to strength" since Powerhouse first invested in 2014.
The incubator's earliest involvement was in "simplifying the value proposition (via a rigorous market research project) to a single gas fixed product (mounted on the wall and technically easier) and finding a suitable market fit (ammonia detection in food processing companies)," he said in emailed comments. "A unique patented technology from the university would not have seen daylight sooner if Powerhouse would not have invested."
Photonic also tapped Powerhouse's network of investors for capital and got its help to draft a Callaghan Innovation R&D project grant application.
"I would like to strongly state that the success/growth of the company depends on the leadership team in place and not its shareholders," Mahapatra said. "We have always seen Powerhouse as an 'enabling shareholder' in the early years after initial investment and now we see them as a 'shareholder' as our company grows."
The relationship with Callaghan is more problematic. After the liquidation of HydroWorks last year, Callaghan suspended operational funding to Powerhouse for its technology incubator pilot programme and hired KordaMentha "to review the effect the liquidation may have on Powerhouse’s incubator services."
That report hasn't been made public and Callaghan will only say that it "is working with Powerhouse to ensure it continues providing incubation services as required under the pilot programme agreement" but operational funding remains suspended. A spokeswoman said Callaghan has to be circumspect in what it says, given Powerhouse is a listed company.
Asked why the Callaghan funding remained suspended, Yardley says: "My view is they are in the very early stages of a new government and are being most cautious. They also have a new chairman who has not yet taken up his place. So it is understandable."
The biggest shareholder in Powerhouse is Christchurch City Council-owned CRIS Ltd with 22.5 percent, which has appeared to distance itself from the incubator company, describing its investment as historic although also acknowledging its contribution to commercialising university science.
Powerhouse raised $818,118 in a sale of convertible notes at 32 Australian cents apiece in December. They pay interest of 12 percent and are repayable on Dec. 22 if not converted to shares. It is working on the sale of three 'out of scope' investments, Motim, Solar Bright and Mars, having sold out of Syft and ArcActive.
The company's loss in the six months ended Dec. 31 widened to $4.3 million from $334,617 a year earlier. Income was negative, as $913,169 and included a net $1.88 million change in the fair value of investments, including the slump in CropLogic shares. It took a provision of about $3.3 million to impair loans to investments including HydroWorks and Solar Bright.
As at Dec. 31, it was holding $1.6 million of cash, up from $1.3 million a year earlier and the company recorded a net cash outflow from operating activities of $2.3 million, down from an outflow of $4.4 million a year earlier. The net cash inflow from investment activities was $1.8 million compared with an outflow of $3.5 million a year earlier.
In the first half, government grant revenue amounted to $215,000, down from $480,000 a year earlier.